Why the "Worst Investing Advice Ever" Can Make You Rich

Warren Buffett and Peter Lynch have been misleading you all these years!

They’ve always encouraged you to buy what you know. Sounds like it makes sense, right? I mean, what in blazes does a hardhat know about biotech?

But according to a recent MarketWatch column, buy what you know is the “worst investing advice ever”. So buy what you know is now bunk, eh? That sounds pretty harsh.

As you’ll see, it’s only half-true. And understanding the full meaning of buy what you know could make you a lot of dough. So today I’m giving three specific rules to help you figure it out…

The author of that column uses Twitter stock as a prime example of how buying what you know (and love) can get you into serious trouble.

“So if this is such an amazing company, why is Twitter stock down more than 30% from its peak last fall?” he asks. “And longer term, why is it down by double-digits since its first print after its 2013 IPO, while the S&P 500 is up 20% since the day Twitter went public?”

Fair questions. But I think they’re way off base. Sure, buy what you know is overused and oversimplified. But the worst advice ever? Hardly. In fact, I think you can get rich buying what you know. You just have to follow a few simple rules:

Think in trends. Buy what you know doesn’t mean you should only buy products you love and use everyday. That’s ridiculous. You might love McDonald’s. But if you’ve been paying attention you know it’s a dog of an investment.

Instead, buy into big trends you believe in. This is the stuff that’s right in front of your face ranging from consumer products to energy or even social networking. Yeah, it’s easy to rag on Twitter. But what about Facebook? That’s the most obvious (and popular) social network play on the market—and it’s up nearly 170% since it went public. Chew on that one, MarketWatch.

Don’t let your bias ruin your returns. “The biggest risk of buying what you know is that you will ignore other people and believe that your perception is the only reality,” MarketWatch further declares. Well, yeah. But that’s also a risk you run with any trade or investment. If you like Lululemon yoga pants but the stock hits your stop level, you sell. Period. But don’t worry– you can keep the tights.

Keep it simple. Don’t think that buying what you know means you have to understand every aspect of the business. Take cybersecurity, for example. I have no clue how these big cybersecurity firms defeat hackers. But I do know identity theft is on the rise. That’s a huge trend! So even though I don’t know the ins and outs of the business, I do know it’s a huge wave I need to ride this year.

The verdict? Buy what you know is far from the worst advice ever. If you’re smart enough to figure it out it can be your greatest money making ally.


Greg Guenthner

for The Daily Reckoning

P.S. Stick to what you know. If you want to cash in on the biggest profits this market has to offer, sign up for my Rude Awakening e-letter, for FREE, right here. Stop missing out. Click here now to sign up for FREE.

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