Investment Strategy. True or False: “Invest In What You Know”?

Peter Lynch is one of the all-time greats. While running the Fidelity Magellan Fund from 1977 to his retirement in 1990, he generated almost hard-to-believe annualized returns of 29.2% per year. And that was before the roaring bull market of the 1990s.

If there were a pantheon of investing gods, no one would question Peter Lynch’s place in it.

But Lynch was also responsible for some of the most misunderstood investment advice in history: “Invest in what you know.”

This is actually pretty solid advice — if used right. Wall Street analysts and fund managers often never leave their elegant New York offices. That means regular, everyday investors can see a budding trend years before Wall Street, simply by virtue of having boots on the ground. Lynch routinely wrote that some of his best investment ideas came from trips to the mall.

But this is where good advice can go very wrong. “Buying what you know” can very quickly degenerate into buying a stock because you like its product — what I call the “Peter Lynch Bias.”

Liking the taste of their burritos is not a sufficient reason to buy shares of Chipotle Mexican Grill any more than liking their lattes is reason to buy shares of Starbucks. Granted, Peter Lynch was never that simplistic, but that’s how many interpret his wisdom.

Sure, we wish it were that easy, and folks like Warren Buffett play it up like it is. A simple Midwesterner, he seems like the kind of guy that really would buy Coca-Cola stock, just because he likes the taste of Cherry Coke.

Don’t believe it for a second. It’s an act.

Buffett is one of the sharpest financial minds in history, and he didn’t build Berkshire Hathaway into a financial empire with such sentimental nonsense. He did it by having discipline and buying the shares of great businesses when they were reasonably priced.

Don’t fall for the Peter Lynch Bias, or the illusory aspect of Warren Buffett. Keep your emotions detached, and stick to your process.

By all means, follow Lynch’s advice by looking for emerging trends on your next trip to the mall. But before you pull the trigger to buy or sell something, make sure you’ve checked yourself at the gate!

Of course, one size does not fit all here. A value investor will have very different investment criteria than a chartist or a momentum investor.

But whatever investment discipline you follow, don’t allow your enthusiasm for a product to cloud your judgment.

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Charles

How CEOs are Earning 335x MORE Than Their Own Employees

There’s an ongoing epidemic on Wall Street.

And it’s been happening to regular investors like yourselves for many years.

But just how bad is it?

Well, what if I told you that up to 95% of companies currently trading on the stock market today are essentially stealing money right out of your pocket!?

These are some of the biggest names in the corporate world… companies that trade millions of shares a day, who you might be invested in right now!

Discover more about just how far this Wall Street deceit goes… and how you can still uncover many more lucrative opportunities in the stock market today, check out our latest infographic: How CEOs are Earning 335x MORE Than Their Own Employees

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Categories: Investing

About Author

Charles Sizemore is a research analyst with Dent Research. His primary research focuses on income, retirement strategies and fundamentals.