(over please)

%www.barrons.comTHE DOW JONES BUSINESS AND FINANCIAL WEEKLY AUGUST 14, 2017

By LESLIE P. NORTON

Joel Tillinghast is nothing if not per-sistent, which explains how an obscure economist came to launch the market-beat-ing Fidelity Low-Priced Stock fund nearly 28 years ago. In the early 1980s, he made a series of phone calls to superstar Peter Lynch’s Boston office. The famed manager of the top-performing Fidelity Magel-lan fund tells the story in his foreword to Tillinghast’s new book, Big Money Thinks Small. Lynch writes that his secretary eventually put Tillinghast through, saying there was a “sweet guy” from the Midwest who kept calling. She thought he might be a farmer. Lynch said he’d give him five min-utes. An hour later, he said, “We’ve got to hire this guy.”

Since the fund (ticker: FLPSX) launched on Dec. 27, 1989, it has returned 13.8% a year, compared with 9.6% for its benchmark, the Russell 2000 index, and 9.7% for the Stan-dard & Poor’s 500. It is a quirky proposition, to use a value style to pick stocks priced below $35, then waiting for the market to recognize their promise. The fund currently owns 889 stocks, and Tillinghast could tell you about every one of them.

A deeply thoughtful man, of medium height, with a shock of graying blonde hair, Tillinghast, 59, is an ardent reader and gardener. In his Beacon Hill backyard, he keeps hydrangeas, tomatoes, basil, rose-mary, and a Japanese maple. Managing money, he says, is like planting a crop. “You plant a seed. It takes time to see results. Sometimes you can just contemplate the

plants, and as long as they aren’t howling for water or sun, you can just enjoy them and watch. But they do need weeding and nurturing and attention.”

Tillinghast joined a group of future stars at Fidelity that orbited around Lynch, peo-ple like Will Danoff and Jeff Vinik. Danoff would go on to run Fidelity Contrafund (FCNTX), the firm’s largest actively man-aged fund; Vinik would go on to run Ma-gellan (FMAGX) and later his own hedge

fund and become a part-owner of the Boston Red Sox.

Peter Lynch owned more than a thou-sand stocks, and top analysts regularly came through his office. But Tillinghast distinguished himself with his discipline and unflappable demeanor. In a vote of ex-treme confidence, Lynch and Ned Johnson, the firm’s chairman, gave Tillinghast their own money to manage, seeding Low-Priced Stock. He was just 31 years old.

The Publisher’s sale Of This rePrinT DOes nOT COnsTiTuTe Or imPly any enDOrsemenT Or sPOnsOrshiP Of any PrODuCT, serviCe, COmPany Or OrganizaTiOn.Custom Reprints 800.843.0008 www.djreprints.com DO NOT EDIT OR ALTER REPRINT/REPRODUCTIONS NOT PERMITTED 54086

Who Says You Can’t Beat the Market?A $1,000 investment in Fidelity Low-Priced Stock in 1989 is worth more than $35,000 today. The same investment in the S&P 500? Only $12,800.

INTERVIEW

Joel Tillinghast David Salafia/Getty Images Global Assignment

A Wesleyan College graduate with an MBA from Northwestern University’s Kel-logg School of Management, Tillinghast worked at Value Line as an analyst and at Drexel Burnham Lambert and Bank of America as a research economist. From there he went to Fidelity. He is legendary for his work ethic. He’s frequently in the office late at night and on Saturdays. He reads company documents on all the stocks in his fund and all the ones he’s looking at, too. And he focuses on stocks with low price/earnings ratios, with decent returns on eq-uity and a history of cash flow-generation, with sustainable business models and run-way to grow. And he rarely sells: Turnover is just 9% a year.

“I always said I was a stockpicker, but I used a macro blueprint to help guide me. Joel is singularly focused on finding good companies,” says Vinik, who tried to hire him for his hedge fund. Tillinghast said, no, thanks; he liked the resources at Fidel-ity—where company managers traipsed in and out all day, and he could work with 25 dedicated small-cap analysts and 135 global analysts—too much.

Adds Jim Lowell, an authority on Fidel-ity funds and an investment advisor whose clients have nearly $400 million invested in Low-Priced Stock, “Joel has consistently been able to outperform his benchmark time and again, and he’s crushed the S&P 500, even with the albatross of 40% of his portfolio in foreign stocks. That’s one way you can really understand you’re in the presence of a truly skilled stockpicker.”

Several years ago he embarked on Big Money Thinks Small, which will be pub-lished this week by Columbia Business School Publishing. He had been in Tokyo at

a company meeting in 2011 when the massive earthquake struck. A favorite uncle died a couple of days later. And friends of his were in financial distress after borrowing money to bet on story stocks that they barely un-derstood. He wanted to share what he had learned, so he took a four-month leave and started to write.

