The Iconoclast Investor

This year has certainly been a wild ride for investors, the volatility in the market has been extraordinary, we’re “officially” in a recession and the financial landscape has been dramatically altered. But we’ve been here with you through it all, giving you our best advice. Today, and in several other posts, I’m going to re-print some of the pieces we’ve written in the last 12 months both here on our blog and in our free email newsletter, Cabot Wealth Advisory.

Think of it like reviewing before a test–while there’s no pop quiz at the end, there are always new investing challenges to tackle, and reviewing lessons learned in the last year can help you meet them head on.

Here’s the advice Brendan Coffey, editor of Cabot Green Investor, gave on August 8:

“Throughout the 13 years he was steering the Magellan Fund, Peter Lynch became known for his philosophy that you should invest in what you know. In his 1993 book, “Beating the Street,” he discussed how he built Magellan from a $200 million fund to a $14 billion fund in a little more than a decade. The philosophy Lynch wanted to drive home to individual investors was that you should buy companies that you are familiar with. In Lynch’s case, he liked the “tasty tacos of Taco Bell,” so he added the then-unknown chain into the portfolio; his wife loved the convenience of L’eggs hosiery, so he bought shares of Hanes.

“Buying what you know has long since become a bit of Gospel among a large segment of investors–after all, if it worked for Peter Lynch, it should work for you. It’s not a bad idea–certainly if you feel strongly about a company and have what you think is pretty decent insight into its products and market, then you can do all right. I know a few creative types who did quite well buying Apple Computer stock when it was well under 20 in the late 1990s.

“But it’s possible to take buying what you know too far. It’s one thing to rely on your gut feeling, but another to let it overwhelm your intellect. Peter Lynch, after all, wasn’t a Forrest Gump-like fund manager, blindly lucking into gold because he liked the taste of nacho cheese. He liked the underlying business of Taco Bell, the balance sheet, the management and the growth plan. It certainly helps that the company had a simple story to tell–it prompted Lynch to take a deeper look at the business structure and the stock valuation.

“But a lot of other food chains have had simple stories, and even better food, but everything from poor management to a too-high debt burden to unrealistic growth plans did them in. That’s a lesson Peter Lynch also discusses in his book, but because it isn’t so pithy, it doesn’t get repeated very often. There is a difference between a good company and a good stock. One can be the first, but that doesn’t mean it’s the second.”

That’s all for today, I’ll be bringing you more pieces from the year throughout the next few weeks. What’s your most memorable part of the year in the investing and financial world?