TIME: Almanac 1995

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<text id=90TT0881> <title> Apr. 09, 1990: The Wizard Bows Out </title> <history> TIME--The Weekly Newsmagazine--1990 Apr. 09, 1990 America's Changing Colors </history> <article> <source>Time Magazine</source> <hdr> BUSINESS, Page 60 The Wizard Bows Out </hdr> <body> America's top money manager leaves a rich legacy. Can anyone fill his shoes? By John Greenwald--Reported by Thomas McCarroll/New York and William McWhirter/Chicago To more than 1 million investors, Peter Lynch was a magician, a modern alchemist who transmuted their modest savings into solid wealth. Since Lynch began running the then tiny Fidelity Magellan fund in 1977, its shares have surged 25-fold in value--far more than the fourfold gain for the Dow Jones industrial average during the same period or the increase for any other mutual fund. Lynch, 46, built Boston-based Magellan from a $22 million operation into a $13.3 billion monster, the world's biggest and most celebrated fund. And he did it the old-fashioned way, through 13-hour workdays and an almost unerring eye for bargains that others seemed to miss. But the most successful money manager in America surprised the financial world last week by disclosing that he will be retiring from Magellan at the end of May. Lynch, who is reportedly paid as much as $10 million a year, broke the news at 9:30 a.m. last Wednesday to hushed staffers who had gathered outside his office door. Citing a longing to spend more time with his family and the fact that his father had died of cancer at the age of 46, Lynch said he had decided it was time to quit. He will be succeeded by Morris Smith, 32, who runs the $700 million Fidelity OTC (over-the-counter) fund, one of the fastest-growing parts of the Fidelity group's 180-fund empire. To brace for a possible rush to redeem Magellan shares in the wake of his departure, Lynch had been quietly accumulating a $1.8 billion cash hoard as part of the mutual fund's portfolio of 1,400 stocks. At week's end nervous investors were redeeming Magellan shares at a rate 75% faster than that of the previous week. Lynch's importance to Magellan--and to all of Wall Street--went far beyond the buying and selling of any one week. At a time when heroes are few and many financial wizards have seemed obsessed by greed and ambition, Lynch was a reassuring presence, a homespun stock picker who disdained the pretensions of the experts and regularly beat them all. His 1989 best seller, One Up on Wall Street, made him almost a household name. "Lynch was more than a great money manager," says Donald Phillips, editor of the Chicago-based newsletter Mutual Fund Values. "He was a credible and trustworthy spokesman for the entire industry. There really isn't anyone who can fill his shoes." Some experts view Lynch's departure as a by-product of Magellan's astounding success. They contend that the fund had become so large and unwieldy that it was no longer possible for Lynch to outperform the market as consistently as he once had. Says Maurice Weiner, a Florida-based investor who sits on the board of a mutual fund: "Every time you add another dollar to manage, you are increasing the odds against you." Lynch has heard such criticism since the mid-1980s, when Magellan was scoring some of its biggest gains. "It hurt when people kept saying that Magellan had reached its peak, that it was impossible for us to beat the market anymore," Lynch told TIME's Boston bureau chief, Robert Ajemian, last week. "I really wanted to prove them wrong. So I stayed on and did." A native of Boston, Lynch got his first taste of the investment world when he caddied for executives at a local country club. The duffers included D. George Sullivan, who at the time was president of the Fidelity group. After earning an M.B.A. at the Wharton School and serving two years in the Army, Lynch joined Fidelity as a research analyst in 1969. His ebullient pursuit of investment opportunities led to his 1977 appointment as head of Magellan, then one of Fidelity's smaller funds. As he built the fund over the years, Lynch acquired a prodigious reputation for doing his homework. Unlike most money managers, Lynch has made a point of visiting companies before he buys their stock. On a typical tour he would call on three firms a day and take note of everything from the alertness of