“I don’t think that any investing book can turn a reader into Warren Buffett,” he says. “But I do hope my book will help most read-ers be a bit better than average by avoiding pitfalls and mistakes.”

He has, he says, come to learn that a huge part of investing is knowing your lim-itations and avoiding mistakes, “the stuff that drags down returns.” One way to do it was to study the mistakes of others—and, of course, his own. At Drexel, Tillinghast tried to develop a stock market timing system, using his own money. He failed miserably. That set the stage for him to devote his life to picking stocks instead.

It’s precisely to avoid mistakes that Till-inghast likes to quote Berkshire Hathaway Vice Chairman Charlie Munger’s saying, “Invert, always invert,” which suggests looking at a problem by working backward. When Tillinghast meets a CEO, he avoids questions about the near term, or how big the company will be in 10 years. Instead, he asks, “What causes companies in your industry to fail?”

That’s a question others at Fidelity now ask when companies come to visit Fideli-ty’s 14th floor. Tillinghast’s long-term ori-entation and his inclination to trade less are widely admired. “Joel has had a profoundly positive influence on me,” says Danoff.

Tillinghast recently sat down with Bar-ron’s for a wide-ranging interview on the

eve of the book’s publication. For an even deeper dive, check out an excerpt on Bar-rons.com, and pick up his book.

Barron’s: What’s it like to run a $40 bil-lion fund?Tillinghast: I’ve tried to be a dancing el-ephant or a whale subsisting on plankton; I’ve adapted to not being particularly nim-ble and made up for it with support from a lot of people and by taking a longer-term view. Peter Lynch was amazing, because he could take a very short-term view and sud-denly shift to a longer-term one. That didn’t really work well for me.

Do you still get the same thrill from picking stocks that you did 25 years ago?Yes, when I’m right. Seeing the future is impossible, but it’s a thrill when you see it a little better than others.

How do investors get tripped up?As a curious person, I can understand why you would say, “Wow, Elon Musk is just so cool.” But that doesn’t make his stock a Buy. Can you estimate what the future will bring? How much do electric-vehicle sales depend on infrastructure that we don’t have? Have they really solved the range issues? What does Tesla do that General Motors can’t? If you are in a place like Massachusetts with high electricity costs, what is your cost per mile driven compared with gas? How do you convert that into an estimate of future cash flows? That said, Elon Musk is a very cool man.

What key lessons from running your fund have you incorporated into the book?Finding and sticking to a range of compe-tency is a big one. I had no idea how to understand American International Group when it went into the financial crisis. An-other is management quality. I’ve had more experience with company-specific crooks than I cared to. Another is obsolescence risk. I invested in Baldwin Piano. When my sister moved, she had to pay someone to take her piano away.

I want to show people how not to be stupid, rather than telling them how to be brilliant. I’m hoping my book will allow the average person to be an above average in-vestor.

What is the role of the active manager today? What will a good active man-ager look like in 10 to 20 years?The role of an active manager is to not in-vest emotionally. Robo-advisors are proba-bly a great idea, but we won’t know until we see if people stay the course when the market is down 40%. Active managers stick

to what they know, know what they own, and think about that more consciously. They also evaluate management on their integrity and capital-allocation skills. A quant screen could tell you that two companies with earn-ings up 20% are equally good. But an active manager will be able to say one of them is wildly cyclical and the other is not. Or a busi-ness that’s going through obsolescence—ac-tive managers can gauge the sustainability of earnings. Most of the quants are all about fast-moving, high-frequency data. They ar-en’t really thinking about where earnings will be in five years. That’s the role of active managers. What a company is worth is a mosaic. A P/E or a price-to-book doesn’t tell you what something is worth. It still takes a human to tell you that. The role of active managers is to think about obsolescence and value.

Let’s talk about the FANG stocks.They aren’t in my benchmark, but they’re a source of deep frustration for small-cap in-vestors. In the ’90s, when Apple had a huge product cycle coming, there were a dozen other stocks you could pile into. Today I have just one—Hon Hai Precision Industry [2317.Taiwan], a contract manufacturer. The Russell 2000 has a lot of victims of Amazon. How do I participate in Amazon? Maybe through forwarders and shippers like UPS. But Amazon plays them against each other and beats them up on pricing. If all the ac-tion is in Facebook, Amazon, Tesla, small caps don’t have much relative attraction.

How does this market feel to you?How do you describe a party where every-body is sloshed but nobody is having any fun? People look for a very short list of stocks where biographies of the founders are selling copies. They buy ETFs: Mar-kets flow differently because people express bullishness by buying an index ETF. Then there’s the sobriety of people who lost bun-dles of money in the ’08-’09 crash and are looking for yield and not finding any, so they look at highly levered tobacco stocks. There’s more desperation than euphoria.

