Editor’s note: This article was first published in December 2014; the description of Apple as the most valuable company on the planet and the view of electric cars as only a matter of time reflect that moment.
People constantly ask me which company might be the most profitable to invest in, and I always answer the same way. I tell them: “Don’t listen to me. Don’t listen to anyone.” The path to becoming a successful investor is to invest only in things you yourself know about. Seen this way, anyone can make money in the stock market.
That is the idea behind a passage in Street Smarts, the book by legendary investor Jim Rogers, in which he talks about how simple stock market investing can be if we use our everyday lives to pick stocks and don’t let ourselves be swayed by other people’s tips.
Everyone knows about something: cars, fashion, whatever it may be. If you think you don’t know much about anything, you’re wrong. Look at your everyday life.
When you look at a magazine or watch TV, what programmes do you watch? Which channel? What cars do people like?
If you’re interested in cars, read everything you can about cars and the car industry, and look in magazines at which cars you think will be the best sellers 3 or 10 years from now. Your intellectual level doesn’t matter, because anyone can see what is about to happen by analysing the information they consume. In fact, to stick with the car example, everybody knows it’s only a matter of time before cars are electric. Now it’s a question of seeing which companies will compete for the vehicle of the future.
Start following what you know in depth, broaden that knowledge and combine it with other knowledge.
If you know nothing about computers and someone tells you to invest in a PC and smartphone company, even if they’re right, that investment probably isn’t for you. You wouldn’t feel comfortable if what you know about is cars.
It was a passion for and interest in the electric car that led a young man to invest all his savings in Tesla and multiply them. He did it at a time when there were doubts about Tesla, but he was clear that the company would revolutionise the market, because he had done his homework and knew what they were working on.
Warren Buffett once said that he asked his children which brand of chewing gum they and their friends liked best, and then went and invested in that gum company, because he reckoned that if his children and their friends liked it, lots of other kids would too, so it would outsell the rest. He was right.
The representative sample
Back when Microsoft and Apple were fighting for the lead in PC sales, our colleague Victoria Bernal decided to bet on Microsoft thanks to the representative sample, which is simply what the people you know use.
Victoria B. says she clearly saw that Microsoft was better known and far more present than Apple in most places. When she went to the United States, many companies preferred Apple, but it was more expensive, so Microsoft was the clear winner in that battle.
She wasn’t wrong on that score, except that Apple grew bigger than Microsoft by launching other kinds of products (the iPhone, the iPad…), becoming the most valuable company on the planet.
That part confirms another of Jim Rogers’s investing lessons: “It doesn’t matter how much you know today, because in 10 or 15 years it won’t be true.”
You can get ahead of Wall Street
Jim Rogers says that you, as a small investor, can get ahead of Wall Street, because you can see things they can’t.
There are changes that can only be seen in everyday life. For example, you have a front-row seat on hundreds of companies when you go to a supermarket or a shopping centre.
As a consumer, you can see which companies are improving in quality and price, even which supermarket chain is doing best, and which supermarkets are starting to get fewer customers. What you see in your local supermarket is probably the same mistake that national chain is making in the rest of the country.
And that’s information you’re getting a few quarters before it shows up in the accounts the company files with the stock exchange.
Basically, for Jim Rogers, making money in the stock market is that easy, bearing in mind that sometimes doing nothing and not making any investment decision is also the right call.
This article was inspired by a Business Insider post based on an excerpt from the book Street Smarts, adapted and substantially modified.
Further reading
- Jim Rogers: 10 stock market investing lessons
- Seven concepts to keep in mind before investing in the stock market
- The risk of executing the right strategy in the wrong context
Featured image: FDV, CC BY-SA 3.0, via Wikimedia Commons.
