1 Simple but Important Thing to Avoid When Buying Stocks

The Singapore stock exchange is made up of more than 700 stocks.

When it comes to variety, the exchange can offer a fair bit. Take the 30 companies that make up the Straits Times Index (SGX: ^STI) for instance. The index’s components can range from retail mall owner Capitaland Mall Trust (SGX: C38U) to regional bank DBS Group Holdings Ltd (SGX: D05) and airline maintenance outfit SIA Engineering Company Ltd  (SGX: S59).

But having variety is one thing – choosing from that wide variety is another. In fact, it can even be a tough task.

Peter Lynch’s principle

We are fans of the legendary fund manager Peter Lynch at the Motley Fool. Lynch is perhaps best known for urging investors to “buy what you know.”

To many, buying what you know would mean understanding what the company does, and being able to explain the investment thesis in as few words as possible. That’s good advice from Lynch.

But, the opposite of Lynch’s advice – avoiding stocks you don’t know well – may be just as, or even more, important.

If we don’t understand the business behind the ticker, we may not be able to follow important business developments over the long-term. And if we can’t follow the changes over time, we may make the wrong investment decision somewhere down the road.

A Fool’s take

Avoiding what you don’t know or don’t understand could be the first step in keeping yourself out of trouble in investing. From there, you can then move on to companies that you know better.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.