The legendary Peter Lynch made famous the "buy what you know" investing philosophy. His purchases of companies like Altria
Here's why grasping this concept can be extremely profitable.
Under the radar
Investing in obscure stocks may seem counterintuitive at first, but that's entirely understandable. After all, it's obvious the real money is being made in big names like Apple Computer and Valero Energy
Wouldn't it be better to find the companies whose great runs are still to come?
That's where the obscure and boring part comes in. We're much more likely to unearth a future Lynch 10-bagger among the names that are not yet household but will be in a few years. It's not a bad thing if your friends remark, "You bought what?" when hearing of your latest investment.
Lynch, for example, raised a few eyebrows with his purchase of Pep Boys. Many had never heard of the auto-parts store and found the name rather silly. That was fine by Lynch, because it allowed him to get into the stock at bargain prices. Apollo Group
More examples can be found in some of Tom Gardner's Motley Fool Stock Advisor recommendations. Have you ever heard of Family Dollar Stores
You can see how unknown companies are more likely to carry bargain price tags than their headline-grabbing brethren. Because fewer people have heard of them, there's less demand for their stocks. Lower demand, lower prices.
But the best part is that as long as a company executes well and continues to rake in the cash, it will attract greater notice. It can't be helped. More investors begin to buy in, driving up demand right along with the stock price.
Tom and his brother David have employed several Peter Lynch principles on their way to outstanding performance in Stock Advisor -- 69% total average returns vs. 30% for equal amounts invested in the S&P 500. You can get a look at their two new picks, plus all their past recommendations, free of charge with a 30-day trial. There's no obligation to subscribe.
This article was originally published on Feb. 17, 2006. It has been updated.
Rex Moore is ready for summer and owns shares in no companies mentioned in this article. The Motley Fool has a disclosure policy on that Internet thingie.