Buy What You Know -- But Be Careful

“Buy what you know” — the great Peter Lynch said investors could succeed by taking that approach. But in a column for Seeking Alpha, Validea CEO John Reese says not to forget the warning Lynch issued in discussing buy-what-you-know.

“Lynch thought that if you knew something positive about a stock — you buy the company’s products, like its marketing, work in its industry — you could find strong stocks before professionals caught on to them,” Reese writes. “But while focusing on ‘what you know’ can be a helpful starting point, it’s far from the be-all and end-all of investing. In fact, in the revised version of One Up on Wall Street, Lynch said many had misinterpreted his advice.”

Lynch warned that you have to do your homework on any stock you buy, looking at its financials and competitive position, plans for expansion, etc. “I couldn’t agree more,” Reese says. He looks at some firms with popular products or services that are also fundamentally and financially sound enough to pass one of his Guru Strategies — investment models based on the approaches of history’s best investors (including Lynch).

Validea’s Peter Lynch-inspired portfolio is up 10.4% annualized since its mid-2003 inception vs. 6.4% for the S&P 500. Check out its holdings here.