Know What You Invest In

I have never read a book about Warren Buffet or his investing approach but one of the most important things I believe he has said is “never invest in a business you don’t understand”.

Just today I have been reading some blogs and posts on a couple of stocks and it amazes me at the amount of “long term investors” (note I am not talking about traders, you are free to buy and sell whatever you want) who say that they hold a stock but clearly don’t understand the business or industry itself. Many of these people may have purchased the stocking “thinking” they know about it, but the majority opening admit that they “just think it has potential but don’t really understand what the company does”

This is probably even more evident in the bio-tech space where every company thinks they are onto the next big thing and it is easy to get caught up in the “hype” generated by the company. However, if you are going to invest in this end of the market please take the time to do the research and understand the company you are about to invest in. It is also important to understand that many of these companies will require significant capital contributions throughout their life and the hype in their technology is required to maintain shareholders belief while they tap them for more money.

I will not sit here and pretend that it is possible to know everything, but at least do the research, understand the company and its potential and run some calculations on its future earnings/profitability. As you will know from reading my blog I only hold two stocks, I have however researched many more than this. Some of these stocks I was originally very positive about and definitely thought I was going to buy. However by taking the time to research the stock, the industry and its potential I cut many by the way side.

If you are one of those investors who do not currently understand the companies you are invested in, stop and take the time to do some research. It is better late than never.