Can You Always Win By Investing In Things You Know?

Peter Lynch is well known for his advice to investors to “buy what you know.”

As manager of the U.S-based Fidelity Magellan Fund from 1977 to 1990, Lynch engraved his name in the stones of investing folklore by generating staggering compound annual returns of 29%. For perspective, every $1,000 entrusted to Lynch in 1977 would have become more than $27,000 by 1990 at that rate of return.

Lynch’s accomplishments give plenty of heft to his words on investing. He has a good reason for advocating “buy what you know.” In his own words:

“Look around you for good stocks. Down the road, you won’t regret it. A lot of people mistakenly think they must search far and wide to find a company with this sort of potential. In fact, many such companies are hard to ignore. They show up down the block or inside the house. They stare us in the face.”

With that, let’s see where “buy what you know” can take us by looking at four Singapore companies whose products and services many Singaporeans will use or run into on a frequent basis. They are namely:

  • BreadTalk Group Limited (SGX: 5DA) – The company runs a bevy of food & beverage retail outlets here in Singapore including the bakeries BreadTalk and the Chinese-cuisine-themed Din Tai Fung restaurant chain.
  • Raffles Medical Group Ltd (SGX: R01) – The healthcare services provider runs around 100 multi-disciplinary clinics across Singapore. That’s not all; the company’s flagship Raffles Hospital is also located in Singapore (along North Bridge Road, to be exact).
  • SMRT Corporation Ltd (SGX: S53) – SMRT’s a provider of land transport services; its public bus, Mass Rapid Transit (MRT), and taxi services will be familiar to many Singaporeans.
  • Tiger Airways Holdings Limited (SGX: J7X) – The low-cost carrier operates out of Singapore and many locals will likely have taken its flights out from Changi Airport onto other global destinations.

The table below (click for larger image) shows the share price changes and earnings growth for the four companies over the past five years:

BreadTalk, Raffles Medical, SMRT, and Tiger Airways share price and earnings table

Source: S&P Capital IQ

We’re working with a limited sample here. But as you can see, it’s clear that growing (shrinking) share prices over the long-term are tagged to growing (shrinking) earnings.

To sum it up, ”buy what you know” can be a good way to look for investing opportunities. But, it’s important that we go beyond the company’s products – we should also take a long hard look at their businesses too.

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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 James Yeo doesn’t own shares in any companies mentioned.