For better or worse, Peter Lynch is the "buy what you know" guru.
Even though he's said he didn't mean that exactly, "buy what you know" is an incomplete guide to beating the market. It suggests that some of your best investing ideas will come by snapping up shares of companies behind your favorite products or by trolling the mall. And when I first read it as a twentysomething investor, I embraced the simple notion of acquiring the familiar.
But it's not so simple.
The other half of "buy what you know"
The problem is that "buying what you know" is just the first step to beating the market. Once you take it up a notch -- going from One Up on Wall Street to what I will call Two Up on Wall Street -- you will realize that the second logical step is even more important.
That second step? The missing ingredient from Lynch's once tantalizing investing recipe?
Buy what they don't know.
Calling off the Lynch mob
After all, I can live my life sipping Frappuccinos at Starbucks (Nasdaq: SBUX ) . It's good stuff. That doesn't mean that I will make a mint on the company. In fact, I probably won't at this point, because everybody already knows the Starbucks story. The real money to be made in Starbucks was several years ago, before the bean water titan was wedged into every strip mall on the planet.
So it's not necessarily about buying what you know. It's ultimately about buying what they don't know.
Some of my favorite investments -- and, I bet, many of yours -- have been companies that grew in popularity after they camped out in your portfolio. I bought Netflix (Nasdaq: NFLX ) in 2002, back when I was just one of 742,000 subscribers.
The convenience of home-delivered DVDs made perfect sense to me, even if it seemed like a laughably lethargic model to the rest of the country. They came around. I am now one of 6.7 million Netflix subscribers, and my initial investment has appreciated several times over.
Zig before they even think of zagging
As a member of the Rule Breakers newsletter team, I try to spot emerging trends early to try to profit from being early to the party. David Gardner's newsletter is all about buying what they do not know.
Baidu.com (Nasdaq: BIDU ) shares have more than tripled since I recommended the stock to newsletter subscribers a year ago. China's leading search engine has had a great run, but how much of that has come at the expense of skeptics who felt that the company would get crushed by Google (Nasdaq: GOOG ) or even some of China's own leading portals such as Sohu.com (Nasdaq: SOHU ) and Sina (Nasdaq: SINA ) ?
In that time, despite a sea of hungry rivals, Baidu has actually increased its share of the Chinese search engine market to 58%. With so much of the investing public either ignorant or cynical when it comes to the power of being the top dog in search in the world's largest market, investors should continue to profit from buying what the rest of the market doesn't know.
The Knot (Nasdaq: KNOT ) is another of my market-thumping picks for Rule Breakers. The wedding planning website hasn't had the same kind of success as Baidu, but its shares have nearly doubled since hopping on the scorecard last year.
The Knot draws 3.2 million unique visitors a month, many of them looking to spend a ton of money to make that special day unforgettable. It's the perfect audience for an online lead generator like TheKnot.com. I knew it several quarters ago. The real kicker is that most investors didn't -- and still don't -- know it.
Buy what you know better
When you invest, go to the mall; ponder the contents of your cupboard; question why you chose one burger joint over the other. And when you unlock that desire to be inquisitive about equities, also figure out what you know -- and what you see -- before the rest of the market.
That's what we do at Rule Breakers -- and you can sign up to see our picks today by clicking here with no obligation to subscribe.
Longtime Fool contributor Rick Munarriz wonders whether Peter Lynch will ever read this article. He still owns shares in Netflix. Starbucks, Sina, and Netflix have been recommended to Stock Advisor subscribers. The Fool has a disclosure policy.