One of the conventional pieces of investment advice attributed to Peter Lynch is: invest in what you know.
The advice may have been paraphrased from his book, Beating the Street, in which he provides a number of principles for investing. Principle #14: “If you like the store, chances are you’ll love the stock”.
This observation has been quoted repeatedly without context, so much so that Peter Lynch clarified his thinking in an interview on MarketWatch here. What he really meant was don’t invest in things you don’t know or understand.
The larger lesson is that every investor needs a starting point, and that is your existing knowledge. Then you seek out more knowledge, it doesn’t end there. If you are in an industry, you may have more insights, but allowing for a better and more careful analysis, you may be able to see things coming before those outside your industry do.
In today’s marketplace, every industry can be disrupted and changed in ways a non-industry professional likely would not be aware of. This article about the upcoming release of the “cosmic crisp” apples in Washington state demonstrates this point well, illustrating that even something as seemingly simple as growing apples has become extremely complicated.
Here are our three favorite highlights:
1. The successful apple growers don’t just grow apple trees – they graft the apple type they want onto smaller dwarf variety root structures and create trellises for them to make them easier to pick and prune. The result:
“Instead of a few hundred branching trees, a single acre held as many as 1,800 thin, elaborately pruned sticks and no longer looked very much like an orchard at all.”
2. Medicine isn’t the only thing that come with a generic version when the patent runs out:
“Pink Lady is a trademark name for the variety whose generic version is called Cripps Pink. The Cripps Pink patent has expired, which means that anybody can grow it, but “Pink Lady” is still trademarked, which means it’s illegal for farmers without a license to sell their Cripps Pinks as Pink Ladies; they must use the generic name.”
3. It took 22 years and going through 10,000 different crossbreeds to develop the Cosmic Crisp apples slated to launch later this year. Aside from ease of growing, packaging, longevity, appearance on the grower side, the user experience needed to be considered:
“The experience of an apple is really five things, Barritt explained. Only two of them, sugar and acidity, are actually about flavor, and there’s a natural divide between people who like sweet and those who prefer tang. It’s the three measures of texture that unite us all”
Being able to judge a good apple isn’t the same thing as being able to know what orchard to invest in. If you really like apples, you’ll likely be more capable of learning about the orchards and what goes into them. It’s only a starting point.
At Garden State Trust Company, we provide a conservative approach to portfolio management, and would be pleased to share more information about our process for assessing risk and providing guidance to clients.