This is a philosophy that was made famous by Warren Buffet and Peter Lynch and adopted by people the world over – invest in what you know. This philosophy was strictly for stocks and shares – Peter’s argument being that the common investor stood better chances of finding a multi bagger than the well educated and well dressed analysts of Wall Street.
I have attempted to contemplate on their philosophy of only invest in what you know to other areas of personal finance. So let’s see whether it holds any water.
Invest in what you know is the holy grail to intelligent investing
How do you invest your money ?
If you do not know about what you are investing in, you could be in trouble financially. The most blaring example in financial planning is life insurance where ULIP trotting agents have mis-sold this product to gullible investors promising returns that are not feasible.
As a result, many small time investors who could have multiplied their money via mutual funds lost a lot of money in the first few years because of high charges of ULIPs. They did not know what they were investing in ! I know of an agent who sold 15 insurance policies to an investor justifying that each policy would mature from 61 years of age to 75 and would take care of his retirement.
Same could be the case with endowment insurance policies or stocks or mutual funds.
If you cannot do enough research on stocks and mutual funds, then either seek professional help or do not invest in it. It is your money and you cannot forget to invest in what you know well.
I personally think investors need to take efforts to understand where their money is being channeled and what the product is. For those who do not want to take the effort, I think the only solution is to go to a financial planner.
Read here what Peter Lynch thinks on invest in what you know principle.
How do you buy consumer goods?
You walk into a mall or electronic store and are welcomed by a sales agent who has brushed up his blabber overnight. He launches into best offers of the month, probably one that will fetch him the most commission.
Be it a laptop, a LCD, washing machine, a car of any other electronic item, you invest in it because you want it – in the greed of acquiring the product sooner, you forget to invest in what you know – and you get to know of the product after you buy it. Should it not be the other way round? And is that possible?
Actually, I have tried it myself and succeeded to some extent. I know nothing about cars so I always talk to a close aide of mine who shockingly even knows the sizes of the bonnet and how much leg room the back of the car will provide. My take is to talk to experts first and then research on the product myself to understand it better. Honestly, this just isn’t possible for every product you buy.
I have failed miserably when I picked up a dual SIM mobile from a brand which was just launched. I did not want to spend on phones because I don’t like them and my requirement was dual SIM. Today, the mobile can do just about everything except I cannot hear the guy on the other line – now it serves as a “I throw it down, you pick it up daddy” for my 1 year old.
My thought is, you might not get to know each and every product very meticulously but a layman overview of each and every feature of the product needs to be investigated before you invest in it. Most of the investors don’t.
How do you buy your first house?
The biggest parameter for buying your house is cost. If you get an apartment or flat you like at a price which is as cheap as possible, you are tempted into buying. You haggle for prices here the same way when you buy vegetables.
If the price is less, investors are often ready to disregard the other important factors like reputation of the builder; whether the locality will be inhabitable over a period of time in case of projects which are in far flung areas; how much delay could possibly be caused in case of under construction projects; whether the project is free of litigations; whether the place will really fetch a rent you expect it to.
Most of this information are either assumed or we are sweet talked and made to believe in them. We ourselves seldom do serious investigations to second everything we have been told. And we still go ahead and invest in what we do not know about.
A house is the biggest asset in terms of a middle class person’s portfolio – not only do you need to invest in what you know with regards to the locality you are buying, but you also need to ensure you do not take too much debt for it.
Wrap up – invest in what you know for a financial free life
Remember that nothing good comes for free. If we want to be happy with our investments, we need to understand what it is and why we are taking it. This requires planning.
For example, if one plans for tax investments through the year, then during January to March, one does not have to invest in unsuitable products just to catch up on the Sec 80C investments.
There have been many occasions with many an investor, that without knowing where he or she was investing, they made a killing on their investment. But that does not happen everyday. Call that a coincidence or luck. We cannot win all our cricket matches just because we won the World Cup.
Expecting all investments to make us rich and happy isn’t a practical expectation if we did not put efforts to understand it. At the same time it isn’t practically possible to do that for each and every product. As long as you apply this philosophy to major investments in your life, it should be fine.
Do you have any thoughts on how you can invest in what you know and how do you personally do this ?
Dont thin’k it is possible to do this with real estate – one cannot know whether the builder will go bankrupt.
To an extent it is possible, but not always.
I think stocks and funds, one should own responsibility.
I do not want to research on consumer goods at all.
@Jigar, Well, to an extent that is true. It is no doubt very tough with real estate but is possible to an extent. You can skip consumer goods.
As far as investments are concerned this is true but not for laptops and LCDs. Does not make sense to me.
Real estate it is possible to know everything by visiting the builder’s office, the site, checking sample flat, talking to friends and all.
@Navneet, If you do not do research on consumer durables, you might be buying an item that is being phased out. You woudl not want that, would you ?
Very Nice.
I completely agree with this thought. Have many things to say that this is right, will see if I get time will comment in detail.
I personally saved my self by asking some basic question to an agent when I thought of investing because my friends were doing. That time even I was unaware about ABC of investing but I didn’t invest in it and after years my friends realized their mistake.
Fianlly, exceptions are always there and 100% is never possible, though why shouldn’t we try as much possible. Homework is always good.
@Chirag, Yes Chirag, sometimes we miss the obvious by not asking questions about products.
I often use the principle of WHAT WHY HOW WHEN to products when I want to buy them.
Appreciate your comments.
The Moral of the Story is that Investing without proper planning is a recipe for disaster. Investing without plaaning is like driving a car without knowing the final destination.
@Sujay, A very commonly used adage 🙂