You may be familiar with the investment strategy of Peter Lynch, Fidelity Investment's legendary portfolio manager. His simple philosophy of "invest in what you know" has resonated with many individual investors who don't have the time to read complicated reports or learn complex stock measures. Most people tend to have expert knowledge in at least one field, so using this principle is a good starting point.
So while at least some of your portfolio should consist of stocks from familiar companies, should individual investors limit themselves there?
In a video on Motley Fool, the website's co-founder, David Gardner, said that while Lynch's advice is especially useful for those new to trading, it shouldn't be the beginning and end of anyone's investing knowledge. He said jokingly that Lynch's mantra should be tweaked slightly to "invest in what you're interested in."
"That's my approach," Gardner said in the video, referring to investing in stocks outside of his knowledge base. "The good news is, it's a rapidly expanding tech world, and if you can embrace and awaken your mind to that, I think you'll see stuff that other people don't. The bad news – because in every strength there's a weakness – the bad news is that you end up being a mile wide and an inch deep."
Gardner then discussed the first biotech stock that he purchased, Amgen, with very little knowledge of the industry. His reasoning was simply that Amgen was a major company that seemed to have large profits. He advised that individual investors should ease into unfamiliar territory by first buying into major companies.
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Categories: Risk Management, Trading & Portfolio Strategies