Invest in What You Know

I was just reading Peter Lynch's book "One Up on Wall Street" (realised that I haven't done a book post for a while as well), about halfway through the book so far, but the most interesting thing brought up so far, investing in industries that we know, either as customers, suppliers or employees, sounds like a great idea that we should adopt when investing in shares.

Look at the business down the road, it may be a good buy

(Image source: Neil Theasby, http://www.geograph.org.uk/)

Instead of investing in high-tech companies with business models that we can barely understand, Lynch argues that investing in industries that are easy-to-understand or that we have inside knowledge about would allow us amateur investors to get good returns as well. I think this is quite true. Who would know whether the company is going to do well other than the customers, the suppliers and the employees, that can get information on the company when they purchase goods, see an increase in supply or see an increase in their workload.

Of course, good business for the company doesn't necessarily translate to good profits for the shareholders, so in this respect, we also have to do some financial statement analysis, to make sure that the company is not in the red for every sale that it makes, but if the P/E ratio is sound and business seems to be improving, the prospects of the company look quite bright for shareholders.

Not following market trends is also an important thing. People are usually the most optimistic when the market reaches its peak and the most pessimistic when the worst has come to pass. So, following what you hear on the news or listening to the stock tips your grandmother gives you isn't exactly the best way to earn good returns on your investment. The book also brings up the advantages that we as amateur investors have over the professionals, such as being able to invest in small companies before they become big and not succumbing to the pressure of investing in the big-cap companies.

I think these 2 ideas that I've managed to get from the book are useful insights that we should take note of before thinking of investing in our next company, which may help us beat the professional investors by making use of what we already know and blocking out the market noise.

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