Investing Basics: Understand Your Company

Peter Lynch is the quintessential investor, with a performance record that dwarfs even the greatest of Wall St. investors.

In 13 years of managing The Magellan Fund, he posted a 29.2% average annual return, outperforming the market by over 13.4% annually.

So, its safe to say that when Peter Lynch speaks, people in finance circles listen.

In Learn to Earn (a great book for the beginning investor) Peter Lynch famously advocates that for most investors in individual stocks, the key to success is to focus on companies with which you have an intimate knowledge. This knowledge of a product or industry can make the difference between wins and massive losses.

This exclusive knowledge can be found in a number of locations that you may never think to consider a source of investment knowledge. Places you shop, products you use, and people that you know can all provide this knowledge, which can sometimes give you the edge you need to beat the market.

But what about diversifying into new sectors of the economy which may be foreign to you? That's when you bring in the experts. Recently, there has been strong growth in the industrial and chemical industries, an area which could offer strong demand moving forward, however, if you are looking to profit from chemical mergers and acquisitions, chances are you may not have the expertise or familiarity that Lynch would say is a prerequisite to owning any share of stock.

So what's an investor to do?

Trust the experts. For those seeking to invest beyond their comfort zone, the diversification to be found in worldwide and diverse investments make hiring the right people essential in building a robust portfolio. Take for example, the investor who is looking for a way to invest in the chemical field. He would likely seek out an expert in chemical investment banking that will help him choose the best investment within the sector.

The best investors trade on information and long term prospects, and do not purchase shares in a company that they do not understand.

Peter Lynch teaches us to invest in what we know. Sometimes that's easier said than done, however, especially when you factor in the myriad of sectors and international companies that one can invest in. That's why, if you don't know a company or sector, you should bring in the professionals. If you can't afford the professionals, buy the Index Fund or ETF. That way, you'll avoid the worst kind of investment mistake; not knowing your company.