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The "buy what you know" mantra will get you in serious trouble if you only take it at face value. Its important to know and like the product(s), but that will o
by d2viant 16y ago
The "buy what you know" mantra will get you in serious trouble if you only take it at face value. Its important to know and like the product(s), but that will only get you so far, it won't necessarily make for a sound investment decision.
Knowing and liking the companies products is a nice bonus at best. If your primary motivation for investing in a company is any reason other than a stellar financial outlook, you're not investing wisely. Some horribly despised products have made some of the best investments (cigarettes), while some truly loved products (General Motors) have made terrible investments.
The two ideas aren't completely detached from one another, but when it all boils down, the most important reason is always about the financials of a company and their ability to make money.
- SkyMarshal 16y agoThat mantra may also be a product of survivorship bias. We hear successful investors like Peter Lynch advocate it a lot, but I wonder how many people have lost money buying what they know but just don't bother warning everyone 'be careful buying what you know'.
- philwelch 16y agoYour examples aren't very good. Cigarettes are a politically incorrect product, and GM cars are a more politically correct product, but I can't imagine many people who know better to actually prefer GM cars over the competition. Likewise, if an enthusiastic smoker wanted to invest in his favorite tobacco company, maybe that would work out. A better example than GM might be Krispy Kreme, which was a terrible investment even though the doughnuts are delicious.
- d2viant 16y agoThat's exactly my point though. Whether the product is good or not has little or no bearing on whether the stock is a good buy. It's all about the underlying financial fundamentals of the company.
- philwelch 16y agoI gave you a decent example of your point, but I'm still not sure the point is good in the general case. GM was a bad investment and a bad bunch of cars.
- d2viant 16y agoThen I don't understand what the general case is that you're referring to. That overall if people invest in products they like then overall they'll get good investment returns? I'm saying that someone liking or not liking a product and investing for that reason is irrelevant to the investment returns they can expect, because that decision is based entirely on preference -- the movement of the stock on the other hand is driven entirely by the financials.
- philwelch 16y agoSee, that's not true at all. Someone liking or disliking a product is based largely on whether the product is crap or not, just like the success of the company.
- d2viant 16y agoNo it's not. Someone liking or disliking a product is based on their own perception of it's value. There will never be universal agreement on whether a product is good. Who's to say you're right vs. your neighbor who says the product is crap? How can you possibly use that as the basis for an investment decision? I wish you the best of luck with that investment strategy. To look at a company and say "Hmmm, I like their product. I'll buy the stock!" is horrible advice to give. That's what amateurs do. You haven't looked at the underlying fundamentals of the company. You haven't looked at the management team. You haven't looked at it's current valuation. You have no basis to say that investment is going to succeed -- it could be wildly overvalued, but you wouldn't know because you're investing based on emotion and feelings, not based on facts.
- 16y ago