January 30, 2019

If you like a company's product, should you buy the stock?

A reader asks, “As an investor, how should I view the correlation between being bullish on the product and being bullish on the stock?”

The idea that you should buy what you know goes something like this- “I cannot believe how much money I spend at Costco. Hey wait a minute, why don’t I buy some stock in this company?”

This line of thinking was made famous by Peter Lynch, the former head of Fidelity’s Magellan Fund. Lynch, however, said this concept was taken out of context and oversimplified. He told the Wall Street Journal, “I’ve never said, If you go to a mall, see a Starbucks and say it’s good coffee, you should call Fidelity brokerage and buy the stock.”

“What you know” can be a great place to start, but that shouldn’t replace actual analysis. “If you can’t understand the balance sheet, Lynch said, “you probably shouldn’t own it.”

You might love your GoPro camera or your Ford Explorer, but that doesn’t mean other people share your opinion. And if everyone does share your opinion, that can actually make for a risky investment. Focusing on the fundamentals and ignoring the expectations falls under the category of what Michael Mauboussin has called the single greatest error:

Read more at https://theirrelevantinvestor.com/2019/01/29/the-single-greatest-error

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