Know Your Chickens

As a starving grad student in Rome, I learned a lot of great things, like paragraph-length insults so beautiful to hear that you can hardly believe their utterance is good cause for a knife fight. Among the more useful pieces of Roman folk wisdom was this little gem: "I know my chickens."

It's a phrase used to indicate intimate knowledge of someone or something. Ask me why I set that wheel of Brie on top of the fridge before running out to grab the mail, and I'll point to my cheese-thieving dog and tell you, "I know my chickens."

As an investor, you've got a portfolio full of chickens, and it should be your goal to understand their every scratch and peck. It's not just a matter of continuing to evaluate whether your current investments are in good businesses. Getting to know your chickens well is always time well spent in the never-ending search for stocks in which to invest new money.

When I look back at my investing gains this year, I find that a major portion has come from increasing my positions in companies I already knew very well. Sometimes I invested after the stock tanked, and other times, I added to a proven winner.

To take a pretty extreme example of one I completely missed, although it was strutting around right under all our noses, I had to look no further than Motley Fool Stock Advisor pick Netflix (Nasdaq: NFLX). Those who followed the space closely were well positioned for capitalizing on the firm's major recent slide, especially those who paid close attention to the gradual ratcheting down of the multifront DVD-by-mail war that was brewing between Netflix and Blockbuster (NYSE: BBI), Wal-Mart (NYSE: WMT), and Amazon.com (Nasdaq: AMZN). If you knew your chickens and got in at recent lows, you'd have seen 150% in just six months.

I missed out on that bird because I wasn't paying close enough attention, but I did a lot better with technical ceramics maker Ceradyne (Nasdaq: CRDN). Earlier this year, when the company told the market it had a disappointing quarter because it had to update its factories to produce body armor to a higher specification, the stock tanked by nearly 50%. I began salivating with greed and bought more, because I knew this chicken. I realized that the revenues would come back, and I guessed there would be a good chance that the margin would be even better than usual, because the firm had previously purchased the company that supplied the expensive, main ingredient. It was no real surprise to me when Ceradyne came back following good news in later quarters, so this familiar little chicken brought me a quick 80% return on that new money.

Ditto my current assessment of Motley Fool Hidden Gems pick Faro Technologies (Nasdaq: FARO), which has been brutalized following what the Street views as a disappointing quarter when earnings were lower than last year's. How is that possible for a growth company like this? It's owed to expansion of the sales and manufacturing efforts at the expense of short-term profitability. Given the intensifying race against global competition -- the kind of thing that was documented in great detail by the smart posters on our Hidden Gems board -- I consider this money well spent for now and have adjusted my position accordingly. Of course, it's possible that management will be wrong and that this will have been money ill spent, but I don't expect that to be the case, since I know these chickens -- they've got a habit of getting the job done.

Knowing your chickens isn't about being right 100% of the time. It's about being less wrong than the rest of the crowd, being wrong less often, and being in a position to profit when those who aren't in the know turn tail and flutter away.

For more bird-brained Foolishness, peck here:

• Faro needs an inspection.
• See why video killed the studio star.
• Invest like you mean it.

Here at The Motley Fool, we make it our practice to know our chickens. That's why our market-beating newsletters feature dedicated message boards, along with periodic reviews. A free trial is just a click away.

Seth Jayson loves his chickens, even though they can do some real damage with those sharp little beaks. At the time of publication, he had shares of Ceradyne and Faro but no position in any other firm mentioned. View his stock holdings and Fool profile here. Fool rules are here.