Recently a company emailed me to tell me about their product. The product re-introduced me to the idea of investing in what you know. Peter Lynch, of Fidelity fame, may be the biggest proponent, and Warren Buffett, may be the best known. When those two minds agree on any piece of investing advice, it is wise to listen…
… or is it?
I was a software engineer working on websites in 1999. (I’m sure you can see where this is going.) What I knew then was building websites. Should I have invested in them? In hindsight, the answer to that question is easy… No. It was extremely hard to know where to invest back then. I remember thinking that software was going to be distributed online and Egghead Software (Symbol: EGGS) was looking like it would be the Amazon.com (when Amazon was mostly books). It was trading at around $18 a share when I bought 100 shares. Later on that day it went up to $32 a share, but by the time my meeting was over it was down to $13. I suppose you could say that wasn’t investing… it was speculating.
I learned this lesson again recently. I know mobile phones relatively well. I know that Palm has one of the best mobile phones… the Palm Pre. You use it for a few minutes and it just feels right. I show someone it and even if they have an iPhone, they say, “Wow, that’s pretty cool!” So, my experiences told me that it was it wise to invest in Palm. Turns out that their marketing was pretty bad, and their exclusive agreement with Sprint went on a month too long. By that time, Verizon decided to put its promotion power behind the Motorola Droid. While I thought I was investing in what I knew, it turns out that I wasn’t. I wasn’t investing in the product only, but also the marketing and the company’s business execution.
As you can tell, I’m a little skeptical about the strategy of investing in what you know. In the next day or two, in part 2, I’ll expand on this topic as well as give more details about the company and their product. In the meantime, let me know in the comments if you invest in what you know or if you are skeptical like me.