Back in January, I tackled the Peter Lynch thesis that you should "invest in what you know," and I came to the conclusion that buying what you know works against the investor by vastly limiting his or her possible investment choices. Today I aim to tackle this topic once again, but this time from a completely different angle -- and you can thank Twitter for that.
Don't be a twit
Last night, I finally came to the conclusion that I am powerless over my social-media addiction and decided to join Twitter. As with Facebook, I can see why users can get so caught up in the hype that is social media, but just because I use the product, that doesn't mean I'd buy into its business model.
Because Twitter isn't a publicly traded company, we don't have easy access to its balance sheet, but based on the data at secondary-market exchange SharesPost, Twitter's current implied valuation is a staggering $9 billion. Keep in mind that this is a company that, according to eMarketer, is on track to bring in just $140 million in revenue this year and is only marginally profitable at best.
But it's GM!
The same can be said for big-name companies that have been around a lot longer than Twitter but have taken their shareholders for a wild ride. From old-economy companies General Motors
To add another aspect to the story, buying what you know involves not only expanding your horizons beyond a handful of companies, but also putting your emotional attachment for products aside and considering how suitable a stock would be for your investment style. As cliched as that may sound, it makes a lot of sense. Just because Yahoo! is my preferred search engine, that doesn't mean I can forgive the company's directionless growth model over the past few years.
Sometimes you have to be cruel to be kind
Only when you can objectively examine a company beyond your attachment to its products can you fully call yourself an investor in the business. Until you can do that, blindly following Peter Lynch's advice has the potential to get you in quite a bit of trouble.
What companies have you purchased just because you liked a product, only to be taken to the woodshed by reality? Share them in the comments section below.