Legendary Fidelity mutual fund manager Peter Lynch believed individual investors should buy stocks in companies they understood. His rationale was simple, "If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them." It was simply a matter of keeping your eyes open to the opportunities around you. (For background reading, check out The Greatest Investors: Peter Lynch.)
Tutorial: World's Greatest Investors
Go With What You Know
Each of us uses products and services on a daily basis with little thought given to their investment potential. That's perfectly normal - we are usually too busy enjoying them to put two-and-two together.
When we step back, however, we realize that we're far more qualified to make educated investment decisions about products we actually use than ones we don't. That's just common sense, and when applied to thorough stock research, provides the foundation for a sound and successful portfolio.
By researching companies whose products and services you use on a daily basis and understanding their financial situation, you'll be able to determine if they meet your criteria for investment. It takes a little legwork, but it's well worth it. (You've got the market research down, to learn the financial side, check out Due Diligence In 10 Easy Steps.)
Three Peter Picks
Thinking like Peter Lynch for a moment then, here are three companies you are likely familiar with that you might want to follow up on:
This global consumer-goods powerhouse produced sales of approximately $58 billion in 2010. Some of the brands that most of us use every day include Quaker Oats hot cereal, Tropicana orange tangerine juice and Lay's potato chips. EBITDA margins for the latest twelve months ended September 2007 are 20.5%. Although not as strong as its biggest direct competitor, Coca Cola (NYSE:KO), PepsiCo is still an extremely profitable company operating in 200 markets around the world. With a market cap well over $100 billion, you're not likely to have a larger company in your portfolio.
Columbia Sportswear (Nasdaq:COLM)
Columbia knows its market - outdoor apparel - and it knows it well. Many investors can't help but wonder why Nike (NYSE:NKE) hasn't already bought Columbia Sportswear yet. The two companies' products rarely overlap and both headquarters are located in Oregon. Nike and its $19 billion in sales could buy Columbia (sales of $1.5 billion) with the petty cash set aside for Tiger's visits to the Northwest.
In 2005, the company bought out Maytag, its closest rival, creating a home appliance dynamo. Its brands include Whirlpool, Maytag, KitchenAid, Jenn-Air and many others. In addition, it supplies Sears with appliances under the department store's own brand name, Kenmore. Many investors have no doubt owned or used an appliance under one of these brand names.
The Bottom Line
The three stocks listed above are just a small sample of the companies that spring forth if you keep your eyes open the way Peter Lynch became famous for doing. Rrather than putting your head in the sand and giving up on investing, consider adopting an investment plan that takes advantage of your built-in knowledge as a consumer. There are opportunities all around us if we take the time to look.
To learn more about Peter Lynch and his investing strategies, read Pick Stocks Like Peter Lynch.