4-03 Buying Stocks that you Know
There are tens of thousands of stocks out there in the world. If you have plenty of time on your hands, you could spend all day, every day reading dozens of news sites, checking out all the latest discussion boards, watching all the investing news shows, listening to podcasts, and starting your day with 20 newsletters in your inbox.
Realistically, this is what most people think “investors” need to do to get started. But really, most investors take the KISS approach – “Keep It Simple, Stupid”!
The most effective way to get started in the stock market is to focus on what you know and what you are good at. You interact with hundreds of companies and their products every day. The most simple, and effective, investing strategy is to “Buy What You Know” – the stock of companies you interact with on a daily basis. Is a restaurant chain you like getting busier lately? That might be an indication that their next quarterly revenue report will show bigger profits – but you noticed the trend before Wall Street got the final data.
Once you own these stocks, it also becomes much easier to manage your portfolio, because you see these brands doing business on a daily basis. If you are starting to see a lot more construction sites pop up around you, Caterpillar (CAT) stock may be a good place to start looking to invest. If you love video games and saw a fantastic new demo at E3, that company’s stock is probably available for sale. Are you a school teacher and do you know what the latest gadget or software program is that your school is buying? Do you work at a grocery store and suddenly everyone is asking for XYZ product and you can’t keep in on the shelves?
It all comes together when you sit down to start building your portfolio!
Each of us knows more than we think we know because everyday we contribute to the profits (or losses) of the stocks that we are choosing in the marketplace. We choose to go to Starbucks (SBUX) for coffee and skip our morning Diet Coke (KO). We eat lunch at McDonald’s (MCD) and not at Taco Bell (YUM). We buy our kids clothes at The Gap (GPS) instead of Limited (LTD). Why do we make these decisions? Because there is something about one product or the way one company is run that makes us want to go there versus its competitor. Do you ever walk into a store or restaurant and say “Wow! This place is packed all of the time?” If so, don’t walk out mad. Instead, find out more about that company and see if they are publicly traded. When my wife comes home from shopping, the first question I ask is “Where did you go?”, then “How much did you spend?”, and then “Was it crowded?” I am not just making idle conversation with my wife, I am researching stocks!