In Focus

Buy What You Know

Note: This article focuses on Step 1 of the Chicks' Dozen. For articles focusing on other Steps, see the links listed at the bottom of the page.

Buy What You Know. easily my favorite of the Chicks Dozen. It's the only principle of the dozen that requires no other research than simply paying attention to your own life. Woo Hoo! That I can do! Immediately, we are all transformed into expert stockpickers. "What?" You say, "Me? An expert? Already?!" That's right. That's the beauty of Buy What You Know.

Since this is the first step, I want to make sure you realize that buying what ya know doesn't mean buy everything you know. This is simply the technique we use to get our pool of stocks from which we will research and buy the best egg for our growing nest. For example, recently I set out to buy all new facial products -- you know, cleansers, toners, creams, etc. (I'm getting older ya know, and these buying sprees help me feel like I'm at least doing something to counteract the aging process.) I settled on the Aveda line. After a brief discussion with the salesperson about the products, I discovered Estee Lauder bought Aveda in 1995. For some reason, maybe it was the thrill of my purchase, I did a little research on Estee Lauder. I was shocked to discover just how many make-up companies they own, including M.A.C., Clinique and Origins. Practically my whole make up bag was owned by Estee Lauder (NYSE: EL). I haven't bought it yet, but they're certainly on my stock-watch list. Are you getting the idea, Chicky?

We are all experts in our own little world. We know what we like and what we don't like, and we determine the products that we buy and the foods that we eat. We don't even have to leave the comfort of our own home to find a wealth of stock-picking opportunities. See? I told you this was the simplest principle of the whole dozen. We can just open the fridge, diaper bag, toy closet or garage to find a host of stocks from which to choose.

Personally, with the number of Huggies diapers my kids have gone through in the last three years, I feel that Kimberly-Clark (NYSE: KMB) stock might be worth a look. Or how 'bout the fact that I'm so excited to have a baby girl that I've already started buying Barbies before she's even had her first birthday? Yep, I better go check out Mattel's stock (NYSE: MAT).

The other day, I was given the greatest (i.e. both easy and tasty!) peach cobbler recipe made with Bisquick. Who knew that the parent company of Bisquick (with the easiest pancake recipe ever) and Cheerios (of which no toddler mom can do without) is General Mills (NYSE: GIS). That's right, I'm adding it to my stock-watch list.

Peter Lynch, one of the most famous and most successful mutual fund managers, is a huge champion of the individual investor. His basic philosophy has always been "invest in what you know". In fact, he believes that an amateur investor (like you and me) who devotes a small amount of time researching companies in an industry we know a little bit about, can outperform 95% of the paid experts who manage mutual funds. You can do this and have fun doing it! Wow, gotta love this guy. He believes in us, the individual investor. Don't you just love your new title? The Individual Investor -- nice ring to it don'tchya think?

I could go on and on, but I think you've got it down now. Stocks to choose from are everywhere and look how much trivia you pick up along the way? With all your new found knowledge you're going to be such a hit at work, the gym, your kids' neighborhood play-day, chatting with your girlfriends... okay, I think you get the picture. Did I say I could go on and on? Go get 'em Chicky, and remember: Buy What You Know!

Articles focusing on the 12 Steps of the Chicks' Dozen:

Step 1: Buy What You Know

Step 2: Keep It Simple, Sister (K.I.S.S.)

Step 3: Industry

Step 4: Leader In It's Field

Step 5: Repeat Profitability

Step 6: Gross Margins, GM: Service Related Industries

Step 7: Net Margins

Step 8: Cash To Long-Term Debt

Step 9: Flow Ratio

Step 10: Increasing Growth

Step 11: Strong Management & Operating History

Step 12: Buy On Sale