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Thursday, October 11, 2012

Buy what you know

Peter Lynch, one of the most successful fund managers of all time, was an advocate for investing in what you know.  If you work in a shoe store and see a certain shoe selling, do a bit of research and you may uncover an investment opportunity.

This was brought to mind recently under slightly different circumstances.  I was prepping for my 10-year colonoscopy, drinking the horrendous concoction whose purpose was to clean me out appropriately.  If you're not sure what I'm talking about, don't worry--it's not crucial to my point.  As I spent time on the throne, so to speak, I was reading Barron's and came across A Better Test for Colon Cancer? by Andrew Bary.  The article discusses a company named Exact Sciences and the test they have developed that is in the clinical trial stage.

In line with Peter Lynch's theory, this stock could be a perfect candidate for doctors working at the clinic where I was getting my procedure done.  They very likely may know more about the potential of such a test than even Wall Street analysts.  Furthermore, the whole back story is beyond the understanding of the average investor.

Although I am not an advocate for buying individual stocks, this might be the type of situation where it could make sense.  It is the type of situation where an investor could gain an edge.

To be clear, my overall philosophy is that individuals should not invest more than 20% of their assets in individual names and no more than 5% in any single name.

Where is your expertise?


  1. Good observation Robert. Every hospital I visit, I see the same adjustable bed patients are given. Uber complicated, but comfortable, adjustable beds. So I looked to see who made these (and I'm sure these are super expensive) and it was company called Stryker. Sure enough, turned out to be a very profitable company!

  2. Robert, good point. Sometimes, it does make sense to buy what you know. However, I like your limiting criteria of <5% in one name and <20% in individual names. I think that is a very good rule of thumb, because it really limits the individual risk. The rest of the portfolio being broad market funds.