How to Invest In What You Know
A version of this thought process first appeared on my company’s blog on August 14th, 2019. Since then there has been a big increase in the amount of people who are interested in investing and the in the stock market. Apps like Robinhood make it fairly easy to get started. I am all for anything that prompts more people to learn about investing, I teach a technical analysis class to college students. But, the learning curve can be steep. Also, there are a lot of companies to choose from, where do you even start? Whenever I am asked “what’s a good stock to buy?”, I don’t start spewing off the names of companies that I own. Instead, I usually tell people to look at the companies whose products they use every day!
Anyone who is interested in writing or becoming a writer will eventually be given the age old advice to “write what you know.” The quote is attributed to Mark Twain and has also been linked to Ernest Hemingway, two of my favorite authors for non-market related reading.
But since we are interested in the market, let’s keep the focus there. One of the first books that I ever read about investing was One Up on Wall Street by Peter Lynch. If you have not heard the name Peter Lynch, here is a quick background. As the manager of the Magellan Fund at Fidelity Investments, Lynch averaged annual returns of over 29% from 1977 to 1990. During his time running the fund, assets under management grew from $18 million to $14 billion. Clearly someone who may have some interesting viewpoints on the investment process.
The book was first published in 1989 and according to Amazon.com has sold over one million copies. Lynch explains that the average investor has an advantage over professional fund managers. How? By adopting the mantra of the two great writers mentioned above with a twist for investing: Invest in what you know! Lynch argued that by paying attention to the products that we use everyday we can uncover potentially profitable investment opportunities. Lynch urges investors to look around their homes to identify the brands that are most used. Walk around the mall and notice which stores are the most crowded in addition to the stores that you visit regularly. What kind of car do you drive? Whose sneakers do you wear? At what restaurants do you eat? You get the point.
The world has changed a lot since 1989 including the way that we consume products. But we can still apply Lynch’s credo of buy what you know; just with a modern adaptation. While we can still pay attention to the products in our homes, the mall is increasingly becoming a place where less shopping is being done. Why? Because we can simply pull out our smartphones and order what we want or need. For many of us, they are an extension of our arm or at the least, rarely more than an arms length away. So I decided to take a look at the apps that are on the first page of my phone and see which public companies’ “products” I interact with frequently. From there I can look at how they stack up in the Rating Model at Chaikin Analytics where I work and publish on a daily basis.
Here is a quick look at which of the apps I use are from publicly traded companies that may warrant further analysis, either now or in the future.
The phone itself is an iPhone. (AAPL)
I use Dropbox to store and share my work and Zoom for recording videos and hosting meetings. (DBX and ZM)
I read a lot, in particular the NY Times and the Wall Street Journal. (NYT & NWSA)
For social media, I like Twitter, Instagram and What’s App. (TWTR, FB)
I bank at Chase, have an American Express card, use Venmo to pay people, and E-Trade for much of my investing. (JPM, AXP, PYPL, E-Trade was bought by Morgan Stanley, MS)
I use no less than ten different Google apps. (GOOGL)
I shop on Amazon.com, use the Kindle app, and order from Whole Foods. We have two Alexa’s at home and use Fire TV. (AMZN)
I go to Planet Fitness (no judgements) and track my workouts using an Under Armour app. I also track my food intake during the day with My Fitness Pal which is owned by Under Armour. (PLNT and UAA)
When the gyms closed for COVID, I downloaded the Nike Training Club and Nike Running Club apps. (NKE)
While I am running or working out, I listen to music on Spotify. (SPOT)
I order my coffee with the Starbucks app so it’s ready for me when I get there. (SBUX)
I was an Uber power user, including UberEats. (UBER)
I book trips with Expedia and usually fly Delta if given the choice. (EXPE and DAL)
So just on my phone, there are 20 publicly traded companies that are staring me in the face. This is a probably a good starting point if I am looking for investment ideas. And to be perfectly honest, I already own two of them: AAPL & NKE. But notice, I said starting point. It’s probably not the best idea to run out a buy a stock without at least reading more about the company and of course checking the chart to make sure that its in an uptrend.
Now that the rotation toward value appears to be taking more of a hold and the financial stocks are performing better, maybe I should take a closer look at JPM, MS and AXP. At least I know them to a degree.