'Invest in What You Know' May Not Be the Best Advice
Magazine Money

Buying What You Know

With that information on the table, let’s look back at “buy what you know.” What we know to be true about these two companies–they have very devoted followings, great histories of growth, and so forth–is not enough going forward. For Apple, there are a handful of pertinent questions. Will the company convince millions who do not own an iPhone to buy one? Will current iPhone and iPad users upgrade to new versions? Moreover, what must-have, groundbreaking new product will succeed the iPod, iPhone, and iPad? For Facebook, will its trajectory keep moving upward or will it follow predecessors MySpace, Yahoo, and AOL? The company has roughly 955 million users worldwide; will it stagnate, grow to a billion, or rise to 2 billion?

All of which brings us to my view on high-growth stocks. First, always remember the difference between admiring a company and its remarkable products and buying its stock. Second, while it is OK to devote a small portion of a portfolio to high-growth stocks, I think the vast majority of a portfolio should go toward companies with far lower expectations baked in. I am a value investor, which means I have a strong preference for undervalued companies with low expectations built into their bargain basement prices. I like it when an out-of-favor company delivers fairly mundane growth; it can top expectations and see its stock rise. Simply put, I think stock investing works better when the bar is set low than when it is very high.