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The edge you need to make a smart investment is often something you already have — the intimate knowledge of the companies you do business with daily.
In drag racing they say, "Run what you brung." In investing it’s, "Buy what you know."
Very often, the edge you need when investing is something you already have. The edge is the intimate knowledge of the companies and industries that you understand and do business with. As a member of the collision repair community, you have an intimate knowledge and understanding of companies, paint products, tools and equipment — the list goes on. Since you already have a vested interest in these companies — they form the very basis of your business — why not consider participating in their success?
Often there’s very little, if any, correlation between the success of a company’s operations and the success of its stock over a short period of time. In the long term, there’s 100 percent correlation between the success of the company and the success of its stock. This disparity is one of the keys to investing — a key that you hold in your hands with the intimate knowledge you have in dealing with certain companies day in and day out, week after week. It’s often this intimate insight that hints at who will be heating up and who will be cooling down.
Case in point: The seventh grade class who invested in McDonald’s (because kids love to eat hamburgers), Disney (self-explanatory), the Gap (because kids have to look good), Coca-Cola (because you’ve got to wash down those hamburgers with something) and Topps (because, in seventh grade, boys are very into baseball). Because the kids could relate to and partake of the companies they invested in, they felt they actually contributed to the revenues of the companies. They invested by buying what they know. Why not do the same thing in your business?
Writer Gregory F. Butler is an investment executive for PaineWebber and specializes in cash-flow management. For more information and a list of particular publicly owned companies by industry, call Greg at (800) 307-4799.
Six Tenets of "Buy What You Know" Investing
2. Behind every stock is a company. Find out what it’s doing.
3. Know what you own and why you own it.
4. Never invest in a company without understanding its finances. You wouldn’t buy a body shop with a poor balance sheet, so don’t buy a stock with one.
5. Do your homework. You know the company’s products, now get to know the company through Valueline, analyst reports and annual reports. (You can obtain these from the library or the company itself.)
6. When in doubt, wait it out. Hold your money until you find an attractive company.