The Perils of "Buy What You Know"

The old investing adage, “Buy what you know,” has real downsides if you don’t apply it properly

AdviceIQ 10 September, 2012 | 7:00AM

This article is part of Morningstar's "Perspectives" series, which is a series of articles written by third-party contributors. Here, David Zuckerman from Zuckerman Capital Management outlines the risks associated with taking the "buy what you know" investment advice at face value.

It’s an old investing adage: “Buy what you know.” But that advice has real downsides if you don’t apply it properly.

Legendary fund manager Peter Lynch and investing icon Warren Buffett both advocate that investors purchase stock in companies whose businesses they understand. The proviso is that investors take a sophisticated approach. Because plunging ahead, full of self-assurance, often is risky and unprofitable.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Coca-Cola Co45.23 USD0.78
Marsh & McLennan Companies, Inc.107.92 USD0.03
Sony Corporation ADR70.53 USD0.43
Volvo Group153.35 SEK3.06

About Author

AdviceIQ  is a site featuring fun-to-read, analytical articles explaining important financial issues. AdviceIQ content is generally written by financial advisers, with some articles by AdviceIQ staff. All pieces are edited by Larry Light, AdviceIQ editor-in-chief, who previously edited investing articles at the Wall Street Journal. 

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