Is Peter Lynch Right that You Should “Buy Stocks that You Know”? - Cabot Wealth Network

Is Peter Lynch Right that You Should “Buy Stocks that You Know”?

Famed investor Peter Lynch has often said to buy stocks that you know. But does that always work? Yes and no. Here are some recent examples.

Should you buy stocks that you know?

After Snap Inc. (SNAP) fell 43% on May 24, I went to my top research analyst, my teenage daughter, to find out if she and her friends were using the social media app less frequently. This one-person channel check is somewhat in line with famed investor Peter Lynch’s theory that you should “Buy stocks that you know.” And for better or worse, my daughter knows social media. Her answer to the SNAP question was a resounding “BUY” that would have made Jim Cramer proud!

“Dad, Snapchat is the new texting, and is way more popular that TikTok, which we still use, but is way less popular than it used to be,” she said.

“How about Facebook (META)?” I then asked. This question elicited a DEEP eye roll that only a teenager could deliver with such utter disdain. Ahhh, the joys of parenting! (Her top brand ideas, and my trades on those hot products, can be found at the bottom of this article.)

But back to Peter Lynch

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Lynch is one of the most successful investors of all time, having managed the Magellan Fund at Fidelity for 13 years. The fund returned an average of 29% per year, largely using price-to-earnings-growth (PEG) ratios which was important to his individual stock calls.

However, Lynch also took great joy in discovering stock ideas while walking through the grocery store or chatting casually with friends and family, and buying stocks that you and I know. So the question becomes: Should we blindly buy the stocks of the companies we use? Yes … but maybe no.

Buy Stocks that You Know? Maybe Not All of Them

For example, during the pandemic, Zoom Video (ZM) went from a relatively unknown to a name brand. However, despite the company’s incredible growth, as shared by @charliebilello on Twitter (shown below), revenue growth and a product going mainstream doesn’t mean that the stock is a good long-term buy:

Buy stocks that you know? Not Zoom, despite its sales growth.

And we can see countless other examples of this in today’s market.

All of my friends have Pelotons (PTON), and now the stock is garbage.

Online gambling is becoming legalized across the country, yet the leader in that space, DraftKings’ (DKNG) stock, is down 80% from all-time highs.

Similarly, Spotify (SPOT), Zillow (Z), and Etsy (ETSY) have all become part of our lives, yet each of these stocks are down 70% or more from their 2021 peaks.

My point is, while Peter Lynch is a legend in the investing world, we can’t blindly follow his “buy what you know” thesis, especially in bear markets like the one we are currently mired in.

That being said, if you have interest in buying SNAP, or the other brands my teenage daughter likes, here are some ideas:

Buy the SNAP January 15 Calls for $2.30.

The most you can lose on this trade is the premium paid, or $230 per call purchased, if SNAP were to close below 15 on January expiration.

Also…

Buy the Lululemon (LULU) January 300 Calls for $31 (she and her friends live in Lululemon clothes)

Buy the Nike (NKE) January 120 Calls for $15.5 (“I HAVE to get the new Air Jordans”)

Let’s check back in on these trades in early 2023 to see if my daughter, using Peter Lynch’s system, can match his investing Midas touch.

How often do you buy stocks that you know? Does it matter to you – or not? Tell us about your successes – and misses – in the comments below.

Jacob Mintz

Quick Profits, Controlled Risk

Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader. He uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.

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Comments

  • Harold B.

    In January of this year, I sold off all of my stocks except for three: Enterprise Products Partners, Energy Transfer, and Pfizer. I do not understand why the partnership stocks are not given much attention. EPD, and ET are safe, they have historically paid a generous annual return, and they grow. Pfizer needs no explanation–even in a bad market it grows. Morally, I have a problem with Pfizer
    because their drugs are way overpriced.

  • Daniel S.

    I live in the region that calls Microsoft, Costco, & Starbucks home. Buying what I know has worked out quite well. Starbucks annual dividends almost exceed my original cost. My two regrets are that I didn’t buy early enough in their life cycle and Washington Mutual Bank was also in this region (that didn’t work out as well).

  • Gary E S.

    PL. fine investment record, BUT, one thing that investment writers never point out. Fidelity had incubator funds and Magellan was one of them. most of the great early returns were during a period when the public could not own the fund but that didn’t stop Fidelity from broadcasting his record as if the public could have.

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