Millionaire Peter Lynch says passive investing ‘is a mistake’

Yahoo Finance Live hosts break down millionaire investor Peter Lynch's comments on passive investing for investors and fund managers.

Video transcript

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- Well, it's time for-- it's time for Brian Sozzi's take. And apparently the reports of active investing's death are greatly exaggerated, at least that's according to Peter Lynch of Fidelity Magellan fame, who's warning investors not to get too enchanted by the now-popular passive funds. So Brian Sozzi, what do you say?

BRIAN SOZZI: Big Peter Lynch fan. And I like seeing Peter Lynch back out there. It looks like he's selling some art from his personal collection to a college. Hence you're starting to see some stories about him hit the wires this week. And this one in particular caught my attention over on Bloomberg. And then you see a breakdown on who Peter Lynch is.

To me, he is really the godfather of individual stock investing. Of course, if you want to exclude the likes of Warren Buffett here. It is Peter Lynch that really gave hope-- not hope, but just a lot of credence behind "buy what you know." So for example, if you own Nike sneakers, perhaps you should be trying to invest in a Nike.

But you have Lynch coming out here telling Bloomberg, quote, "The move to passive investing is a mistake. Our active guys have beat the market for 10, 20, 30 years. And I think they'll keep on doing it." As proof he cited three current Fidelity managers. You know, Lynch continues to mentor a lot of the folks at Fidelity.

And who are we to argue with Peter Lynch? I know [INAUDIBLE] investing has become very popular. It's low fees. And [INAUDIBLE] investing, of course, ETFs and other index funds.

But look, I mean, Peter Lynch-- I'm reading some of his returns when he ran the Magellan Fund. 30% return under his watch. He beat the S&P 500 10 of his 13 years running that Magellan Fund. So Peter Lynch is no slouch. Good to see him resurface. I very much agree with his views. Go out there. Pick some stocks. Figure out what you're doing

- Well, but the problem is for the vast, vast, vast majority of people, for the vast vast majority of fund managers, they don't and can't have that kind of record. And so wouldn't in that case, it make sense to put their money just into an S&P 500 ETF and still have positive returns over the long term without trying to beat the market, and risk missing big time? I don't know. I see--

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BRIAN SOZZI: I knew you were going to push back. I knew you were going to push back on my love for Peter Lynch. I think you've seen a lot of hybrid strategies out there.

- No, listen. I admire Peter Lynch. There's a place for active management. It's just that most people cannot achieve those kinds of records.

- And I think structurally, structurally the world of passive investing has just gotten cheaper. I mean, with all due respect to Peter Lynch, but the investing world now is very, very different than it was, let's say 20 or 30 years ago. It only costs a few pennies for each fund that you can get into if you're trying to get into an SPY or into an SPX. It's just so enormously cheap now. And I think that has really incentivized a lot of these traders, who find it more attractive to be able to get a whole exposure to a basket of stocks without having to do the dirty work themselves.

That's not to say there isn't a place for individual stock picking. But in fact, I think some of the statistics that I've seen from Morningstar show that kind of real estate funds or kind of non-traditional equities are really where you need to have someone picking things for you. But of course, with everything is-- as is the case with finance, everything is cyclical. Even though passive is the trend right now, that's not to say it'll be the trend forever, right? So we'll see if that ever comes back into vogue. But of course, interesting remarks from Peter Lynch. And we'll have that friendly debate on the show again in the episodes to come.