Warren Buffett says, “Never invest in a business you cannot understand.”
The world of investing is vast and complex. You may be tempted to try your hand at an investment or business you don’t fully understand with the rationale that you don’t really need to know what’s going on to make money from it. Warren Buffett says otherwise.
The investing mogul recommends sticking to investments and businesses you are familiar with and can easily understand. This way, you won’t be in over your head, and you’ll be able to make sound judgment calls and decisions based on your own knowledge and expertise in that industry.
This advice holds true for those using an investment advisor, financial planner or roboadvisor, and those going it on their own. You may be handing over the reins to someone else, but ultimately, you are in charge of your own investments. And you owe it to yourself to be on top of the game.
If this advice makes you think your options will be vastly limited, think again. Which fields have you worked in during your lifetime? Are there industries where you have a special interest? Have you always favored a specific company?
Each of these industries would make excellent investment choices for you because you probably have a reasonably strong grasp on how these particular markets work and who the best companies are in the industry.
In contrast, there are probably thousands of companies whose markets are driven by rules and patterns you will not be able to comprehend. Can you predict the success of a biotechnology company’s drug pipeline or forecast the next technological breakthrough that will drive growth in semiconductor chips? If not, it’s best to give these industries a wide berth.
Aside from his purchase of IBM, Warren himself has famously avoided investing in the technology sector.
The rule is simple and logical: Stick to what you know for a greater chance at success.
Do you think you really need to understand a business or industry successfully invest in it? Why, or why not? Share your thoughts with us in the comments!