Invest In What You Know

August 14th, 2007

This is the most overlooked thing I have noticed among people who invest. In my humble opinion, people should invest in industries and companies they know well. For example, a diesel mechanic knows the diesel industry well. He knows which engines are performing better, which engines have a lot of problems and which companies are starting to take the lead. This information doesn’t always appear on the income statement, balance sheet or stock charts right away… many of those indicators are after the fact. This is information he can use to spot an opportunity. One such opportunity occurred in the last several years. I know a diesel mechanic that understood that Cummins engines were not only selling like hot cakes because they met the new emission standards being put in place (they met these standards while the competitors still didn’t for quite some time!), but that the manufacturer was sold right out years in advanced and had to place a limit on how many engines they would allow China to buy (they did this so they wouldn’t lose their other markets completely). Guess what? The stock price of Cummins has been amazing in the last five years! See how it went from about $9 to over $110?

I talked about this a while back in Investing Made Simple. Investing is simple when you know the industry. You don’t have to be an expert investor to spot a good product, service or a growing company. You just use the product or service or see the long line-ups to notice that a company is doing well.

Using your knowledge and expertise can give you an edge in the investing world. I think the average investor or non-investors have more insights and advantage over the professional investors. There is no way an investor would know which engines are more reliable with first-hand knowledge that a mechanic would. In technically advanced businesses it is almost certain that people that work within that industry know more than a professional investor.

Why do you think Warren Buffett sticks to a lot of ‘easy to understand’ companies? Simple… he knows them. He is able to know Coke has a good product because he drinks it. He can see Coke commercials and that the product is in restaurants and vending machines… He likes the product and knows it well. But he is not technically knowledgeable enough to know which software company is coming out with the next best thing or which solar company is leading the pack with the best technology… or which engine manufacturer is set to grow due to its superior products… Warren Buffett has done so well because he has stuck to investments he knows well. Invest in what you know! You have an advantage over the pros… you really do!

Entry Filed under: Articles