This is probably another one of those common sense tips that tends to be overlooked and swept under the rug in favor of the latest “hot tip” or whatever happens to have come down the pipe. Nevertheless, these tips have been around for a reason: they’re important, and their wisdom bears repeating. This time around, we’re going to talk about the old adage of sticking with what you know.
Get the best results from what you know
You’ve probably heard this advice given most often in conjunction with the exercise of writing, under the pretense that by writing about the topics that one is most intimately familiar with, one can produce the best results. The same applies to investing. If you put money into industries that you don’t know the first thing about, you’re going to get into trouble and fast. Suppose that you open up your morning news paper to the technology section and read about Company X having developed an all new standard for etching circuits onto the surface of a microchip, one that can double the number of circuits of past chips. If you know nothing whatsoever about computer chips, then you wouldn’t know exactly what this meant for Company X. You wouldn’t be able to (accurately) speculate as to what it meant for them in terms of near future stock market activity and your hands would be tied. Everyone knows that following an industry’s developments is one of the best ways to know what’s going to happen in its corresponding market presence, so it pays to invest in those industries that you understand well enough to follow.
Satisfaction from investments
Furthermore, you’ll have the advantage of feeling more passionately about your investments, and you’ll derive a greater emotional satisfaction out of working with them. After all, part of the appeal of the stock market is that it’s a lot more fun than just letting your money sit in a bank somewhere! If you have an investment in a company that you used to work for, for instance, or a company that produces a product you use on a daily basis and feel a personal fondness for, you’ll have more invested than just your money. This isn’t just sentimentalism, either; the more you personally care for a company and its products, the more carefully you’ll be inclined to follow the trends that affect it, and ultimately affect your investment.
See you next week for part 9 of Basic Investment Strategies.
Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 – 2008
{ 2 comments… read them below or add one }
Hi Sean,
This is a really great tip and one I hadn’t even thought of. That’s not surprising though. It makes sense that when you read the financial papers, you will understand the implication that the news has on your industry and your stocks.
I always thought you chose stocks according to what money they were making and what you thought they were going to make. They were just financial decisions. This is different.
I am wondering if you are talking about buy and hold shares here Sean?
When I look for puts and calls, I just look for certain indicators with blue chip shares and don’t go too deeply into analysing the company, but if I was looking for shares to buy and hold I would definitely take your advice.