SCOTT WELSH TRADING BLOG

The Robot v. Peter Lynch

The Robot v. Peter Lynch

Oct. 9, 2013

I can say this with no hesitation: I love Peter Lynch.

After getting through just a few chapters of Lynch’s book, One Up On Wall Street, I was overcome with excitement. He was funny, interesting, revolutionary, and inspiring. After finishing the book, I was ready to quit my job, go to the mall, and start hunting for 10-baggers using any money I had. Warren Buffett was the king, but Peter Lynch was the best of all time.

Don’t take my word for it, though. Take a look at Lynch’s stats:

-From 1977 to 1990, Lynch’s Fidelity Magellan Fund AVERAGED a 29.2% annual return

-As of 2003, Peter Lynch’s Magellan Fund had the best 20-year return of any mutual fund EVER.

-Lynch destroyed the S & P 500 in all but two years during that run, and a $37,000 investment with him in 1977 made you a millionaire by 1990.

No matter how you look at it, Peter Lynch was the best.

But the problem was that he was an outlier, a one-in-a-million superstar. When he retired, any chances of those out-sized returns retired with him. The regular person can only hope to make one-fourth of that and be extremely happy to do it…

Excuse me, sir. That’s not entirely true.

Robot, can this wait? I’m in the middle of my Peter Lynch tribute.

I’m very sorry, sir. But I can do what Peter Lynch did.

You can do what? You can match the greatest investor of all time? Forgive me for not believing you.

I forgive you, sir. But isn’t it true that Mr. Lynch almost literally worked 24 hours a day and invested in hundreds of stocks at a time?

Yes.

Well, sir, I can match his performance with just one financial instrument: the USDJPY 15 minute chart. In addition, sir, the only work I require is that you make sure my power is connected. And also that you don’t interfere.

That’s very presumptuous, Robot.  Are you saying that I’m stupid enough to mess with a system that’s as good as Peter Lynch?

With all due respect, sir, that is exactly what I am saying.

I see. Well how about you start explaining yourself before I throw you out the window.

Okay, sir. Peter Lynch set the all-time record by averaging 29.2% per year. If one invested $10,000, turned on my USDJPY chart in 2003, and kept it on until October, 2013, one would have averaged 44.9% per year. Please see my USDJPY yearly profit figures below:

1/1/2013 $9,088.92
1/1/2012 $2,065.67
1/1/2011 $841.61
1/1/2010 $6,892.38
1/1/2009 $3,896.34
1/1/2008 $12,228.91
1/1/2007 $3,560.97
1/1/2006 $1,088.10
1/1/2005 $2,295.35
1/1/2004 $4,479.21
1/1/2003 $781.09

 

How do I know those figures are real, Robot? What kind of ridiculous system produced those numbers?

It is a simple trend-following system, sir, using moving averages and an RSI entry.

Anyone with a computer can make a over-optimized, curve-fitted system that gives results like that.

Sir, I did all of my testing in the period between 2003-2011. All returns after 2011 are “real-time” results with no optimizing whatsoever. As you can see, sir, it actually did better after my testing period.

Well, I’ll be darned, Robot.

Furthermore, sir, using a 10% compounding rate, $37,000 invested with me in 2003 would have become a million dollars in a little over 7 years. Did it not take Mr. Lynch 13 years to turn $37,000 into a million? I beat him by 6 years.

Wait, what do you mean “compounding rate”?

I mean, sir, that every time my balance at the end of the month increased by 10%, I increased my betting size by 10%.

Well, I’ll be darned again. So you’re saying that anyone can invest as well or better than Peter Lynch? Are you really saying those returns are possible for anyone?

Yes, sir, provided that humans do not sabotage the system. In fact, sir, a human can do much better than those numbers if a human used more than one chart in its portfolio. 

Did you just call me an “it”?

Sorry, sir. I meant he. Or she.

“He” is fine. This is a lot to think about, Robot. Give me some time to mull it over and then I might have some more questions.

Take your time, sir. I’m always available.

 

Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.