(FORTUNE Magazine) – Since Peter Lynch, 42, took over Fidelity's Magellan Fund nine years ago, its assets have multiplied 345 times and the gray-haired manager has become the most successful in his field in the 1980s. So much for history. Along with the rest of the stock market, Magellan took a beating in July, falling 6.7%, a little more than the Dow Jones industrial average and the S&P 500. July was also the first month in two years that investors took as much money out of Magellan as they put in. Redemptions, which are running about 6% a month, have equaled new sales for the past six weeks. Lynch is unperturbed: ''Since I've been running it, Magellan has had six price declines of 10% to 20%,'' he says. ''The nice thing about a broad-based decline is that you can sell what you don't like and buy what you do like. If people aren't ready to add to their holdings now, they should get out of the market.'' For a superstar investor, Lynch may seem to behave a little peculiarly. He does not make market forecasts, saying only that ''I expect the market to be up six points every day I come to work.'' He also disdains economic analysis. ''That's a complete waste of time,'' he says, arguing that the results are rarely accurate. ''Nobody called me to tell me about the recession in 1980 and 1981.'' Likewise he shrugs off inside information, legal and illegal: ''I don't listen to that stuff,'' he insists. ''It's all garbage anyway. All of the tips I've gotten on takeovers have been wrong. I'm 0 for 57 on takeovers.'' Lynch thinks the economic climate is improving for industrial companies. He is impressed by the strides they are making in cutting costs and boosting quality, and he expects them to keep exchanging high-cost debt for cheaper loans. He also looks for the weaker dollar to boost earnings. ''The first 30% decline only helped a little,'' he says, ''but the next 10% should help a lot.'' Though his Magellan portfolio contains 1,500 stocks, Lynch still follows individual companies assiduously. During a three-week trip to Europe with his wife recently, he visited 23. He tries to invest in three kinds of companies: those that are doing poorly but have the potential to do better, small profitable ones that are growing to medium size, and firms that are rich in assets but underpriced. Among his biggest hits: Zayre, which increased 18- fold, Pic 'N' Save, which multiplied ten times, both retailers, and Pep Boys -- Manny, Moe & Jack, an auto parts supplier that rose tenfold. Ford Motor, which represents 3% of Magellan, is Lynch's biggest holding. He likes its cost-cutting campaign and low price-earnings ratio of 5. Other large holdings: Fannie Mae, Chrysler, Kemper Insurance, Bank of New England, Student Loan Marketing, and Volvo. Lynch is heavily invested in financial services companies. Savings and loan institutions make up 9% of Magellan's portfolio; regional banks, 8%; and insurance companies, 7%. Lynch's other favorite categories are auto companies, 9%; drug manufacturers, 7%; and electronics and office equipment makers, 7%. Lynch is avoiding stocks he considers ''hyped up,'' especially media companies, brewers, telephone and electric utilities, and soft-drink and food companies. Some 30% to 40% of Magellan is invested in growth companies, and an equal amount is in cyclical stocks, special situations, and companies with undervalued assets. ''With these stocks you can lose 30% to 50%,'' he says, ''but you're hoping for doubles and triples.'' Lynch never parks money in cash. Instead he keeps 25% to 30% of Magellan invested in conservative stocks and bonds. He explains: ''A market player has 50% of his portfolio in cash at the bottom of the market. When the market goes up, he can miss some of the move. These conservative stocks do okay in an up market, but they are fabulous in a down market. If I'm wrong I only lose 10%, but if I'm right I might make 30% to 35%.'' The son of a Boston College mathematics professor who took ill when Lynch was 7 and died when he was 10, Lynch graduated from Newton High School, Boston College, and the Wharton Graduate School of Finance. He worked for Fidelity one summer, then joined full time in 1969 after a two-year hitch in the Army to satisfy an ROTC obligation. He started running Magellan in May, 1977, when its assets were only $20 million. Despite his obvious talent for the job, Lynch straight-facedly attributes his success to hard work. ''If I work 15% longer, I should do 15% better,'' he says. Lynch car-pools to the office from his waterfront home in Marblehead and arrives at 7:15 A.M. He leaves at 6:15 P.M. to go home by bus. He has spent every Saturday of the last six years in the office and claims to have taken only two ''real'' vacations with his wife of 18 years since he started managing Magellan. Fidelity's competitors regard Lynch's record with awe but wonder if Magellan has grown too big to outperform the market. With $6.9 billion in assets, the fund needs a clutch of hot stocks, not just a single Pep Boys, to move up, and implementing a new strategy takes weeks. Fund managers tend to regard $200 million to $400 million as the maximum efficient size for stock selection and trading. Lynch regards such theories as mostly hogwash. He insists: ''You can have 50 stocks and be a clone of the market and 5,000 stocks and not be, depending on which stocks you choose.'' Lynch expects to outperform the market by 0.5% per month. His somewhat startling advice to investors who want bigger returns: ''Buy funds with assets of $10 million, $20 million, or $30 million. That's what it takes to beat the market by 15% to 20%.'' Lynch is not giving away business. Fidelity offers several such funds.