You hang on to positions for so long that even people who’ve worked for you for 10 years can’t figure out your sell discipline.

I sell when I think a stock is at its intrinsic value and when I don’t have much confi-dence in my estimate. One of the stocks I’ve held is Ansys [ANSS]. Do you want to test what happens to an airplane wing when the wind is hitting it a particular way and it’s raining? Ansys has the software. It has a great leading position in a growing market. But it’s a high P/E of 32. I mostly haven’t sold because there is a very long runway.

Where are you finding value today?Japan still has the biggest pockets of value, partly because the number of listed com-panies isn’t that much smaller than in the U.S., despite a population that’s only 40% as big. We own Dvx [3079.Japan], which trades at 13 times trailing earnings and distrib-utes cardiovascular products. It has a debt-free balance sheet, a pile of cash, sales and earnings have been growing nicely, and the aging population in Japan needs more med-ical care. We also own Central Automotive Products [8117.Japan], which distributes specialty products for automotive cleaning and coating and has grown moderately. It has a P/E of 11, a 2.3% dividend yield, and cash is 30% of the stock price.

In Korea, I like Nice Information & Telecommunications [036800.Korea], a cred-it-card payment network. It is debt free and trades at seven times earnings. We also like Korea Electric Terminal [025540.Korea], which makes connectors and sensors, in-cluding for airbags. They have grown nicely, and may benefit from more electronics in cars and the Internet of Things. It trades at 11 times earnings and is debt free.

Europe has some pockets of value as well. In Ireland, we own a house builder called Abbey [ABBY.Ireland] that sells for one times book value and seven times earnings. They have basically no debt. The Gallagher family owns a lot of stock, so its interests are tied with ours.

And I like Norwegian sparebanks [sav-ings banks] generally, and in particular Sparebank 1 Øestlandet [SPOL.Norway], a conservative underwriter, with low loan/value ratios and a very strong capital posi-tion. The bank hasn’t had a loss year since World War II. It is trading just above book value, 11 times earnings, with nearly a 5% yield.

Anything in the U.S.?Pretty much all the things in the U.S. are like retail, where there’s more mortality risk than I’d really like. The next recession will probably be triggered by the bankruptcy of a major retailer. Sears Holding [SHLD], for example, still has more employees than the entire coal industry. That’s a problem for retail REITs and a lot of employment in smaller towns.

The offerings of bargain-priced stocks are so few and far between. If the best opportunity that you really understand is selling for 110% of its intrinsic value, should you buy?

What is your advice for young people who want a career in investment man-agement?Don’t do it unless you really are fasci-nated by stock markets. Don’t do it if you are afraid to hold unpopular opinions and to contradict people. You can make a lot of money in this business, it’s true, but it’s exhausting if you don’t. You won’t be very good if you don’t hold cussed and sometimes wrong opinions. And just because you get good feedback today doesn’t mean you are doing the right thing.

Money management is contracting. There is a role for humans. Quants haven’t thought much about the long term. That’s the opportunity. It’s a great adventure and I would probably still do it. But I would have to think longer about it if I were 25.

What are you reading?I’ve just finished Deep Work, by Cal New-port. The takeaway is that everything really valuable comes from deep work and concen-trated attention. Don’t overindulge in social media. I’m partway through Adaptive Mar-kets by Andrew Lo. Sometimes investors are trying to act rationally for an environ-ment that no longer exists.

I’m still trying to learn from my mis-takes. I saw a sign in Orlando 25 years ago that said “Bungee Jumping! Perfect safety record. $80.” Down the street was a sign that said “Bungee Jumping! $40.” As a value investor, I still don’t know which was best.

Thanks, Joel.

Fidelity Low-Priced Stock Fund (FLPSX)All data as of 3/31/18 unless otherwise noted.

AVERAGE ANNUAL RETURNS (%) YTD† 1-Year 3-Year 5-Year 10-YearSince

Inception‡

Fidelity Low-Priced Stock Fund -1.06 14.46 8.26 11.09 9.88 13.72

Russell 2000® Index -0.08 11.79 8.39 11.47 9.84 –

S&P 500® Index -0.76 13.99 10.78 13.31 9.49 –

Gross Expense Ratio: 0.68%

† Cumulative returns.‡ Since fund inception, 12/27/89.

Current performance may be higher or lower than that quoted. Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Visit fidelity.com, institutional.fidelity.com, or 401k.com for most recent month-end performance. Total returns are historical and include changes in share price and reinvestment of dividends and capital gains, if any.

