Take advantage of what you already know

In my last article Do not trust analysts and fund managers, I pointed out how important it is to make own investment decisions. But how to find that perfect company? I think, most investors have yet made the mistake to buy a stock because it was hot or sounded exciting, like microchips in the New Economy boom, for example. But that is exactly what your fund manager picks on a regular base: companies that sound exciting and hopeful. Unfortunately, he is often wrong with his picks. So you have to rely upon yourself to find good stocks and guess what, you are in a far better position than any analyst.

The most important thing here is really never to buy stocks from companies you have absolutely no idea of the business model. It is also only a first step in the investment process, but a very basic one. So, instead of buying that microchip firm, take a look around you. Everyday you are surrounded by a lot of companies either at work or at home. Your credit card is probably the only requirement to become an shopping mall analyst. Take advantage of what you already know! If you work in the steel industry, for example, you know how to estimate the current situation of your industry and even know which companies perform well. You just have to put your eyes open and pay attention. You got better sources than any analyst and so you have the chance to discover excellent companies before Wall Street does.

I have got two examples for you, the first one is Wal-Mart. I am not from America, but you surely must have noticed, that this company was doing extremely well for years. The stocks performed great between 1975 and 2000, in fact the chart went up for 25 years! It’s amazing how much time people had to notice that amazing development. This happens all the time, because there are always good companies with great products around. Let us take a look at Apple, a typical turnaround. In 2002, when the stock sold for $12, you must have noticed the first people with this cool, white iPod music players on the streets. In December 2007, it sold for $200, what an investment! And again, you had really a lot of time to notice that Apple is doing something right. Everybody who bough an iPod at this time, should have bought shares too

So, always ask yourself: What does the company do? I’m sure, you have specific knowledge of the industry you work in, so you know what is important to have success in this industry. Beginners often buy stocks in fast growing industries, because they think that there are no out-performer in industries with a low growth rate, but that is only true for cyclical industries. There are always great companies around and they are near you, you do not have to buy that hot Internet stock from China, just go to the local shopping mall or ask your children or some teenagers what stuff they bought the last 6 months. You will be surprised how many opportunities you will find.