Peter Lynch achieved rock-star status in the 1980s when he ran the Fidelity Magellan Fund. So much so that an estimated one in 100 Americans invested at the time based on a very simple premise driving his work: "invest in what you know."
It's a common-sense mantra that still resonates with millions of folks today who think they're going to get ahead of Wall Street by doing nothing more sophisticated than buying an "iconic brand" they've encountered in their lives.
Problem is… being iconic isn't good enough in today's markets.
The Roaring '80s Worked in the Roaring '80s… for a Reason
Millions of investors took Mr. Lynch's common-sense advice to heart and went with what they "knew" – meaning they bought stocks based on personal experience and knowledge. Doing so made sense because the roaring '80s were just getting underway.
In fact, I can vividly recall the moment they began.
Dec. 12, 1980 – that's the day Apple Computer went public at $22 a share and 4.6 million shares were gobbled up in the largest stock offering since Ford Motor Co. went public 24 years earlier, in 1956.
I can recall with equal clarity when the markets responded.
Aug. 18, 1982 – that's the first time more than 100 million shares changed hands on the New York Stock Exchange in a single day. A year later, the Dow blew by 1,000 and has never looked back.
I remember these dates because that's when double-digit gains entered the minds of investors who were used to the single-digit returns of the 1970s, when you'd take profits and pack it in with only modest gains to show for your effort.
Greed became an operative word for millions who suddenly viewed the markets as a source of instant "strike it rich" wealth rather than something that produces value over time – as was the case for generations before them.
Movie characters like Gordon Gekko (the corporate raider Michael Douglas played so perfectly in 1987's smash hit, "Wall Street") didn't help. They made conspicuous consumption acceptable and something to aspire to. If you weren't living it up, then you weren't living… or so went the thinking.
It was entirely logical that Lynch's advice (misinterpreted though it was, which I'll get to in a minute) became so popular against this back drop.
Today's parallels are striking.
We've got the Kardashians, Paris Hilton, bling-laden rappers, and the Rich Kids of Instagram just to name a few – all of whom ply their trade on social media in front of hundreds of millions who want to "live the dream" at a time when the dream seems exceptionally limited.
Fast cars, champagne, jewelry – anything you can buy takes on new importance if it's worn or even shown on social media these days. For example, Kanye West's Adidas "Yeezy Boost 750s" sold out in minutes… seconds, according to some accounts. Millennials consider Victoria's Secret and Nike Inc. (NYSE: NKE) to be top brands. Michael Kors Holdings Ltd. (NYSE: KORS), DSW Inc. (NYSE: DSW), and Coach Inc. (NYSE: COH) aren't far behind.
Each of these companies produces iconic goods – shoes, bags, clothes – that have become a status symbol. It's led many people to once again make investment decisions based on "going with what they know" – simply because they have experience shopping in a particular store, have a familiarity with certain products, or have seen celebrities wearing them on social media, TV, magazines… you name it.
The situation reminds me of a mosquito drawn to a porch light on a hot summer night. Most are gonna get zapped.
Big retail brands like the ones I just mentioned are particularly risky right now.
Trapped in the past, unable to adapt, or simply unable to compete with Amazon.com Inc. (Nasdaq: AMZN), they're going to clobber millions of unsuspecting investors who have overestimated their prospects.
Starting with these three portfolio-killers.
Harley-Davidson Inc. (NYSE: HOG)
Harley-Davidson Inc. (NYSE: HOG) has let the pursuit of shareholder value stifle innovation, kill the rebel role model that customers value, and commoditize its motorcycles.
Back in 2002, riders would pay a 38% premium over similarly equipped Japanese offerings, according to Forbes. Now it's the other way around. Value-oriented customers are moving on to less expensive Japanese bikes with better technology, better service, and better quality.
Harley's most recent earnings report was abysmal.
Shipments fell 14.7% in the first quarter compared to last year. That's not surprising considering that U.S. retail motorcycle sales fell 5.7%; international sales fell 1.8%, with a 9% drop in the previously hot Asia Pacific region.
