Jason and Chris have provided some excellent advice and guidlines when making investments this week. It’s imperative that you know what you’re investing in not only from a personal standpoint, but also from a market perspective. But that alone is not enough, it is imperative that you can differentiate between what you know and what you like. Failing to be able to do so will cost you in the long term.
Each and everyone of us knows certain things, and likes certain things. In the case of the market this is true as well. We all work in an industry, have hobbies or interests, and in general this leads to a more expansive knowledge of the happenings in these areas. In my case it’s been technology and finance. For someone else it could be manufacturing, defense, automotive, biotech, or any number of other fields. Both inside and outside of those areas there are companies, products, and things that we like and dislike. However, inside of those areas that we have knowledge our likes and dislikes tend to become more intense, as we have reasons for them.
Why is this important, why does this matter? Because it’s important to be able to make unbiased investment decisions. Investing in companies that we do not necessarily like can be highly profitable, even if we know better. Take for example Rambus and SCO. These are two companies that I loathe for various reasons, and in both cases I choose and advised that people avoid these companies.
Why? I didn’t like them, and I knew that the claims that they were making and the buzz that they generated wasn’t in line with what I knew. Sure Rambus just landed a contract with Intel that pretty much garaunteed them a lock on the x86 platform. Plus they appeared to hold patents key to the current and next generations of memory produced by the other memory makers. What wasn’t as widely reported was that there were some serious questions about the enforceability of the patents due to Rambus behavior on certain standards committees and the fact that none of the other memory or motherboard manufacturers were adopting Rambus. I knew this because I knew the industry, so I didn’t like Rambus. In spite of this the stock shot up from around $30 or so to $150, before splitting and heading back towards $150.
Something similar occured with SCO. I knew that thier claims against IBM were completely bogus, UNIX had been in the public domain in the form of BSD for a long time, and IBM had held a valid license from AT&T for years. Again the stock shot up from trading in the low single digits to a bit north of $20.
Ouch. Those were some hefty gains to miss out on. Worst of all I missed out because I knew about the companies and didn’t like them. Had I paid more attention to the buzz in the market and the press I’d have taken advantage of the situation. By investing in the stock, and pulling out when I felt it had reached it’s peak. I’d still rather build a portfolio on strong long term investments, as this is only slightly better than speculative investing. But it’s hard to pass up profits like those provided by these stocks. In the future by paying attention using my knowledge, likes and dislikes, and what I have learned and will learn, I hope to take advantage of the situation and use any profits that I do gain, to strengthen my growth portfolio.