In his latest column for Seeking Alpha, Validea CEO John P. Reese looks at Peter Lynch’s “buy-what-you-know” advice, and some other tips the mutual fund legend gave for finding good stock ideas.
“Investors often overlook a couple key points when considering Lynch’s buy-what-you-know mantra,” writes Reese. “First, Lynch warns that focusing on what you know is a good starting point when examining a company, but far from a be-all and end-all. ‘Never invest in any company before you’ve done the homework on the company’s earnings prospects, financial condition, competitive position, plans for expansion, and so forth,’ he wrote.”
“Second, while it was the most publicized, ‘focus-on-what-you-know’ was just one of many jumping-off points Lynch used when looking for stock ideas,” Reese continues. “He cited in his book a number of qualities a firm could have that would also pique his interest … Remember, as with ‘buy-what-you-know’, these only serve as jumping off points for further research.”
Reese looks at a handful of stocks that currently possess one of the qualities Lynch cited, and which have the fundamentals to pass one of his Guru Strategies, which are based on the approaches of Lynch and other greats. Among them: Rollins Inc., a pest-control services firm, which meets Lynch’s “disagreeable product line” criterion. “If a firm does something that makes you a bit queasy or uneasy, that’s another sign it might get passed over by others, allowing you to get it on the cheap,” Reese says in explaining Lynch’s rationale.