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Do You Buy What You Know?

Eric Dutram

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 1977-1990, 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 market environments.

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.

Recent research 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 AAPL 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 CMG or LULU.

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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Read the analyst report on LULU

Read the analyst report on CMG

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