I'm a deep admirer of Peter Lynch, the legendary manager of Fidelity Magellan who produced 29% average annual returns over 13 years at the helm. So highly regarded is he that we often quote him. Here's a favorite, taken from his bestselling book Beating the Street: "The best stock to buy may be the one you already own."
It sounds great, doesn't it? Of course it does, but what does it really mean? There's a hidden story behind that quote that, if you'll allow me, I'd like to expose today because it holds the secret to a $500 million gain.
Yes, $500 million. Here's how Lynch explains it in the book:
When 5% of a portfolio is invested in a stock that quadruples in two years, this does wonders for a fund's performance. In five years, Magellan made a $500 million profit on Fannie Mae (NYSE: FNM ) , while all the Fidelity funds combined made more than $1 billion. This may be an all-time record for profits for a single firm from a single stock.
So, just find the multibagger, right? Not exactly. Fannie Mae was a smashing success partly because the mortgage financier routinely made huge earnings gains during the late '80s. But Lynch earned outsized profits because he doubled down when he knew he had a winner. That's what he meant by that famous quote. Fannie Mae was the best stock for him to buy. Over and over and over again.
The joy of doubling down
So he did. According to his transaction diary in chapter 18 of Beating the Street, Lynch purchased his first 30,000 Fannie Mae shares in 1977, as the rookie leader of Magellan.
He'd exit the position too soon but was a buyer again in 1982. And again in 1984, and 1987, and 1988, and ... well, you get the picture. All along, Fannie Mae's stock was rising and profits were improving. By 1988, Lynch was calling Fannie Mae a "Sell the house, boat, cars, and barbecue, and insist that your mother-in-law, aunts, uncles, and cousins do the same" buy. The result was $500 million in profits.
No other stock in the Magellan portfolio earned such praise (or profit), but dozens were considered nearly as important to the fund's long-term success. And Lynch doubled down on many of them. Among his favorites were automakers Ford (NYSE: F ) and DaimlerChrysler (NYSE: DCX ) , as well as Boeing (NYSE: BA ) , Stride Rite (NYSE: SRR ) , and Comerica (NYSE: CMA ) .
Copying the master
Thanks to Lynch, I've often done the same. Take Oracle (Nasdaq: ORCL ) , for example. I've purchased shares of the database maker six times, and my aggregate position is up more than 50% in two years.
David and Tom Gardner have done even better in Motley Fool Stock Advisor. Tom has re-recommended 13 picks 18 times. And his best pick -- a nine-bagger -- was a re-recommendation of a position that today is a seven-bagger. David, meanwhile, has re-recommended nine stocks 14 times -- also with great success.
Back up the truck
That's the power of Lynch's principle, which you can put into practice to produce multibagger returns. $500 million? No, probably not. But if you focus your stock picking on great businesses with obvious advantages, you'll beat the market. And if you then back up the truck, and keep backing it up, when Mr. Market puts your best ideas on sale, you'll earn huge returns without much effort.
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Fool contributor Tim Beyers wishes he had re-upped some of his best picks not mentioned here. He's a happy owner of Oracle shares, however. Get the skinny on all of the stocks in Tim's portfolio by checking his Fool profile. Fannie Mae is an Inside Value recommendation. The Motley Fool's disclosure policy is worth doubling down on.