“Buy what you know.”
You’ve probably heard this bit of folksy, feel-good advice about stock picking. It’s often attributed to investing legend Peter Lynch, who from 1977 to 1990 managed Fidelity Investment’s Magellan Fund (FMAGX), which earned an eye-popping 29% average annual return.
The basic idea is tantalizing: rather than taking a broker’s advice to buy, say, some new energy stock that you don’t fully grok, use your own two eyes to suss out investing ideas from everyday life.
Have you just discovered the best yoga pants on earth? Are your co-workers driving more hybrid cars?
A key piece of Lynch’s philosophy is that we, as everyday consumers, often have a better vantage point on trends than a Wall Street analyst reading stale reports from his mahogany office.
But just because, say, you love a certain brand of doughnuts, that doesn’t necessarily mean you’ve found a great investment. “Finding the promising company is only the first step,” Lynch wrote in his bestseller One Up on Wall Street. “The next step is doing the research.” That means understanding the company’s business model and making sure the stock isn’t overvalued.
Let’s face it: step two is a doozy.
Taking stock: Where do your investing ideas come from?