Back in the 1980s and 1990s, one of the most infamous pieces of investing advice was Peter Lynch telling folks to invest in what they know.
Lynch got a lot of attention for this advice, and it’s easy to see why. It’s a great way to get regular investors curious about the practice. And although the average person can’t accurately read a balance sheet or a profit/loss statement, they can still accurately identify a fantastic product. That’s a great start.
But sometimes, investors who are following this advice can take it too literally. They can let their own personal judgement cloud an otherwise lucrative investing thesis. Let’s take a look at how I missed out on a couple of great stocks because of this.
My Tim Hortons experience
I live in a small town that only got its first Tim Hortons restaurant about five years ago. We’re a little behind the times.
I’m not sure if my expectations are too high or maybe deep down I just don’t like the chain, but it seemed like every time I stepped foot in my local restaurant, something went wrong. I’d be forced to wait for at least five minutes in line, while cars were zipping through the drive-thru. They’d be out of the soup or donut I wanted. The staff didn’t seem to hustle. I’d get my food in a to-go bag even though I specified I wanted to eat in.
Although I’m the first to admit the mistakes were small, they’ve really added up. So, I stopped going and don’t really go when I’m in other communities, either.
I took my petty grievances to the next level when taking a closer look at Restaurant Brands International (TSX: QSR)(NYSE: QSR) stock. Despite all the good things the company has going for it — including the acquisition of Popeyes (and the potential of acquiring more chains in the future), the huge potential to expand Tim Hortons around the world, and the company’s attractive price-to-free cash flow ratio — I just couldn’t pull the trigger because of my experience with my local restaurant.
That was a mistake. Shares are up approximately 85% in the last three years, and the company has more than tripled its quarterly dividend since 2016.
Another example
I became aware of MTY Food Group (TSX: MTY) and its ambitious plan to acquire as many fast-food brands as possible back in 2015 or so.
Unlike my experience with Tim Hortons, I’m mostly impressed when I eat at an MTY brand. I get Manchu Wok Chinese food a few times a year. Mucho Burrito is my go-to choice when I’m in a nearby city. Taco Time is consistently delicious. And whenever a buddy and I are in a mall that has one, Jugo Juice is our treat of choice.
But despite my positive experience, I still didn’t pull the trigger on the stock because of little things I saw about the chain that troubled me. I thought it would be much more difficult to run a company with dozens of brands instead of a few. I noticed MTY locations in food courts I visited weren’t doing quite as much business as more established chains. And very few of the company’s brands are instantly recognizable.
So I passed on the stock. And in that time shares have doubled.
Whoops.
The bottom line
Investing in what you know can be a great strategy, but it’s easily possible for investors to take it too literally. I know I sure did.
Your personal experience is important, but the overall numbers are a far bigger factor. Your bad experience might be due to the staff having a bad day or a local operator who needs a little more training. Or maybe your expectations are too high.
Look at the whole picture and then make your investing decision. If I would have done that with Restaurant Brands or MTY Food Group, I’d be richer today.
