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Investment Advice – buy what you know



May 08, 2009 – Comments (1) | RELATED TICKERS: JNJ , WSM

Yes, we have all done it: bought stock in a company just because of positive news coverage or what someone has said, without really knowing about the strengths and weaknesses of same, or even what the company does or sells. This is one reason why TMF advice on stocks has always been kinda marginal to me: they always seem to feature a company I have never heard of in an industry I know little about. To emphasize this point, I present 3 cases where I do know about the company.



I have family in Hawaii, and kept up on their comments on HA. When it emerged from bankruptcy, I got positive reports, and bought. At the peak, this stock was a 6-bagger. In the current market, it is “only” a 2-bagger. Then came champagne day: both Aloha ( the main inter-island competitor) and ATA (small fry) disappeared from the Hawaiian market, and I got nothing but glowing reports on how HA handled the increased traffic. Currently, I am getting conversations that when the economy recovers and tourism resumes apace, HA will clean up.



Way too early in life, I had congestive heart failure, and was therefore intimately familiar with its intricacies. By coincidence, a couple weeks after finally being able to return to work, I read a rather lengthy article during lunch on a warm afternoon, on a new drug for same. Natrecor is a natural enzyme created by the human body as a reaction to heart failure, being manufactured by a small biotech firm called Scios. I researched the clinical trials, and found that they were kinda nugatory but nonetheless had positive effects and was being approved the FDA. Despite its weakness, knowing the coming wave of retiring boomers and consequent cardiac care, I was reasonably sure that it would become regularly prescribed, and stock therefore becoming something like a 10-bagger when Natrecore became a standard treatment. THEN: JNJ bought it out, not for Natrecor but because Scios also had a promising arthritis drug in the pipeline. Yeah, doubled my money, but D’OH: there goes one long-term investment.



I graduated from cooking school many moons ago. Before that, I worked much in various high-class cooking retailers. I learned that even when the economy heads south, people still bought $50 kitchen knives and $125 pots and pans regularly, seemingly unfazed by dark economic conditions. So, WSM is on the buy list. Sadly, I ran out of cash and could not buy it, but I did add it to my Fool portfolio.


1 Comments – Post Your Own

#1) On May 09, 2009 at 1:17 AM, doctorpeer (52.27) wrote:

Buy what you know is a Buffett tenet.  Of course, the term *know* is relative.  Perhaps it's a company you've done business with, or a company you've worked for, but these are surface *know's*.  What ranges have they traded in for the last month, six months, week, year?  When do they report earnings?  What is the outlook for those earnings?  By the time I actually buy a company, I know enough about it to teach an incoming executive about the company.  This is regardless of whether I ever come in contact with them in life.

  One of my favorite *buy what you know* methods is to take a company that has performed exceptionally well in my portfolio in the last 6 months, and look at who THEY do business with.  Whose products do they buy as inputs?  Whose machinery do they use?  Who is their accountant?  Who prints their paychecks?  Who takes their product to their customers?  Who are their customers?  You build a sort of *friends* network from that company, and look at how the success you've found in the company benefits the other satellites in the network.

  Of course, some relationships are 1 to 1, like if ZEP has 10% higher unit sales, and JBHT takes their product to their customers, then it would hold that JBHT should see an increase in billed miles or load-weight.  It's your job then as an investor to see what does JBHT do with their revenue, do they have good expense control or do they piss it away?  Does ZEP constitute a huge customer for them, or are they tiny fish?  This is where you can find your next winner based on your current winners.  This is how buy what you know pays off.

  Before you spend one cent, KNOW EVERYTHING.  Know whether you're buying the day before earnings and oops they're going to announce a loss, know whether you're buying at the 10-day high, this is knowing.

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