As you probably know, we at Cabot value education very highly. Just last week, Editor Timothy Lutts implored you to read the Education section of our Web site. And in that spirit, I’ve been at a conference in Las Vegas this week learning how to be a better editor and more effectively communicate with you, our readers.

Since I wasn’t in the office, I dipped into the archives to find a post worth repeating. I picked the one below because it contains a timeless investing lesson and the stock recommended in it is still doing well today. Enjoy!

The lesson itself comes from an issue written by Editor Brendan Coffey in August of last year. In it, he discussed the concept of buying stocks based on what you know … and what you like. Here’s what he said:

“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.”

I took this advice to heart after reading the June 1 issue of Cabot Top Ten Report, which featured one of my favorite stores: J. Crew (JCG). In that issue, Editor Michael Cintolo wrote:

“J. Crew is one of the market’s strongest stocks because its bottom line is coming in much better than expected, and analysts are tripping over themselves to hike earnings estimates. J. Crew reported earnings last week, and while the year-over-year numbers were nothing to shout about (it squeaked out a small revenue gain but earnings fell 29%), the bottom line was more than triple what analysts had expected. The reason: Solid margins, which we believe is because of top-notch management–the company has a history of outperforming its peers, and while that didn’t mean much during the last year, it will as the economy picks up. Analysts hiked their 2009 earnings estimates from $0.47 to $0.82 a share after last week’s report, and considering J. Crew has beat expectations the past three quarters, we believe even these newer estimates are conservative. It’s an interesting turnaround situation.”

Mike put the suggested buy range at 24 to 27 and I picked it up at 26 for my Paper Portfolio at work (not real money, just a little office competition) and as of press time, I’m sitting on a 58% profit. JCG isn’t your typical growth stock, but I like the company and the clothes, so I’m going to hold on a little bit longer.

However, I also have a word of caution from Brendan’s write-up last year about Lynch’s philosophy and I’ll share it with you here:

“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, 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.”

Recently, Cabot Market Letter Editor Michael Cintolo had this to say about J. Crew:

“The retail clothing business can be a tough way to make money during a recession, but J. Crew Group’s management seems to have the right touch. Founded in 1983 as a catalog-only operation, J. Crew now has over 225 retail outlets, plus the Crewcuts line for kids, a weddings-and-parties division and a high-end line of exclusive, limited edition and couture pieces. This successful build-out of the brand is the work of Millard Mickey Drexler, who took the helm in 2003. JCG has been a rocket, blasting off from 9 in March to over 40 in recent trading, with a big boost on October 22 when the company raised its Q3 earnings forecast.”

And if you didn’t visit the Education section of our Web site last week when Tim recommended it to you, I urge you to do it now. We have information outlining the basic strategies of growth investing and value investing as well as more timeless investing lessons.