Invest In What You Know

By Erin Joyce | May 10, 2010 AAA

Investing can be extremely intimidating, from the serious newspaper articles detailing how millions will no longer be able to retire, to the angry man on television yelling about dividends, it's no wonder that so many of us are hesitant to take the leap into the money market. For many otherwise intelligent, confident people, the idea of risking hard-earned cash in a market they don't truly understand just doesn't make sense. But the truth is, you may have an advantage over Wall Street brokers when it comes to investing - your personal area of expertise.
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Do as Buffett Does
You've probably heard of the legendary investor Warren Buffett, who is currently the third-richest man in the world, according to Forbes. What sets Buffett apart is how many people turn to him for investing advice - and one of his personal investing rules (right after "never lose money") is if you don't understand a business, don't buy it. (You may think the recent financial meltdown changed things, but don't be fooled: those unfussy sayings from the Oracle of Omaha still rule. Learn more in Rules That Warren Buffett Lives By.)

The flipside? If you understand a business, or a sector, you could have the upper hand when it comes to buying its stock. Your experience may not seem to be financially related, but with the ability to invest in everything from movies to weather, your knowledge might come in handy in the stock market.

A Niche for Everyone
No matter who you are, there is something you are interested in. And no matter what that is, you can translate that interest into valuable trading information. If you are a tech geek, you'll know if fragmenting Linux will help it to compete with Apple's (Nasdaq:AAPL) range of products. If you worked on the oil rigs in Alberta, you'll know which companies were efficient enough to have a shot at major growth over the next few years.

Are you a fitness buff or do you play a sport intensely if not competitively? You know what equipment, supplements and companies are behind athletes like yourself. Maybe your passion lies in video games; with Halo: Reach set for release this fall, now might be the time to get into Microsoft (Nasdaq:MSFT). (New ways to benefit from this industry have emerged over the last few years. The best part is, they're very profitable. Learn more in Play Video Games; Become A Millionaire.)

Perhaps you're a bookworm, someone who reads every New York Times best seller before it actually makes it to the list. If so, you might have caught Harry Potter as it was picked up to be turned into a movie, and invested in Warner Brothers' parent company, Time Warner (NYSE:TWX).

Don't just consider the companies benefiting directly from a new trend or product. The next big thing also affects secondary players in a given market in a trickle-down effect you can cash in on. Or, consider products you think will be a bust and either short the stock or invest in the rival. For example, if you think Google's (Nasdaq:GOOG) "iPad killer" just isn't going to cut it, you can invest to reflect that opinion.

The Bottom Line
Investing doesn't have to mean researching banks or investment firms – although it certainly can. By focusing your stock picks on companies and industries that interest you outside of your financial obligations, you will likely make more informed choices. Keep in mind that knowing an industry should not be an excuse to avoid doing any research into a specific company. Even if your insider knowledge gives you a leg up, every investor should hold themselves responsible for doing their due diligence. And who knows, you may even discover that investing can be fun! (For more, see How To Invest On A Shoestring Budget.)

Feeling uninformed? Check out the financial news highlights in Water Cooler Finance: Greece Is Burning And Buffett's Under Fire.

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