Fidelity Low-Priced Stock Fund – Top 10 Holdings1

UNITEDHEALTH GROUP INC

SEAGATE TECHNOLOGY

ROSS STORES INC

BEST BUY CO INC

NEXT PLC

METRO INC

UNUM GROUP

AETNA INC

ANSYS INC

HON HAI PRECISION IND CO LTD

% of Total Net Assets Top 10: 26.75

Top 20: 38.14

Top 50: 54.85

Total Holdings: 954

Fidelity Low-Priced Stock Fund – Top Sectors (%)

Fund1,2 Benchmark

Consumer Discretionary 23.20 12.12

Information Technology 18.84 17.52

Health Care 13.14 16.61

Financials 10.89 17.97

Consumer Staples 8.93 2.34

Industrials 7.49 15.22

Energy 3.45 3.66

Materials 3.44 4.36

Utilities 1.15 3.28

Real Estate 0.83 6.33

Telecommunication Services 0.00 0.60

Fidelity Low-Priced Stock Fund – Asset Allocation (%)1,2

Domestic Equities 54.31

International Equities 37.06

Developed Markets 29.92

Emerging Markets 7.14

Tax-Advantaged Domiciles 0.00

Bonds 0.01

Cash & Net Other Assets3 8.62

FX Forwards/Spots -0.03

Fidelity Low-Priced Stock Fund – Regional Diversification (%)

Fund1,2 Benchmark

United States 62.93 98.29

Europe 13.61 0.60

Japan 9.81 0.00

Emerging Markets 7.15 0.54

Canada 4.07 0.33

Asia-Pacific ex Japan 2.44 0.12

Other -0.01 0.12

Fidelity Low-Priced Stock Fund – Key FactsManagement Fee (1/31/18) 0.48%

Turnover Rate (as of 1/18) 9%

1. The top 10 holdings, top sectors, asset allocation, and regional diversification may not be representative of the fund’s current or future investments and may change at any time. Top 10 holdings do not include money market instruments and/or futures contracts. Any U.S. position includes cash and other assets. Depositary receipts are normally combined with the underlying security.2. As a percentage of total net assets.3. Net Other Assets can include fund receivables, fund payables, and offsets to other derivative positions, as well as certain assets that do not fall into any of the Portfolio Composition categories. Depending on the extent to which the fund invests in derivatives and the number of positions that are held for future settlement, Net Other Assets can be a negative number.Benchmark data represented by the Russell 2000 Index.

Not FDIC Insured • May Lose Value • No Bank Guarantee

Unless otherwise disclosed to you, in providing this information, Fidelity is not undertaking to provide impartial investment advice, act as an impartial adviser, or to give advice in a fiduciary capacity.Not NCUA or NCUSIF insured. May lose value. No credit union guarantee.

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. The securities of smaller, less well-known companies can be more volatile than those of larger companies.

Past performance does not guarantee future results. Investing involves risk, including risk of loss. It is not possible to invest directly in an index. All indices are unmanaged.

The stocks mentioned are for illustrative purposes only and not necessarily current holdings invested in by FMR LLC. References to specific company stocks should not be construed as recommendations or investment advice. The statements and opinions are subject to change at any time, based on market and other conditions.

Diversification does not ensure a profit or guarantee against a loss.

This information should in no way be considered investment advice. There is no guarantee the trends discussed in this article will continue. Investment decisions should take into account the unique circumstances of the individual investor, and should be based on an individual’s own goals, time horizon, and tolerance for risk.

This reprint and any materials delivered with it should not be construed as an offer to sell or a solicitation of any offer to buy shares of any securities mentioned.

Reprinted from the August 12, 2017, issue with permission from Barron’s. The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.

The information contained herein represents the opinions of a third party and does not necessarily represent the opinions of Fidelity Investments.Gross Expense Ratio is the total annual fund or class operating expense ratio from the most recent prospectus (before waivers or reimbursements) and generally is based on amounts incurred during the most recent fiscal year. Management Fee is the fee paid by the fund to Fidelity Management & Research Company (FMR) for managing its investments and business affairs. Russell 2000 Index is a market capitalization-weighted index designed to measure the performance of the small cap segment of the U.S. equity market. It includes approximately 2,000 of the smallest securities in the Russell 3000® Index. S&P 500 Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. Turnover Rate is the lesser of amounts of purchases or sales of long-term portfolio securities divided by the monthly average value of long-term securities owned by the fund.

The third-party trademarks and service marks are the property of their respective owners.

Before investing, consider the fund’s investment objectives, risks, charges, and expenses. Contact your investment professional or visit fidelity.com, institutional.fidelity.com, or 401k.com for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

FIDELITY BROKERAGE SERVICES LLC, MEMBER NYSE, SIPC, 900 SALEM STREET SMITHFIELD, RI 02917813344.1.3 FIDELITY INVESTMENTS INSTITUTIONAL SERVICES COMPANY, INC., 500 SALEM ST., SMITHFIELD, RI 02917 1.9861762.103 FIAM-BD 0418