The Intelligent Investor

Should You Buy What You Know?

Do you like this great investing book The Intelligent Investor ?

What is even more interesting is that billionaire investor Warren Buffett still continues to read this great book by Benjamin Graham and yet the great legendary investor still continues to learn from it!

Under the revised edition by Jason Zweig, Chapter 5, pg 125 (commentary on Chapter 5), there is this one interesting commentary:

Should You Buy What You Know?

Another excellent commentary in which Jason commented that the intelligent investor should not simply abuse any famous investment teaching. Take one of Peter Lynch's famous teachings "buy what you know", in which, Lynch teaches that one can outperform the experts if one uses their edge by investing in companies or industries one already understand. The next step is doing the research. In which accordingly to Lynch, no one should invest in a company, no matter how great its products, without studying its financial statements and estimating its business value.

So how does one abuse this great teaching?

Ahhh... according to Jason, many would only remember and adopt the very first part of the teaching, which is "buy what you know". The next part of doing the research is sadly neglected by the investor!!!

How valid is this point? Think about it...

Jason puts it very nicely:

In short, familiarity breeds complacency. On the TV news, isn't always a neighbour or the best friend or the parent of the criminal who says in a shocked voice, "He was such a nice guy". That's because whenever we are too close to someone or something, we take the beliefs for granted, instead of questioning them as we do when we confront something more remote. The more familiar a stock is, the more likely is to turn an investor into a lazy one who thinks there's no need to do any homework. Don't let that happen to you.

Don't you agree?