Post of the Day
February 17, 2000
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Buying What You Know
Folks, here's an article I recently wrote for eBay Magazine, on how to find companies in which to invest. It offers a few twists on buying what you know.
You've probably heard it many times: "Buy what you know." It's very sensible advice, frequently offered to those wondering which of the thousands of companies out there they should invest in. Despite this, many people ignore the maxim as they rush to snap up shares of some company a stranger gushed about at a cocktail party. They buy into Global Transoptics Imaging. And UltraFiber Technologies. And Zanzibar Silicon Mining Co. And BioGeneron. (I made these companies up, but don't they sound exciting?)
Buying what you know is great, but you could still go wrong. After all, everyone knew PamAm, but it disappeared anyway. So here are some variations on the theme that might prove useful.
Buy What You Use and Love
The universe of companies that you know about is enormous, but the companies that offer products or services that you actually use -- and truly love -- is considerably smaller. To generate an initial list of companies that you might invest in, get out a piece of paper. Think back over the last 24 hours and jot down every product or service that you used and you like. For example, you wake up and shower, using Pantene shampoo (Procter & Gamble). You brush your teeth (Colgate). You get dressed (Gap) and have breakfast (General Mills). You drive (Ford) to the golf course (Callaway) or maybe to the mall (Nordstrom, Williams-Sonoma, Sears, etc.). Midday you have a snack (Coca-Cola, PepsiCo). For dinner you take your spouse out (Rainforest Caf�). Before going to bed, you watch some TV (TimeWarner), answer some e-mail (Gateway and America Online), and check out telescopes (Meade) being auctioned online (eBay, Amazon.com).
Buy What You Are
Don't forget your hobbies, pastimes, and beliefs. Think about what products or services you use regularly. If you're an avid bicyclist, consider cycling-related firms. If you're a high school teacher, perhaps explore companies marketing popular products for young people. If you're committed to healthful living, you might investigate firms offering nutritious foods or vitamins.
Buy What Everyone Knows
A clever twist on the old buy-what-you-know adage is to buy what everyone knows. You may have loved and really believed in your Betamax video cassette player, but had you looked around, you would have found most people supporting the VHS option instead. Look for companies with a broad (and ideally, growing) customer base.
Buy What You Understand
In addition to being familiar with a company, it's also important to really understand it, its industry, and its competitors. You might love an airline, for example, but it's vital that as an investor you learn about the airline industry and about the challenges it faces, such as fuel prices, fare wars, filling seating capacity, routes, and airports.
Good companies to explore are those related to the industry you work in. Chances are you already know a lot about the field and its major players. If you're a molecular biologist or a physician, for example, you're probably well suited to make sense of the pharmaceutical and biotechnology arenas. If you toil for a wireless phone company, you'd do well to study telecommunications enterprises.
Buy What You've Researched
Finally, make sure that whatever company you buy stock in is one that you've done ample research on. For example, you might love the cosmetics company Revlon and use many of its products, but without digging through its financial statements, you're not likely to notice that it's carrying a heavy burden of debt. Compare it to its competitors and you'll likely notice that Estee Lauder is a more appealing business. Research pays off. Order some free annual reports of companies that interest you at www.icbinc.com. Learn to make sense of them at www.fool.com/school.
It's a great feeling when you look at your portfolio and see a bunch of companies that represent your interests, beliefs, and habits. If they're all firms that you know well and understand inside and out, you're not likely to encounter many unpleasant or inexplicable surprises.
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