Sticking To What You Know

Details

By Harriette Halepis

Warren Buffet said it best when he told a Forbes reporter seeking investment advice to “stick to what you know.” While simple, this golden rule has made Buffet a rich man. Buffet’s number one rule can be adopted by any investor and applied to any kind of investment. Sticking with what you know and understand will keep your investments solid while also giving you a distinct advantage.

Prior to Buffet’s famed Forbes quote, Benjamin Graham wrote (in The Intelligent Investor, 1949) of all investors keeping with investments that made sense. Countless books have been written after The Intelligent Investor was first published, and a good portion of those books echo both Graham’s and Buffet’s sentiments: investors should always stick with what’s understood and known.

The reasoning behind this philosophy is simple enough. If you are uncertain of an investment, that investment will never make sense. Eventually, the money that you have put into a company will fluctuate without a clear reasoning behind this fluctuation. The only thing that can result from investing in something that you don’t understand is confusion and, perhaps, failure.

Investors need to know when to invest, but an intelligent investor must also know when to pull out. How can an investor who doesn’t understand an investment make either move wisely? Once again, Buffet can be used as an example.

Until November of 2011, Warren Buffet never invested in technology. When news of Buffet's rather large stake in IBM broke, many wondered if Buffet had lost his mind, broken his golden rule, or was forced to have a change of heart.

With one statement, the Oracle of Omaha’s decision to finally invest in technology made sense (and was directly in line with his “stick to your guns” philosophy). Speaking on behalf of Berkshire Hathaway, Buffet told reporters that “…when we see something that makes sense, we act very fast and very big.”

What clicked for Buffet about IBM had nothing to do with technology, but it had everything to do with the fact that IBM was clear “…about what they intend to do and how they intend to do it.” The fact that IBM had a track record of sticking to plans coupled with a precise roadmap was the part of the technology investment that made sense to Buffet.

Investors of any kind will do well to follow in Graham’s and, later, Buffet’s footsteps by sticking to an industry, concept, or idea that is known and understood. Going one step further, investors will also benefit from partnering with another investor who compliments current skills or knowledge.

Partners that don’t bring anything additional to the table are quickly replaceable, and an easily replaced partner is not a partner that a solid investment relationship can be built upon.