Peter Lynch gave the advice in his book “One Up on Wall Street” to invest in what you know. And that is not bad advice as far as it goes. But there is another piece to that advice. You still have to a take an unbiased look at the situation and the numbers. The thing that can bite us is if we invest in something just because we like it, or shun something just because we don’t. I might love Best Buy and hate Amazon.com, but over the last 5 years, Best Buy has been cut in half while Amazon is up 300%. My pride in Best Buy and prejudice against Amazon would not have served me well. The path for growth was clearly more with Amazon than with Best Buy.
Investors now take great pride in the cash earning 1% in a 5 year CD and continue to be prejudiced against a rental property or a stock fund that at least offers the potential to earn several times that.
This applies in other arenas as well. Many people were prejudiced that the economy was doomed because Obama was re-elected or because the Republicans took control of the House (take your pick). Yet several months on the economy continues to motor on and the stock market is very close to an all time high. Maybe we should take more pride in checks and balances of the US system.
Peter Lynch was right. We might have the inside scoop about a company, or about a particular fixer property in our neighborhood. But we still have to stand back and look at the reality and the numbers. Let’s not let our pride or our prejudice blind us to what’s really going on when our money is at stake.