Investing in What You Know
Readers’ Views on Clunkers
In Case You Missed It
I was browsing through our Web site archives this week and ran across a Cabot Wealth Advisory written by Brendan Coffey in August of last year. In it, he discussed the concept of buying stocks based on what you know … and what you like. Here’s what he said:
“Throughout the 13 years he was steering the Magellan Fund, Peter Lynch became known for his philosophy that you should invest in what you know. In his 1993 book, “Beating the Street,” he discussed how he built Magellan from a $200 million fund to a $14 billion fund in a little more than a decade. The philosophy Lynch wanted to drive home to individual investors was that you should buy companies that you are familiar with. In Lynch’s case, he liked the “tasty tacos of Taco Bell,” so he added the then-unknown chain into the portfolio; his wife loved the convenience of L’eggs hosiery, so he bought shares of Hanes.
“Buying what you know has long since become a bit of Gospel among a large segment of investors–after all, if it worked for Peter Lynch, it should work for you. It’s not a bad idea–certainly if you feel strongly about a company and have what you think is pretty decent insight into its products and market, then you can do all right. I know a few creative types who did quite well buying Apple Computer stock when it was well under 20 in the late 1990s.”
I took this advice to heart after reading the June 1 issue of Cabot Top Ten Report, which featured on of my favorite stores: J. Crew (JCG). In that issue, Editor Michael Cintolo wrote:
“J. Crew is one of the market’s strongest stocks because its bottom line is coming in much better than expected, and analysts are tripping over themselves to hike earnings estimates. J. Crew reported earnings last week, and while the year-over-year numbers were nothing to shout about (it squeaked out a small revenue gain but earnings fell 29%), the bottom line was more than triple what analysts had expected. The reason: Solid margins, which we believe is because of top-notch management–the company has a history of outperforming its peers, and while that didn’t mean much during the last year, it will as the economy picks up. Analysts hiked their 2009 earnings estimates from $0.47 to $0.82 a share after last week’s report, and considering J. Crew has beat expectations the past three quarters, we believe even these newer estimates are conservative. It’s an interesting turnaround situation.”
Mike put the suggested buy range at 24 to 27 and I picked it up at 26 for my Paper Portfolio at work (not real money, just a little office competition) and as of press time, I’m sitting on a 20% profit. JCG isn’t your typical growth stock, but I like the company and the clothes, so I’m going to hold on a little bit longer. It’s back-to-school shopping season and the store, with its classic styles, is bound to see an uptick in spending from that.
However, I also have a word of caution from Brendan’s write-up last year about Lynch’s philosophy and I’ll share it with you here:
“But it’s possible to take buying what you know too far. It’s one thing to rely on your gut feeling, but another to let it overwhelm your intellect. Peter Lynch, after all, wasn’t a Forrest Gump-like fund manager, blindly lucking into gold because he liked the taste of nacho cheese. He liked the underlying business of Taco Bell, the balance sheet, the management and the growth plan. It certainly helps that the company had a simple story to tell–it prompted Lynch to take a deeper look at the business structure and the stock valuation.
“But a lot of other food chains have had simple stories, even better food, but everything from poor management to a too-high debt burden to unrealistic growth plans did them in. That’s a lesson Peter Lynch also discusses in his book, but because it isn’t so pithy, it doesn’t get repeated very often. There is a difference between a good company and a good stock. One can be the first, but that doesn’t mean it’s the second.”
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A couple of weeks ago, both Editor Brendan Coffey and I wrote about the U.S. government’s Cash for Clunkers program. We received a lot of comments from readers and some of the most insightful are printed below. Some of our readers brought up great points that neither Brendan nor I discussed and I want to share them with you here.
If you missed either of our articles, you can read them on the Cabot Web site here: LINK. And if you haven’t shared your view on the Cash for Clunkers program yet, do so by emailing us or commenting on our blog a http://www.iconoclast-investor.com. Thanks to everyone for writing in!
The Cash for Clunkers sound nice, but to my thinking, it’s just another bailout for the auto industry with your money and mine. And it just doesn’t set right with me that it seems to be covering all makes of cars. Japanese; Korean; German; French? A heck of a lot that is doing to promote American industry!
The problem with this program is that it rewards the people who bought those clunker cars. Plus, Edmunds discovered that they fudged those top 10 results. It is actually Ford and Chevy pick-up trucks that were the best sellers! And the program was first initiated in Germany, which the press never mentions!
I believe that most people have forgotten how much raw materials it took to manufacture the clunkers and the new models. Perhaps it fits into the equation.
Enjoyed your story about your vehicle. I’d like someone to look up this information. How much fuel is used by each usage sector in the U.S. or by U.S. entities? Not coal, but fossil fuel (gas or oil).
Trucks for moving/delivering goods and services
Education sector–school buses
Power plants–if use fuel/oil, not coal
Etc., etc., etc.
I think with the U.S. having 15,000 airports and a huge military that personal passenger vehicles are a drop in the bucket!!!! A waste of money again. And a short-term fix only. Only those who can already afford to buy a new vehicle are using this program.
Plus, why can’t D.C. figure out that the reason this CARS program worked is because it was money in peoples’ pockets … and not welfare. We do know best how to spur the economy! Trickle down does work.
San Marcos, Texas
It seems really odd to me about how the U.S. citizens gripe and complain about our economy but yet so many of them turn around spend money on foreign vehicles. DUH. Come on people keep your money at home.
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In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, I have links below to each issue.
Cabot Wealth Advisory 8/17/09 – 10 Big Ideas … and 10 Ways to Profit
On Monday, Timothy Lutts wrote about why it’s important to get perspective on the both the short- and long-term trends happening in the world. Tim discussed 10 of these trends and provided at least 10 ways to profit from them. Featured stocks: Acorn Energy (AFCN), Copa Airlines (CPA), AeroVironment (AVAV), American Superconductor (AMSC), E-House (EJ), Green Mountain Coffee Roasters (GMCR), Whole Foods Market (WFMI), NBTY (NTY), Maxwell Technologies (MXWL), Rackspace (RAX), Apple (AAPL).
Cabot Wealth Advisory 8/20/09 – The Portfolio Management Manifesto
On Thursday, Michael Cintolo wrote about how to handle your winning stocks and the battle between drawdowns and profit potential. Mike discussed four specific strategies you can use to handle your winning stocks and what type of investors they are best for. Mike finished by discussing the current market climate and a “non-growth” stock that was recently featured in Cabot Top Ten Report. Featured stock:.
Until next time,
Editor of Cabot Wealth Advisory
Editor’s Note: Do you want to read even more of Editor Brendan Coffey’s expert advice? That and more can be found in Cabot Green Investor, the newsletter Brendan edits. In it, he highlights the top Green stocks, with detailed technical and fundamental analysis, including buy and sell advice. Brendan also employs Cabot’s market timing indicators to ensure that you’re always on the right side of the market. To find out what he’s currently recommending, subscribe today!