Invest in What You Know
Stephen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When I was a Residential Advisor during my senior year in undergrad, I coordinated a floor program titled "How to Be A Millionaire." In hindsight, my sales pitch reminds me now of the advertisements lining the sides of most finance websites, and I'm surprised my students didn't ignore the fliers I posted with the same discrimination I now have when refusing to click any banner advertising how to gain wealth from penny stocks.
I'm glad they didn't ignore my cheesy advertising, because low attendance might have resulted in the program being cancelled, and I would have missed out on the presentation that changed my life. It was given by the financial director for the school of engineering. He had booklets prepared, full of articles, stock index charts, and data tables, one of which blew my mind away. The topic of the table was the effect of compound interest and why it is ideal to start investing as early as possible. Two scenarios were compared. In the first scenario, an individual invests $5,000 annual for 10 years and stops making contributions after those 10 years. In the second scenario, and individual makes no investment for the first 10 years, then invests $5,000 annual every year after that. I was astounded to learn that at the 30 year mark, the person who only invested $50,000 over 10 years outperformed the person who invested $100,000 over 20 years, assuming the same compound interest rate. That was all the convincing I needed to make investing early a priority after graduation.
The only problem was I knew absolutely nothing about investing. Stocks appeared to be the territory of the elite; no way could a 22 year old college grad going into the Navy participate in that kind of market with the big boys. I'm no sucker, so I bought some mutual funds. Ok, maybe I was a sucker, and it wasn't until 2009 that I felt comfortable enough to "experiment" in buying stocks. I typed the ticker of a big name company in my broker's website and was overwhelmed by the deluge of data and charts assaulting my eyes. It's ironic, considering how I voraciously slurp up this information now. Needless to say, I quickly gave up and called my Mom for advice. Her recommendation was to invest in a company I was familiar with.
With this piece of advice I bought my first stock, before I knew anything about the P/E, margins, financial reports, earnings calls, etc. However, what I did know was how much money I was spending weekly buying coffee at Starbucks (NASDAQ: SBUX). Despite this happening right smack in the middle of the recession, every time I visited a Starbucks there was always a queue of customers happily waiting to spend their money on expensive beverage and food offerings. I loved their products, their customer service, and their corporate responsibility. I was an early adopter of their Rewards Card program, and the company endeared itself to me when I received a birthday postcard offering a free beverage. I had been a local coffee house snob since high school, and I'm pretty sure back in those days I sneered at anyone who would buy coffee from a corporate beast like Starbucks. I still prefer and support local businesses to this day, but I couldn't deny the superior product and experience of this coffee giant. My investing thesis was straightforward: this is a company I love and respect, and if they are doing good business during a recession, imagine what they will do when the economy turns around! I invested in what I knew.
Investing is very intuitive. Today I know to check the valuation and metrics of my stocks with those of their competitors, and back then I thought it would be prudent to consider some competitors of Starbucks. The most pure coffee competitor I could think of was Tim Hortons Inc. (NYSE: THI), a Canadian company I only knew existed because they had a wildly popular location next to the Canadian camp in Kandahar, Afghanistan. I thought the coffee was decent, but I reasoned it was unlikely they could expand into the United States where Starbucks is so ubiquitous. I was also very familiar with Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR) due to the fact that seemingly every office break-room I encountered sported one of their K-Cup machines. This would have turned out to be a very solid short term investment at the time, however I couldn't imagine how a single cup brewing system, no matter how novel, could replace the superior product and service of a well run coffee house. Green Mountain has significantly outperformed Starbucks over the last 5 years, but the tide has turned over the last year and I believe over the long haul things will be very different.
Investors are bombarded by the financial media with all sorts of rationales for buying a particular stock. Dividend yields, low P/E's, high growers, insider buys, macroeconomic trends, inventory trends, and acquisitions are just a few reasons investors are encouraged to consider a stock a buy. However, the most powerful piece of information you have at your disposal is your personal experience and familiarity with a company, and that cannot be fed to you by a financial website or TV program. Odds are that every day you interact with several public companies. If you are starting out in investing, I highly recommend starting with these companies before investing in that "hot tip" stock you've never heard of before.
drfrank1 owns shares of sbux. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services recommend Green Mountain Coffee Roasters, Starbucks, and Tim Hortons. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.