Invest In What You Know
For those of us on this side of Wall Street, investing can be quite the challenge. Many amateur investors compound this issue by speculating in companies that are a part of a sector they know nothing about. To get an edge on the market, it is imperative to invest in what you know.
To truly break the market, one must know what others to not know. Buying companies that you know little about it not too unlike throwing darts at a board. Such a strategy isn’t necessarily bad if the market is primed to make a run. But on that token, why not just buy an ETF (like SPY) to ride the upswing so and avoid exposing yourself to companies you know little about?
The market is pretty efficient at taking into account earnings reports and analyst expectations. These numbers are available to anyone, anywhere. There is no money to be made in knowing something that everyone else knows. It’s like coming up with an idea for a device that turns on the lights when you clap. Sure, it’s a good idea, but someone already thought of it before, so you’re not going to make any money off of it. Stocks work in precisely this same fashion.
When you’re ready to stop throwing darts at a board and truly start investing, play to your strengths. What do you know that others might not? Is there a restaurant chain in your area that Wall Street might lack awareness of their upside? Is there a company within the industry you work for that is slowly gaining a competitive edge while not seeing an improvement in their stock price? Look around you. You don’t have to be a seasoned investing professional to find a gem of a stock pick.
Remember, when you invest in what everyone else wants to invest in, you’re not on the cutting edge, you’re merely part of the herd. This has been a conundrum that Jim Cramer has had to face with the increasing popularity of his show, Mad Money. There is an inverse correlation between the value of his stock tips and the number of viewers of his show who buy the stocks he recommends.
Sure, you might squeeze out a buck or two by investing with the herd. But like I said earlier, if you’re going to invest with the herd, why pretend to be doing otherwise? Just buy an ETF and spend your time elsewhere. There’s absolutely nothing wrong with that. But if you’re ready to break the market with your portfolio, you have to get out on the cutting edge by investing in what you know [and that others don’t know].