Should You Sink Your Money Into Familiar Companies?

Peter Lynch is a famous fund manager who ran the Magellan Fund under Fidelity Investments from 1977 to 1990.

During that period, Lynch delivered a handsome return of 29.2% per year, handily beating the returns of the S&P 500. In 1989, he wrote a book called “One Up On Wall Street” which went on to become an international bestseller. Within, Lynch mentions the now famous line – “Invest in what you know” – encouraging the common investor to look out for a familiar company to invest in.

But is investing really that simple?

The idea behind “invest in what you know” is not complicated. As the average Joe encounters many brands and companies each day, Lynch suggests that these products and services are a good source of investment ideas. While I do agree that investors should be alert and observant in order to form a good base of knowledge about products and services around us, the advice comes across as too simplistic and may even lead an investor into hot soup. That is because sufficient due diligence and understanding of the business characteristics of each investment are still necessary requirements for an investor to make an informed decision.

The investor, therefore, has to undertake his own research into these companies. Basic fact-finding steps should include at least obtaining and reviewing the company’s latest set of financials and also reading up on the management’s strategies to grow the business.

Another key aspect to consider is whether a lot of optimism or pessimism has been factored into the share price of the business that you are considering. In my previous article, I explain why it’s important to be able to discern if the share price has discounted the expectations of analysts and the general investing public. In my view, buying a great business alone is not enough to avoid losing money, the stock also has to be purchased at a good price.

To be fair, Peter Lynch himself has, in 2015, clarified on what he wrote back in his 1989 book. He added that the necessary homework and due diligence still needs to be done when assessing familiar names for investment and that it’s not just a case of “closing your eyes and just buying it”.

Investors should undertake the necessary reading and research to ensure that the investment in something “familiar” does not end up being a dud.

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