One of the most famous pieces of investing advice is arguably
'buy what you know'. This phrase has been traced back to
investing legend Peter Lynch, easily one of the most popular and
well-known investors of all-time.
It is hard to deny that this technique worked very well for
Lynch, as he beat the S&P 500 for 11 of 13 years, from
posting an average annual return of 29%
. Clearly, when used correctly, this approach can lead to solid
performance and allow investors to perform well in a variety of
Yet while it has undoubtedly been a winning strategy for
Lynch, some people are more skeptical of its use among everyday
investors. These buy what you know pessimists cite investors who
buy stocks in companies they work at that soon crumble-such as an
Enron or Countrywide-- or those who buy the local firm because
they think they have an inside track on its businesses.
has also shown that investors often overweight stocks in their
own industry of employment, generally feeling more confident
about these securities. Furthermore, local proximity didn't
provide any advantage, at least according to the study.
While this may be true, it doesn't really speak to general
consumer knowledge about products and applying this to investment
strategies. For example, an investor who was at the cusp of the
tablet revolution with
is likely quite pleased with their performance, while the same
can be said for those who got in early on other hot companies
that have managed to grow well over the past year or so, such as
In any of these instances, knowledge about the fundamentals
certainly helped, but a true grasp of how these few were leading
their respective markets by an incredible margin would have been
good enough to lead to incredible gains…
What about you; do you believe in/ try to follow the 'buy what
you know' philosophy? Does your brand loyalty-or your current
occupation-- influence your investment decisions?
Let us know in the comments below!
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