Investing in Stocks You Love
The internet is filled with articles pitching various companies as being good investment ideas. Found on sites like MarketWatch or The Motley Fool, or recommended by an expert like Jim Cramer on his TV show Mad Money, these pitches often contain impressive data on the stock and are generally articulate. However, these pitches are generally for esoteric companies that the average consumer likely hasn’t heard of, and whose products the consumer has undoubtedly never used. Examples might include a Venezuelan financial services firm, a Chinese chemical producer that exports to the United States, or a company that makes piping and other equipment for oil producers in Southeastern Texas.
I was recently researching stocks that pay out a high dividend, and was scrolling through lists of such companies. Besides for the companies’ tickers, some basic financial data, and the fact that they pay out high dividends, I didn’t know anything about the actual companies themselves. Some were Real Estate Investment Trusts (REITs), some were mortgage companies, and I didn’t even pay attention to what the others were. I went into this project with the intention of doing some basic research, but definitely not planning on investing any money right away. However, inexperienced or younger investors definitely could invest in a company they don’t know anything about, based on a spur of the moment research project like I did, or on the recommendation of MarketWatch or Cramer.
Instead, I believe that investors should emphasize researching—and then investing in—companies that they are actually interested in, are familiar with, and whose products they’ve used before. I don’t suggest that this be the only criteria for choosing investments and come to replace the fundamental analysis that should occur before investing any money. Rather, this interest in the company should be a precursor to conducting any further analyses like modelling out the company on Microsoft Excel or reading analyst reports on it. Similarly, this obviously isn’t to say that an investor can’t have tremendous returns from an investment where they don’t know a whole lot about the company or its product offerings.
Two reasons come to mind for why having a passion for the company and its product is critical for making investing decisions, particularly for younger and inexperienced investors. First, this will encourage the investor—especially investors with longer-term horizons—to maintain interest in the stock over a long period of time. So two, five, or twenty years later, the investor will still be interested in the company’s quarterly earning reports, and attentive when they hire a new CEO. When the investor is active and engaged investor will help the
Second, when a person invests in a company that they are familiar with, they have the added benefit of understanding what the company does, the products that it makes, and the company’s competitors. For example, many college students have a thorough and firsthand knowledge of what Facebook, Apple, Amazon, and Netflix do—they understand the companies’ product offerings and general markets that they compete in. Contrast this with our previous examples of the Venezuelan financial services company, the company that manufactures pipes and other products for oil exploration companies, or the Chinese chemical producer. It would take a lot of research to understand the complex financial services regulatory environment in Venezuela, or to understand the need for various pipes and other equipment in an oil producing plant, and how OPEC’s decision-making will impact this. Ditto for understanding complex trade tariffs that’ll affect this Chinese chemical producer—in addition to all the scientific and technical information that you would need to understand how chemical producers work.