Investing in Companies You Know: Why it Matters

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Unless you are an investing superstar, chances are you are not an expert on every sector of the economy. One of the first principles investors starting out should know is to stick with what you know and understand. In all honesty occasionally even some of the more experienced investors among us need to be reminded of this fact. Too often even the best of us get bogged down in researching overly complex companies just because we feel we may be missing out on a profit. But your money is important, so there is no reason to forget the simple principle of value investing. Start with what you know. Let’s go over some ways to apply this principle.

What if you don’t consider yourself an expert in anything? Well, that just cannot be true. Do you participate in the economy? Unless you are a recluse, the answer should be yes. Every single person brings a unique perspective on some thing to the table. What car company do you prefer and why? What type of laundry detergent works better on your cloths? Even better, try finding products that are virtually identical in purpose yet one of these products consistently wins your dollar. Analyze your own behavior as a consumer. Start with simple things like this and then branch out from there.

Many companies are relatively simple to understand conceptually. For example, the fast food chain Wendy’s (tick: WEN) is a quick service food chain specializing in the classic hamburger. There is not much to get lost with here. From this point, delve into the analytics. Check out the company’s cash flow, the P/E ratio, and the most recent investor conference call to get a better picture of where the company stands fundamentally. The important part is to start in some area where you have a working knowledge of. As consumers we are all endowed with this ability. Do not let it go to waste!

Investing does not have to be for whiz kids or market manipulators. There is simply too much wealth creation potential NOT to start investing today. Put a little faith in your own abilities by scouting companies that are easy for you to comprehend. Top value investors like Warren Buffet have followed venerable principle and made millions.

Good luck and happy investing!  


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