Investing in what you know
Warren Buffett says, “Never invest in a business you cannot understand.” The world of investing is vast and complex. You may be tempted to try your hand at an investment or business you don’t fully understand with the rationale that you don’t need to know what’s going on to make money from it. Warren Buffett says otherwise.
The investing mogul recommends sticking to investments and businesses you are familiar with and can easily understand. This way, you won’t be in over your head, and you’ll be able to make the right judgment calls and decisions based on your knowledge and expertise in that industry.
This advice holds for those using an investment advisor, financial planner, robo-advisor, and those going on their own. You may be handing over the reins to someone else, but ultimately, you are in charge of your investments. And you owe it to yourself to be on top of the game.
Limited knowledge
If this advice makes you think your options will be vastly limited, think again. Which fields have you worked in during your lifetime? Are there industries which you have a particular interest? Have you always favored a specific company?
Each of these industries would make excellent investment choices because you probably have a reasonably firm grasp of how these particular markets work and who the best companies are.
Too Complicated
In contrast, there are probably thousands of companies whose markets are driven by rules and patterns you will not comprehend. Can you predict a biotechnology company’s drug pipeline’s success or forecast the next technological breakthrough that will drive growth in semiconductor chips? If not, it’s best to give these industries a wide berth.
Aside from his purchase of IBM, Warren has famously avoided investing in the technology sector.
Now that you have this excellent advice invest in what you know. The rule is simple and logical: Stick to what you know for a greater chance at success. We hope that you enjoyed this quick post. If you liked this post, please check out our other posts on our MoneySmart Tips Blog.