Harley's dealer level inventory is so high that they will have to hold back new model production. It's no surprise to me that the company predicted that this year's shipments will be flat.
Then there's the resurrected Indian – America's first motorcycle company, founded in 1901.
Harley execs laughed that yet another company would try "yet again" to bring back Indian – something many have tried and failed to do over the years – and that it would be a viable competitor.
Yet, since launching, Indian's revenue has increased 47%, while Harley's has fallen 2%. At this rate, Polaris Industries Inc. (NYSE: PII),which makes Indian, will sell more motorcycles than Harley in less than three years.
Anecdotally, my wife and I see more Harleys broken down on the side of the road when we're out riding than any other motorcycle brand I encounter.
Sears Holding Corp. (Nasdaq: SHLD)
I think there's a good argument to be made that Sears Holding Corp. (Nasdaq: SHLD) CEO Eddie Lampert has fleeced the investing public the way movie villain Gordon Gekko did, only this time around greed is not good.
Things are so bad that management actually issued a statement on March 22, 2017, saying that "Our historical operating results indicate substantial doubt exists related to the company's ability to continue as a going concern."
In my best Valley Girl voice – an ode to another 1980s cultural icon – "no duh!"
Sears hasn't turned a profit since 2010. Last year was particularly bad, with net income falling 96.72% before winding up a $2.2 billion loss. That's an astounding number considering the company's entire market cap is just $1.46 billion.
Optimistic investors convinced the company had some redeeming value used to talk about how Sears was a real estate play in disguise. Evidently they didn't get the memo that up to 50% of American shopping malls are at risk of going dark or being used for non-retail purposes within a decade.
The share price has fallen 91% since 2006. To put that in context, the stock will have to appreciate a staggering 1,100% from current levels just to break even.
Like that's going to happen at a time when it's Amazon versus everybody else?!
International Business Machines Corp. (NYSE: IBM)
This one surprises a lot of investors, but none more so than older folks who remember International Business Machines Corp. (NYSE: IBM) at the pinnacle of its success when its name was synonymous with technological innovation.
It's a position that management understands well, which is why they're doing everything they can to maintain the illusion. Chances are you've seen those clever "Watson" commercials just like I have.
But, as I noted on FOX Business Network last Monday, IBM's had 20 consecutive quarters of year-over- year revenue declines. You don't need to work at NASA to know this is a disaster.
IBM is a portfolio-killer in the making.
From 2013 to 2016, Big Blue has seen revenue slide from $98.36 billion (in 2013) to $79.9 billion (in 2016). Legacy consulting contracts don't do much for new growth, especially when they've sold off much of the core technology business that got IBM where it is today… or was yesterday.
Cutting costs has been the order of the day for years, but the market doesn't buy it and you shouldn't either, pun absolutely intended.
Share prices have dropped more than 24% in the past four years. By comparison, Apple Inc. (Nasdaq: AAPL), the tech-heavy Nasdaq, and S&P 500 have gained 124.7%, 82.1%, and 51% over the same time, respectively.
In closing, I want to return to Lynch for a minute.
He's emphatic that he never said "buy what you know" and that his advice has been misinterpreted over the years.
Which is why I urge you to reread what he actually did say in his bestselling 1989 book, "One Up On Wall Street" – and I'm paraphrasing here…
…know the company (you want to buy) as a business.
For us, that means three things when it comes to investments capable of producing terrific profits in today's markets:
- Knowing which Unstoppable Trends power it… and steering clear if there are none
- Identifying must-have products and services" with the power to cut through unpredictable economic cycles and market events… and steering clear if the company produces easily substituted "nice to haves"
- Using risk management consistently to protect your profits and your capital… or risking financial disaster when there's a panic-inducing hiccup
I'll be with you every step of the way.
Must See: What do billionaires Peter Lynch, President Trump, and a retired cop from Northridge have in common? They've all benefited enormously from a curious Great Depression-era "program." And even though most have no idea this exists, it could be worth $68,870 or more to the average American. Continue reading…
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About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.