Comments on: Don’t Invest In What You Know

By: DERPADERP

DERPADERP — Tue, 21 Sep 2010 19:27:17 +0000

I’m laughing hard right now considering Peter Lynch’s net worth is $352 million.

I’ve never even heard of you.

So I, E. Lynch (Yes, I’m a relative of Peter), Humbly disagree with YOU.

To each their own I suppose…

Good Day Sir.

By: CarlosPorto

CarlosPorto — Thu, 07 May 2009 19:33:26 +0000

Hey Jim, just came across this post and wanted to chip in with my two cents. I agree that basing any kind of investment strategy on simply “investing in what you know” is a bad idea. However, I totally agree with Andrea too. It can be a great introduction to the market. Maybe not to find specific stock picks, but to learn.

Say you want to learn about valuation or reading financial statements. Would you rather read the annual report for Apple or for some random banking stock? It’ll be a lot easier to start with the companies you care about/know about to learn this stuff.

By: Andrea@FoolsandSages

Andrea@FoolsandSages — Thu, 28 Aug 2008 01:21:59 +0000

While I agree with you on the one hand (as someone who has been in the brokerage industry for 15 years), I think telling people who are already unsure about investing to try to disregard what knowledge they do have just adds another layer of anxiety.

But yeah, index funds kinda take care of all of that. I’ll be posting something about mutual fund expenses tomorrow, actually, and it basically concludes with, “or you could just get an index fund.”

By: Matt

Matt — Thu, 21 Aug 2008 19:32:45 +0000

I realize this is a devil’s advocate post, but I must humbly disagree w/ the “don’t invest in what you don’t know” thesis. I’m a biochemist by education and investing in the pharma & biotech sector has made me a double the profits I’ve made in my “not in the know” portfolio over the last 10 years. Now, before you go into the being overweight and diversification argument, I fully admit to being overweight in this sector but I’ve also learned to TRADE these overweight sectors by putting protective stops in place.

As to the statement in your opening scenario regarding being overweight in tech – I wholeheartedly agree that it was certainly a bubble and you potentially got hammered like many others. However, the simple fact remains that bubbles create trading markets, and you likely made investments in companies that shot up 100% or more in less than year. It’s only natural that momentum stocks would fall, and fall they certainly did.

Traders such as myself later took that opportunity to short everything tech related from 2001 to 2003. Point is – you can’t be an investor in companies that CNBC hypes everyday (think Amazon.com or JDS Uniphase from 2000) and expect them to stay above the stratosphere forever. Same thing is happening in the oil markets today in 2008.

By: ToughMoneyLove

ToughMoneyLove — Thu, 21 Aug 2008 15:20:06 +0000

The problem with “knowledge” and the markets is that the price of equities already takes into account what people “know”. But future movement is based on what we cannot know (unless you are an insider). So forget managed funds – the knowledge of the fund managers doesn’t really help. Index funds + proper allocation is what you need to know to survive.

By: Start-Up

Start-Up — Thu, 21 Aug 2008 15:06:34 +0000

I agree with Kent, that last statement is rather ridiculous. How are you supposed to know which funds are led by people who know a lot? From my readings it seems as though picking mutual fund managers is just as much of a random walk as the stock market. The idea of buying an index fund is probably the best thing you can do, as long as you KEEP THE COSTS DOWN.

Invest in what you know. I take that to mean, if you are knowlegdeable in pharmaceuticals, then stick to pharmaceuticals when selecting individual stocks. I think Lynch meant his advice to be used when selecting individual stocks, which can be super fun, but make sure it is only a portion of your overall nest egg, especially if you only have expertise in one area.

Thanks for the devil’s advocate point of view, always seems to make me want to comment.

By: Kent @ The Financial Philosopher

Kent @ The Financial Philosopher — Thu, 21 Aug 2008 13:31:37 +0000

You make an excellent point and I will add that, while it is true that “knowledge is power,” knowledge is certainly not wisdom.

Wisdom, in my humble opinion, is “knowing what you don’t know” or awareness of your own ignorance, which is a human condition shared by everyone — including fund managers.

Your final statement says, “Don’t invest with what you know, invest in fund who are led by people who know a lot and who invest in a lot of things. Or buy an index fund.”

While this guidance is good, it would be better (for the average investor) to use only index funds. Investing in a fund that is “led by people who know a lot” does not resolve the problem at hand — it only buys the investor a basket of stocks or bonds managed by a person or a team that is just as susceptible to human error as anyone else, which is why the majority of fund managers do not beat the indexes over long periods of time…

Thanks for the interesting perspective…

Kent @ The Financial Philosopher