This is not a book review… or maybe it is.  Either way, buying stocks of companies that you are familiar with is a successful investing strategy.  Great investors like Warren Buffett and Peter Lynch did this for decades, and made billions with this technique.  We don’t recommend you buy these stocks blindly, or just because you like them.  Instead, we recommend you use what you already know to identify companies you want to investigate further.

I Bought What I Knew

First a personal story: back in 1988, I was working in the customer service department for a company that made electrical products.  One day the Vice President of Sales called a special meeting.  “We need to change the way we do business”, he said.  “We believe that one of our customers will grow exponentially in the coming years and we need to be ready for this growth.”  The customer he was talking about was Home Depot.  I went back to my desk and thought that if our 100 year-old company was going to change the way we do business for Home Depot, then they must really think this is an amazing company… so I bought some stock.
This turned out to be one of the best investments of my life.  I carefully watched their purchase orders float in every day, while they opened new stores at a groundbreaking pace… I was literally watching Home Depot burgeon every day from my desk at work.  Not only did I buy stock once, I signed up for their dividend reinvestment plan and direct stock purchase plan and continued to buy every month for years.

Now I don’t recommend you buy a company’s stock just because you like the company.  This is just a starting point to identify companies you want to investigate further.

Peter Lynch

Buying what you know is what made Peter Lynch one of the most successful mutual fund managers in history.  He ran Fidelity’s Magellan Fund from 1977 until his resignation in 1990, growing it from $18 million to $14 billion, using the buy what you know technique.

His wife and daughter shopped at The Limited before anyone on Wall Street even heard of it, allowing Lynch to make a killing.  He investigated Apple Computer because his kids owned one, and researched Pier One because his wife shopped there often.  Taco Bell appeared on his radar after he enjoyed a Burrito Supreme (hold the sour cream), and he found Volvo because his family and friends owned their cars and loved them.

The Book

After retiring from Fidelity, Lynch decided to share his investing techniques with the world through his first book One Up On Wall Street: How To Use What You Already Know To Make Money In The Market. This was the first book on investing I ever bought, and in my opinion it is still the best.  Lynch focuses on the power of common knowledge and how to take advantage of what you already know.  He believes you don’t have to be a Wall Street analyst to uncover great investment opportunities, and in fact you may actually have an advantage because of it.  If you want a great book on investing, this is it.  Additionally, Lynch’s second book,  Beating the Street, is amazing as well.

If you want to be a successful investor, you need to own these books. And you need to start paying attention to where you shop, what you like and what you see.