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Tags: Reeves | Lynch | buy | know

MarketWatch's Reeves: Peter Lynch Is Wrong on Buying What You Know

By    |   Wednesday, 03 June 2015 06:00 AM EDT

Legendary fund manager Peter Lynch has received great acclaim over the years for recommending that investors who enjoy using certain products and see others enjoying those products should consider buying the stocks of the companies that make them.

"The idea is folksy and simple: keep your eyes open as a consumer, then invest in the companies that you see doing lots of business," writes MarketWatch columnist Jeff Reeves.

"But with due respect to Peter Lynch, this strategy of buy what you know is harmful. It's not a bad sentiment and perhaps useful as a starting point, but buying a stock because you use its product? That's the worst idea ever."

The problem: "it's naive to assume that simply because a company makes money selling hot dogs, and because it's selling lots of hot dogs right now, that it's a great investment," Reeves argues.

In fairness to Lynch, he did indeed stress that the idea serves only as a starting point. You should thoroughly research a company's finances and make certain it's on a solid path to profitable growth before buying.

Meanwhile, with the S&P 500 index having tripled over the last six years and now standing just 1 percent below its record high, many experts are worried about a crash. So which stocks offer safety in the event of a market meltdown?

USA Today, using data from S&P Capital IQ chose nine stocks. They are small-cap issues (market capitalization of $400 million or less) that are members of the S&P 1500 index. They trade for 50 percent valuation discounts to the average of stocks in the index.

Three of the stocks are technology company Digi International (Ticker: DGII), Monarch Casino & Resort (MCRI) and apparel seller Christopher & Banks (CBK)

"Why does all this matter?" writes USA Today's Matt Krantz. "Academic studies have shown top-performing stocks over the long haul tend to be ones that carry valuations that are below the market's."

Small-cap stocks "also have been demonstrated to be top performers," he says. "Combine these two traits and magic happens."

Rounding out the rest of the list are Bel Fuse (BELF.B), Pericom Semiconductor (PSEM), Cohu (COHU), DSP Group (DSPG), Kopin (KOPN) and CryoLife (CRY).

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StreetTalk
Legendary fund manager Peter Lynch has received great acclaim over the years for recommending that investors who enjoy using certain products and see others enjoying those products should consider buying the stocks of the companies that make them.
Reeves, Lynch, buy, know
367
2015-00-03
Wednesday, 03 June 2015 06:00 AM
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