Investing in your circle of competence
The idea behind investing in what you know is often known as investing with your circle of competence. This means investing in companies that you understand and have knowledge of because of your own professional background, interest, and hobbies. By focusing on what you know, it becomes easier to grasp the fundamental workings of a company and assess whether it’s a good investment or not. Think of it this way: Let’s say you have a deep understanding of the restaurant business after years of working as a chef within this circle. You understand every aspect that goes into setting up a successful restaurant, from curating the menu and ambience, to setting up kitchen processes, and attracting customers to dine at the restaurant. You’re an expert in the food industry, and by leveraging your years of expertise in this field, you have a higher chance of success in finding solid and profitable restaurant businesses to invest in rather than, say, semiconductor businesses. The concept of investing within your circle of competence was popularized by Warren Buffett, who stressed in his 1996 Shareholder Letter: “You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence.”Why invest in your favourite brands?
Have you ever come across an Apple fan? Or are you a fan yourself? If you’ve spent any time speaking with an Apple superfan (or are one), chances are they can tell you what sets Apple apart from its competitors. They also tend to be a lot more passionate about the brand, which gives them a better understanding of the company’s potential growth.
Successful investors like former fund manager Peter Lynch believe, too, in the mantra of “invest in what you know”. What you know translates to a greater understanding of a company’s products and services, as well as a stronger emotional connection to the brand, the latter of which can make it easier to hold on to your investment during market downturns or periods of volatility. This will also give you higher confidence in the company’s long-term growth prospects, helping you make better investment decisions. Don’t buy without research
Before blindly investing in a brand you love, it’s important to consider a few key factors, which will help you evaluate whether the company is a good investment opportunity or not. Financial Health of the Company Review the financial statements from the latest earnings reports, debt levels (both short-term and long-term), and overall profitability. Consistent revenue growth over the past few years is a positive sign that the company is doing well, but if the company has too much debt, it could struggle to pay it off and may not be a good investment. Industry Trends and Competition Research the competitive landscape and trends in the industry to ensure that the company is well-positioned for growth. The emergence of a new technology or sector can often disrupt traditional industries and make a significant impact on their stock prices. Valuation Evaluate the current stock price and compare it to the company’s financial metrics and future growth potential. These financial metrics are most valuable when measured against other competitors’ metrics over a longer period.Investing in brands you love isn’t without risk
Of course, investing in the brands you love is never without risk. Consumer preferences can shift rapidly, and companies that fail to keep up with and adapt to these changes risk losing market share. Even well-established household names such as Tupperware and Bed Bath and Beyond can face losses because they fail to adapt to changing customer preferences. Aside from changing consumer preferences, other risk factors to consider include brand fatigue, unexpected market and industry disruptions, and investors’ emotional biases. These can all lead to losses in your investment portfolio, if you’re not careful. To mitigate these risks, it’s important to diversify your portfolio in order to spread out your risk. Unforeseen events like political instability and pandemics can cause significant market disruptions. You should also stay up-to-date and informed on current industry trends and consumer behaviour, which will help you evaluate whether your investments remain a good opportunity. Investing in brands you love can be an excellent jumping-off point, but it’s essential to do your research and evaluate key factors before making any investment decisions. By investing in companies that you understand well, you focus on your core competencies. This can free up the time and energy to slowly learn more outside of your expertise and push the boundaries of your circle of competence at your own pace. Content sponsored by Moomoo Singapore If you’re a fan of Apple, McDonald’s or Starbucks and want to research and invest in these companies, you can use moomoo to buy into and grow with your favourite brands. Register for a Moomoo SG Universal Account to unlock free investment courses and market data. As a new user:- Get $2* cashback daily for 10 days if you deposit $100*,
- Get 1 x Coca-Cola stock* when you deposit S$2,000 and perform 2 buy trades in total
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