Jun 292014

Luigi Rosa - Train with Crossing TracksNo doubt you have heard the advice that you should only invest in things you know. Problem is, you’re not an industry expert. You don’t pretend to be and you don’t want to put in the thousands of hours to become one. That’s ok – almost every industry is still open to you to invest in.

Many people think investing only in what you know means limiting yourself to the industries you have expertise in. While that would be the optimal situation, it’s not the requirement. You can actually invest in the oil & gas industry, pharmaceutical industry, telecom industry, and a host of others without knowing the ins and outs of all their movements.

Know what makes an industry tick.

Find out what resources and delivery methods they need to keep operating. See what industries their customers are in and why their general type of products or services are being used. These are things that, with a little research and critical thinking, you should be able to figure out yourself without devoting countless hours into it.

You don’t need to find the best opportunity. You just need to find some good ones.

Knowing the inner details of an industry will allow you to find the diamonds in the rough. Armed with expert knowledge, you can make assumptions and connections that most people have not figured out yet, giving you the chance to buy something before demand for that opportunity increases.

However, if you’re not looking for the diamond in the rough then the value of the detailed knowledge is much less important. You are more able to compare companies on a general level. The “crowd” will be able to tell you what companies are good and which aren’t. After that, it is simply up to you to use your investment prowess to determine when to enter and exit the position.

The less you know of an industry, the more diversified in that industry you must be.

Considering all I’ve said above, if you don’t have deep industry knowledge then you should fill your portfolio with larger, more generally well-known and well-thought-of companies. Why? These are companies that usually have a wider customer base, larger assortment of products, and greater financial resources. You won’t get the ridiculously large +1,000% gains of really small companies but you can still find opportunities for +20% or even +100% gains. These companies are often referred to as the “blue chips” of a certain industry: BP and Shell for Oil & Gas, IBM and Cisco for Technology, Goldman Sachs and JPMorgan for Investment Banking. It’s not a bad idea to rely on what the crowd says, especially if they are more knowledgeable than you in that area.

The catch is that you must have an advantage somehow.

If you can’t get an edge by choosing a better company, you must find some other way to get it. This can be timing the opportunity, such as buying good stocks during a recession when many people are throwing them away. It can be leverage, if you happen to be able to take on debt or margin at a lower rate than others. It could simply be that you have a longer timeframe, allowing you to buy companies that people know will do well over the long term but will suffer in the short term.

By applying your edge, which is an ability you already have, and combining it with crowd knowledge, you are able to make investments in these industries. The crowd can sometimes be wrong, of course, and if they are you won’t be able to tell. That is why you must purchase several good companies.

Remember – if you do not feel comfortable entering into an investment, don’t.

 Posted by at 3:23 AM

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