To many experts, a “buy-what-you-know” strategy is the best way to invest. For example, if you’re happy with the car you’re driving, chances are that other people will be, too. Sales and profits likely will rise so the company’s stock may be a good investment.
On the other hand, if you are not happy with that car-or with any other product-you’re probably not the only one. That company may be in for some tough times so you should avoid the stock.
To see how this can work, consider the example of Peter Lynch, who became a legendary mutual fund manager. He made his reputation by such tactics as investing in Hanes after his wife told him about the popularity of L’eggs pantyhose. The value of those shares rose nearly 600 percent after he invested.
Once you find a good company with outstanding prospects, you must avoid paying too much for a stock. To lower this risk, use dollar cost averaging. With this method, you make regular investments, perhaps every month or every quarter. If you spread out your investments in this manner you’ll catch the stock-price lows as well as the highs so you won’t be making a huge purchase at the very top.