Find Your Favorite Investment at a Big Discount Here...
By Tom Dyson
October 17, 2007
In 1989, as Peter Lynch celebrated his 46th birthday, he had a revelation...
He now had outlived his dad, who died at 46. "You start to realize that you're only going to exist for a little while, whereas you're going to be dead for a long time," he says.
Lynch's work had controlled him for so many years, and he missed his family life. A few months later, he quit his job... and vowed to spend more time with his wife, kids, and the Boston Red Sox...
Peter Lynch is the investment legend who ran Fidelity's Magellan fund for 13 years...
Like any mutual fund, the Magellan Fund is essentially a large pool of money. The fund manager invests this money in the stocks (or whatever investments) he thinks will go up most. Lynch liked stocks, especially the ones he understood personally. For example, Lynch invested in Hanes after his wife told him how much she liked L'eggs pantyhose. He bought shares of Dunkin' Donuts because he liked its coffee.
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Fidelity launched the Magellan Fund in 1963. Six different fund managers have controlled it, but no one ever did as well as Peter Lynch. Peter Lynch was the one who made it famous. A thousand dollars invested with Lynch in 1977 would have been worth $28,000 by May 1990, an average annual return of 29%. (He made 600% in Hanes and 370% in Dunkin' Donuts.)
As Lynch's reputation spread, more people wanted to invest in the fund. The fund had $20 million when he started. When he left, the fund had an astounding $13 billion.
As soon as people heard the news of Lynch's retirement, new job offers started pouring in. Running a closed-end fund called the Lynch Fund was the most attractive job offer Lynch got. "The promoters said they could sell billions of dollars' worth of 'Lynch Fund' shares," he says.
Let's imagine Lynch had accepted the promoters' offer and started a closed-end Lynch Fund with $2 billion.
Lynch would have taken that money and invested it in stocks and shares, just like he would have done with the Magellan. But here's the difference with a "closed-end" fund. Instead of allowing new investors to give Lynch more money, Lynch's fund would trade on the stock market. New investors would simply buy shares at the market price. Thus, for every seller of a closed-end fund share, there has to be a buyer. The number of shares always stays the same... and so does the amount of money Lynch has to make investments.
This structure would have been great for Lynch. He wouldn't have had to worry about redemptions. It would have created massive opportunities for Lynch's investors, too. Here's why...
Most of the time, the value of a closed-end fund unit tracks the value of the assets in the fund. If Lynch makes a 10% profit on his funds, you'd expect Lynch's units to rise 10%, too. Here's the thing: As closed-end fund units float on the stock market, it's possible for them to trade at a large premium or discount to the net asset value of the fund according to investor sentiment.
For example, let's say you want to invest in China. What about the Morgan Stanley China A-Share fund (CAF)? This fund invests in Chinese A shares on the Shanghai Stock Exchange. It trades at a 21% discount to the value of the assets in the fund.
The same would have happened with a Lynch fund. At times, it would have been possible to buy into Lynch's product at huge discounts to net asset value.
Unfortunately, Lynch never went back to fund management. However, closed-end fund investors still have many opportunities out there. Steve Sjuggerud has several closed-end fund investments in his True Wealth portfolio. I use them in The 12% Letter, too. About 1,000 closed-end funds trade on the stock market. You can browse them at www.etfconnect.com. Find a strategy you like, and then see if you can buy it at a discount.
Good investing,
Tom
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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