secretaries to the cleanliness of parking lots. In one visit to Chrysler he first met Chairman Lee Iacocca and then walked into an auto plant to talk with workers. "People often ask me to explain my strategy," he says. "When I tell them my strategy is to learn which companies are likely to grow, they're usually disappointed. That doesn't sound complicated enough." Lynch has shunned scientific market analysis and short-term speculation. He has often held stocks for many years, as long as the companies remained healthy. By the same token, he has been quick to sell when he recognized that a stock was going bad. As he notes in his book, "You won't improve results by pulling out the flowers and watering the weeds." He believes great stock tips come from everyday life, so he pays close attention to the buying habits of his wife Carolyn and their three daughters. When Carolyn began bringing L'eggs panty hose home from the supermarket in the 1970s, Lynch recognized a winning product. Magellan bought stock in Hanes, the panty-hose maker, and saw the value of its shares grow some 600%. Earlier this year Lynch began to feel the pace of two decades of workdays that began at 6:45 a.m. and lasted long past dark. Adding to the load was his position as head of the Fidelity group of nine growth funds. A devout Roman Catholic, Lynch found that he was working not only six-hour Saturdays but also early Sunday mornings before attending Mass. "Alarm bells began to go off," he recalls. But when Lynch told Fidelity Chairman Edward Johnson III that he wanted to leave, Johnson urged his star fund manager to stay on in a less demanding post. Lynch wavered for several weeks before making up his mind. On March 25, a Sunday, Lynch telephoned Fidelity President Gary Burkhead to say he definitely planned to retire. Over the course of three phone calls, the two men picked Morris Smith to be Lynch's successor. Smith could barely contain his excitement when informed the next morning. "I had to make sure my knees weren't knocking when I stood up," he recalls. While Smith faces a daunting task as Lynch's replacement, many fund watchers are confident he will succeed. If Lynch had a weakness, such experts note, it was his tendency to keep Magellan fully invested in stocks. That made the fund highly profitable when the market surged but also vulnerable to sudden slumps. Magellan lost $4 billion--nearly a third of its total value--during the 1987 crash. By contrast, Smith likes to keep about 20% of his fund's assets in cash to cushion the impact of a market fall. "Smith will do a better job in a down market," predicts Michael Lipper, head of Lipper Analytical Services, which follows mutual funds. Smith will also inherit a cadre of Magellan managers trained by Lynch. "A lot of the decision making on that fund was being made by a team of individuals," says Gerald Perritt, editor of the Chicago-based Mutual Fund Letter. Some 15 assistants helped Lynch keep abreast of the stocks in the gargantuan fund. As for Lynch, he has already begun to savor the benefits of retirement. Says he: "I have a personal transmission of only two gears--overdrive and park. I either work extremely hard or turn things off. Now I'll apply my overdrive instincts to different targets." Moreover, he vows, "I'm not going to run money again. I could probably sell a Lynch Mutual Fund, but I'm not going to do that." Yet even as he embarks on a more tranquil life, Lynch's integrity, zest and diligence will stand as his legacy to a Wall Street that sorely needs such old-fashioned virtues. HIS BEST PICKS [Prices adjusted for stock splits.] -- CHRYSLER AND FORD: Believing in a comeback, Lynch bought Chrysler shares in 1982 at about $2.25 and started selling in 1986 at nearly $40. He invested in Ford in late 1981 at $4 and began taking profits about six years later at $50. -- LA QUINTA MOTOR INNS: The Southwest chain offered a pleasing combination of low rates and quality rooms. Lynch bought shares in 1978 at $2. When he began selling them four years later, the stock had passed $18. -- STOP & SHOP: Lynch liked the chain's new jumbo supermarkets in 1978, so he bought stock at $3. By 1986 it had reached $30. -- ZAYRE: The company's youth-oriented T.J. Maxx clothing stores showed promise. Lynch bought in 1978 at $1.50 and sold between 1985 and 1987, after the price topped $30. </body> </article> </text>