Invest In What You Know

Lesson number: 
81

Years of stressful investment experiences have taught me a simple investment rule that I eventually learned to follow. That rule being "invest in what YOU know." In fact when it comes to investing in stocks or businesses outside your fields of expertise, I would caution anyone to be careful. Investing in a business that you are unfamiliar with can cause lots of pain. Keep in mind that when you purchase a public company's stock, you are purchasing a small share of that company and you are now a proud owner for better or for worse.

I have known many successful individuals who were top performers in their field of expertise. They earned excellent incomes in medicine, law, consulting or in their own small business. Each month, their hard work produced extra after tax income which they felt compelled to invest. Many individuals sent checks monthly to their stock brokers with household names that advertised heavily on TV, trusting that these companies would do a better job investing their money than they could. After all, they were the experts, RIGHT? Hold on!

I for one have traveled down this road. Over the years I have danced with the best known brokerage houses in the industry. I worked extremely hard to accumulate financial assets, and unfortunately turned over checks to strangers with "credentials." Their jobs depended on gaining new clients and bringing in fresh investments into the firm. It took me a while to figure out what their real expertise was. They followed orders from analysts and their superiors. They followed models in the same way we take prescription drugs. The difference is their investment models are based on our financial risk tolerance verses drugs based on our medical tolerance. Unfortunately, I knew very little about the stocks and companies they invested in. After all, I was too busy in my profession and left the decisions up to the so called "experts." Over decades, my returns were pathetic.

Keep in mind that this lesson is not about discouraging people from investing in the stock market. It is about being wise and investing in companies and industries that you thoroughly know and understand, starting with your own business. For instance let's assume you are a medical doctor with your own practice. You may not know or care much about any other business than your own. You care about being the best doctor possible and providing excellent service to your patients. In return, you will make more money than you need in your practice and have extra money to invest. My suggestion of what to do with that extra money would be first: to invest some of it in newer equipment; technologies; software; more competent workers; and developing efficient daily systems. By doing so you will serve your patients better; make going to work more pleasant for you and your staff; and grow the profits and equity in your own business. By running a top notch profitable practice, your own business will be more valuable when you cash out. Then you could look forward to receiving more for the shares of your business. Thus, you have invested wisely in what you knew and benefited for years from your decisions.

The second scenario for our doctor may be to invest in their own education. Learning new procedures can bring a better return for your time and investments than purchasing stocks in companies you know little about. The third scenario for our doctor may be to invest in the best and most profitable companies in the medical field. As a doctor, you'll probably hear about every stage and trial of the next blockbuster drug long before the majority of investors. You may know which company is producing the latest and best medical software, medical instruments or equipment that every doctor will want to purchase in the future. After you invest in your practice and yourself, take some of your investment money and carefully purchase the stocks of companies in YOUR field that YOU believe have the greatest futures ahead of them. Buy the stocks of company's early, with prospects of blockbuster earnings and fast growth. Stock prices expand on the excitement about tomorrow's winners not the last decade's stalwarts. If you feel you must invest outside of your practice, invest carefully in what you know!

Too often, we tend to follow someone else's advice when it comes to investments. The best investments I have ever made were first: in myself. I invested a great deal of money and time in my adult education. My knowledge brought me the greatest overall returns in the last thirty-five years. Second: in growing my business by multiplying our success formula over and over again in new markets. Efficiency, scale, and great service created exceptional profits. When it came time to sell, we had an extremely valuable asset to sell. Third: I invested in areas I was familiar with like real estate. These tangible assets never went down 20% in one day like the stocks of Nokia, Intel or other top brands, because they missed their earnings projections by two cents. Make it a rule to invest in what you know. Start as early as possible and be wise allocating your hard earned assets. Don't gamble your money away and if possible try to never, ever lose money! Be happy to accumulate wealth slow and steady.

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