Stop Your Emotional Investing

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You're calling for the spirit of Peter Lynch, Fool. "Buy what you know." But the legendary Fidelity Magellan manager never told you to buy what you love. Let me elucidate.

My own meandering experience
Back in college, I thought that the fortunes of Coca-Cola (NYSE: KO) would rise and fall with my own copious consumption of that sugary brew. But my Coke always tasted better with a dash of lime or lemon juice for that extra citrus tang that Pepsi (NYSE: PEP) always did better. So you can imagine my excitement when those "put the lime in the Coke, you nut" commercials started playing on TV. The perfect drink would now come pre-mixed, and the world would surely fall headlong for this magical mixture!

That didn't work out too well. Less than a year later, the lime flavor was relegated to the diet line only, and I'm mixing my own citrusy Coke again.

And how about those coffee-laced granola bars from General Mills (NYSE: GIS) and Caribou Coffee (Nasdaq: CBOU)? The mint-chocolate-coffee flavor blew the other three variants out of the water -- in my opinion. Guess which one I can't find in any of my local supermarkets anymore? Yep: Mint Condition. Caribou still sells granola bars, but don't expect them to get rich that way. General Mills isn't even mentioned in Caribou's latest 10-Q filing.

The message should be clear by now: Just because I happen to love something to pieces doesn't mean that everyone else will buy that product, too.

The real story
What Lynch really meant was: "Only invest in companies you understand." Warren Buffett would agree. Don't even spend the time to research Google's (Nasdaq: GOOG) financial fundamentals if you don't get how they make money from anonymous mouse clicks. Leave that one to the geeks and the marketing professionals who know something about Web usage patterns and/or advertising conversion rates. If and when Big G's business model or operating environment changes significantly, you need to understand what's going on. Otherwise, you won't know whether to buy more, sell it all, or stay put.

Most people would probably be more comfortable with Coke or Pepsi -- but could you explain the difference between their distribution models? Everybody knows that Buffett's Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) is a great investment, but could you tell me why? If not, strike those stocks off your research list and move on to more comfortable pastures. Lather, rinse, and repeat until you're choosing the best stocks from a list of industries you know like the back of your hand. You might still end up falling in love with a stock or two, but at least you'll have good reason to lose your heart.

Foolish coda
It's still a free country. Go ahead and love a product, be smitten with a business leader, fall head over heels for a gorgeous company. But don't buy stock based on those emotions, and don't get fooled by a hot stock tip from your barber. Haste makes waste, but homework will make you rich.