Peter Lynch is famous for telling individual investors to "buy what you know." He explains that it isn't as simple as saying, "I eat at McDonald's(NYSE:MCD) every day; therefore, I'm going to buy the stock." Rather, if you traveled the country in the '60s and you noticed the Golden Arches popping up all over, it would have been very profitable to research Ray Kroc's new fast food chain. So, that's the idea: Pay attention to the world around you, and when you see something new or hear some unusual news, get to the bottom of the story. There is likely a fortune sitting right under your nose.
Last August, I described my sorrow at missing a 30-bagger in Tesoro(NYSE:TSO). It wasn't just that I was working at one of its refineries when the stock was less than $2 a share, but what happened afterward. Through 2004, everyone I knew in the refining business was discussing how the crack spread (the price difference between crude oil and refined products) was hitting record levels. Yet I never bought Tesoro, Valero(NYSE:VLO), or Marathon Oil(NYSE:MRO). Had I purchased at the beginning of 2005, when it was clear that refining was a good business again, my returns could have been: