One piece of advice often given to investors who are just starting out is to "buy what you know". It's a phrase most associated with Peter Lynch, one of the investment superstars of the 1980s. Lynch delivered returns of nearly 30% a year when he was running the Fidelity Magellan Fund from 1977 to 1990, beating the S&P 500 index in 11 of those 13 years. As a result, the fund's size ballooned from $18m to $14bn during the same period. He was very much a stockpicker, with a focus on hunting for "ten-baggers" fast-growing stocks with the potential for rising tenfold or more.
In his bestselling book, One Up On Wall Street, Lynch argued that individual investors can get an edge on professionals simply by keeping their eyes open on the high street and in their place of work.For example, one of Lynch's most successful investments was in Hanes, a company selling hosiery. He decided to buy after his wife tested a line of tights made by the company and raved about how great they were.
Paying attention to "the evidence of our own eyes" can be a good move, agrees Ian Cowie in The Sunday Times. He tells of how he bought into McDonald's in July 2014 "when the burger chain was widely reviled and out of favour with institutional investors". Despite the heavy criticism it was getting, says Cowie, "whenever I went McDonald's outlets were always busy" and "fast food was unlikely to go out of fashion". So Cowie took a gamble on the fast-food franchise it duly soared in value by 40%, with the shares hitting an all-time peak last month.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
However, this approach is not as it's sometimes presented a simple matter of just picking a product or service you like, then buying the company behind it. You still need to do your homework. For example, the Hanes purchase wasn't just about Lynch's wife finding a nice pair of tights. The key factor was that Hanes had made the leap to selling good-quality tights through supermarkets, rather than just through department stores. Lynch dug into the data and found that the average woman made roughly six times as many visits to a supermarket in a year as to a department store, and that Hanes' product was the best in that market.
Latest Videos FromMoneyWeek
So it had a huge competitive advantage in a nascent market. As for Cowie's move, it doesn't take a genius to realise that McDonald's is often busy. But it does take some specialist knowledge to understand that at that point in time McDonald's was also cheap (offering by US standards a high yield of 3.3%) and widely disliked, and therefore worth buying.
As Lynch himself told The Wall Street Journal last month: "I've never said, if you go to a mall, see a Starbucks and say it's good coffee, you should... buy the stock'." Instead, "use your specialised knowledge to home in on stocks you can analyse, study them, and then decide if they're worth owning". For example,"if you're in the steel industry and it ever turns around, you'll see it before I do".
In short, if you're picking individual stocks, it makes sense to focus on industries you understand and you certainly shouldn't buy any company whose business model you can't describe to a friend in easily comprehensible terms. As Lynch's fellow superstar, Warren Buffett, once put it: "You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital."
Shares with perks is it worth buying in?
Most investors buy shares for one reason only to make money via dividends and capital gains. However, there is another way to profit from some shares via perks. In the past, such offers, available only to shareholders, could be very generous. The idea was to turn shareholders into customers, and to encourage them to hang on to the shares (and, implicitly, stick with existing management), even if the firm ran into difficulties.
Tougher financial times and the rise of online trading (and the corresponding fall in investor holding periods) have in many cases seen the generosity of such perks fall. For example, last year Euro Disney (Paris: EDL) shut its shareholders' club to new members, and cut the benefits available. However, for those who are fans of particular products, there are still some potentially interesting offers.
For instance, publisher Bloomsbury (LSE: BMY) offers a 35% discount on any print title it publishes, and you need only own a single share to take advantage. Suit hire firm Moss Bross (LSE: MOSB) offers a 20% discount on any purchase, also available to those with just one share. And those who trade shares frequently might be interested to know that buying 100 shares in online broker Share Plc (LSE: SHRE) an outlay of roughly £28 right now can get you a 20% reduction in online trading commissions.
Obviously, unless you're a big buyer of Bloomsbury books or Moss Bros suits, we wouldn't suggest buying any company's shares for the perks alone bear in mind that as a shareholder you ultimately pay for said perks out of corporate profits.
And you never know when a perk might be withdrawn. But if you do plan to buy a share, and it happens to come with a perk attached, it can be a pleasant bonus. Just remember to check any conditions attached and make sure your broker enables you to claim perks (some perks are unavailable if the shares are held in nominee rather than certificated accounts).
