How to Invest in What You Know
Investing is a complicated, confusing, and often intimidating process. There is a nearly endless selection of market segments, funds, bond options and global markets available to both long-term investors and day traders alike. How are you to determine those that are right for your investment strategy and will help you successfully achieve your financial goals? If you’ve worked for 10 years in an IT consulting firm, you no-doubt have acquired knowledge of multiple software companies and technology services. Likewise involvement in the apparel industry would provide you with knowledge of trends in style or new fabrics to be introduced. Such experience and knowledge of these companies – many of which are publically held – can help you leverage this knowledge for investment opportunities.
Warren Buffet, unquestionably one of the most successful investors ever refers to the “Circle of Competence” which relates to an individual’s investing in those industries where they possess the most knowledge. Through detailed experience of the inner-workings of a particular business or market segment you are able to recognize market trends that impact the business. You therefore have an advantage when making decisions whether to invest or divest in that particular business, commodity, or industry.
About.com offers guidance related to such familiarity with the companies you invest in:
- Be observant – what interests do your children, friends, or family members have? Perhaps there are certain products that are frequently referred to, restaurants that are visited regularly, or even hotel chains that are consistently favorites. Investing in the companies that produce products and services that you know provide value to consumers can also provide value to your portfolio.
- What trends do you see taking place that may open the door for successful investing? Perhaps the latest technology that strikes you personally as a must-have device or lifestyle enhancement. You won’t be the only consumer to make that assessment, but you may be able to get in on the ground floor for possible financial gains when the technology takes off. Here again any inside knowledge of the technology and application for consumers will benefit you greatly. You may even become a key stakeholder of the next Apple.
- What about you? What products do you respect, use, or even feel you cannot live without? Those are the companies you want to investigate to find out if they trade publicly and what their financial history is. You can look up many annual reports and other financial statements online through corporate web sites and evaluate current financial results through online brokerage sites. Armed with this detailed information you can make intelligent moves for investing or seeking other alternatives.
- Buy the company – We all know of companies with highly effective brand imaging and leadership in their particular market segments. For many years products that are of highest quality have been referred to as “the Cadillac” of their particular product or service. This was a testament to the quality and luxury provided by that automobile producer. That level of consumer or investor acknowledgement is precisely what you want to invest in. Even if the price is higher than another company in the same market the image is likely worth the extra cost especially for long-term investors.
- What about that price point? It still counts, certainly. Evaluate each investment on its own merit and what your particular financial goals are. A high price for a stock that you don’t intend to hold for the long term probably does not make sense for you. On the other hand an investor building a nest egg for the long term may pay a higher price for a quality item for your portfolio.
Are There Pitfalls?
There are nearly always caveats to any investment advice or strategy suggestions. Investopedia points out some of the downsides and cautions of this course of action. When considering the “buy what you know” approach there are alternative arguments, to be sure:
- Focusing on existing companies for investments may tune you out on new and exciting opportunities. Many if the huge successes in the high-tech industry started out as companies no one ever heard of.
- Many companies experience their highest rates of growth in their earliest years then stabilize even though remaining profitable and reliable. While investing in long-standing companies with attractive balance sheets and quality products you may not experience the growth rate you desire for your holdings.
What’s the Right Answer?
Investing in what you know is a strategy long-emphasized by such financial giants as Warren Buffet, Peter Lynch and others. Wisdom from such respected sources cannot be ignored to be sure. It seems logical to invest in companies producing goods and services that you know, use every day, and identify with. But keep your mind, eyes, ears, and investment strategy open to emerging markets and new opportunities for financial gain. Perhaps you’ll run across a chance to participate in some unknown technology stock such as IBM or Microsoft.
Regardless of your approach do your homework. You can bet that while the advice and recommendations of Warren Buffet and Peter Lynch have truth behind them, they didn’t place buy orders without significant research and analysis of the proposed stock or fund being considered. Use the tools available to you for investigating financial expectations and balance sheets. Online brokers can benefit clients through accessibility to charting tools for comprehensive analysis before you proceed with buy or sell orders.
SureTrader is a leading online broker for day trading that provides clients with essential tools that help investors make choices based on facts including up-to-the-minute stock tickers and analysis tools to properly evaluate opportunities that matter most to them. Once you determine the right investment you benefit from lightning-fast execution of trades combined with consistent service to ensure you can quickly react to fluctuations or market trends. SureTrader support is courteous and consistent. For traders on the move access to trading services is provided on multiple platforms including desktop and mobile options using both iOS and Android devices.
Disclaimer: SureTrader Blog is not intended for U.S. persons. Stock information is not to be viewed as buy or sell recommendations.