January 10, 2009

Buy What you Know: A Recipe for Investing in Tough Markets

"Buy what you know", this quote first coined by Peter Lynch has been interpreted a number of different ways throughout the years. I am going to add to that list and suggest there is a way to interpret it in this economy and secure your investments.

During the stock market crash of 1929 almost all companies plummeted, but some investors still profited by picking companies that could make money in the economy of the day. If some of the dire predication about how long the current recession will continue are correct we may be entering a similar phase. So what companies are setup to make money when times are tough? Companies that serve our core human needs.

Let me give you an example, in the 1920's, prior to the crash, radios were flying off store shelves all across the country, farmers were buying new tractors and automobile sales were just starting to kick into high gear. When the crash came these markets evaporated, we don't need radios, new tractors, and new cars- we can live without them or at least continue to utilize the ones we current have. Not all people are responsible spenders but when it comes down to choosing food or a radio even the most irresponsible will tend towards the correct choice.
In today's world the same can be said again of plasma TVs, GPS controlled tractors, $7 coffee, and SUVs- we simply don't need these things to exist.

My recommendation then is to "buy what you know", look at what you purchase on a monthly basis that you know you could not do without- those are the types of products to invest in. Notice how I say products here, though not companies, once you have found the products the next stage is to find the best priced healthiest companies that make these products.

Unless I starve to death I am always going to need food, water and housing- explore markets like these, look at companies like grocery store chains, and energy providers. Above all else find those sectors and those companies that you know have stability and enduring market value written into their very names.


Dividend Growth Investor said...


This article is right on the money - even during a recession people still need food, shelter and even heating. During the great depression, people still smoked. During this recession tobacco might be a good bet as well.

value investor said...

true enough, sin stocks are a great source: beer, tobacco- both potential winners. Great comment dividend growth investor.

The Stock Scribe said...

I totally agree with you.

Products that we all have to consume whether we like it or not are the ideal thing to be invested in.

Only downside is, if things eventually get back to "normal", these very defensive companies will not experience as large an increase in price as other sectors of the market.