Wednesday, May 07, 2014

Buy Stocks in What You Know?

A long time ago, Peter Lynch, the Manager of Fidelity’s Magellan Fund, became a hero of investors by popularizing the idea of buying stocks in companies with which one is personally familiar, either as a customer or as an employee. Enough successful examples of that strategy were around to promote Magellan and Lynch to well deserved cult status, and investors began asking their wives and children which stores and which products they liked – and why.

All that was true then. But does it make sense today? Yes, if one doesn’t confuse notoriety with knowledge. Take, for example, Alibaba, the Chinese e-commerce colossus that is about to go public in what may well be the biggest IPO in history. People are angling to buy stock in Alibaba or in Yahoo, which owns a big stake in the Chinese Company.  Other people are buying “momentum” stocks – stocks such as Tesla or Facebook or Twitter or Netflix. Some of these will make money for their buyers, but many are plunging on the basis, not of personal knowledge, but of hype. There’s a difference.

Look, with any of these momentum stocks, no matter how much you think you know, hundreds of Wall Street’s best and brightest know a thousand times more. They know more and they trade faster. You don’t have to believe the market is rigged, as one author plugged his book by charging. It’s just a fact of life, much more so now than in the golden age of Peter Lynch.

Publicity attracts crowds; that’s the idea, after all. In my stock trading, I scour the table of contents in the Journal and Barron’s, and if I find a company listed in which I am interested in trading, I cross it off my list. It is hard enough making a buck in the market without competing with the sharks. There are plenty of companies, even NYSE-listed companies, that never appear on those tables of contents.

I’m not saying that investing in what you know is a bad idea. I am saying that trading in hyped stocks is a loser. I bought some Apple several years ago because I believed in the Company, and I still own those shares. Score one for Lynch. But I trade other stocks, and those are the stocks where publicity is the kiss of death. Which ones? I’m not going to tell you, because that would be dumb.