Tuesday, April 28, 2009

Jim Rogers on Buying What You Know

In a post last week I was happy to offer some advice from legendary investor Jim Rogers. Link here.

Rogers was advising people to buy what they know. If you are an auto mechanic, you have a specialist's knowledge of, for example, lube. You should use that knowledge to make investment decisions.

Rogers feels that it is better to invest predominantly in businesses you understand than to diversify your portfolio into a hodge-podge of products you do not understand.

The Rogers advice, also popularized by the great Peter Lynch, has become a mantra for some, and risks being misapplied.

Slogans that get passed around promiscuously are easily misapplied.

In my post I qualified Rogers' advice by adding that no matter how much you know about lube or video games, you also need to look over annual reports, balance sheets, and so on.

Now, as it happens, Rogers himself has included these caveats in his new book, "A Gift for My Children." Link here.

According to a review on Bloomberg,(link here) Rogers says that before investing in a business you also need to read all the company's financial statements, including the footnotes.

Then you should go out and verify the accuracy of those statements. Rogers tells us: "Talk to customers, suppliers, competitors and anyone else who might effect the company."

If the original slogan made it sound too easy to be true, these qualifications guard against potential misunderstanding by showing how much hard work goes into buying what you know.

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