Invest In Companies You Understand



This blog post will no doubt be met with people telling me I shouldn't influence your investing decisions – and they're right. 

But it's my blog so I'm going to explain my thoughts on this topic anyway. 

Since I began investing, I've probably bought and sold shares in more companies than I can remember. I've bought everything from mREITs to BDC's to utility companies and Aristocrats. At one point I owned 50+ stocks in the hopes of achieving greater diversification and capital security. 

What I didn't realize was the importance of investing within my circle of competence. 

What this means is learning to invest in companies you know and understand well. Companies whose balance sheets, income statements, cash flow statements and quarterly reports won't confuse you. 

If you're reading this and you own a Business Development Company like $MAIN, $PSEC or $ARCC, ask yourself: What is the definition of net investment income?. 

If you own a REIT, ask yourself, why should I focus on the AFFO payout ratio compared to the general net income payout ratio when it comes to dividend sustainability? 

If either of these questions confused you, you might be invested in stocks you don't really understand well. 

Warren Buffet once said that you should think of your investment like so: 

Imagine you were given a punch card with 20 spaces on it, and each investment meant you would have to punch a hole in one of the spaces. The caveat however is that you only get this one punch card to make 20 total investment decisions in your life.

Now you're forced to make twenty really thoughtful decisions. 


Thinking in this manner forces you to see your investments as they really are: ownership in REAL companies. Not just a gamble to throw money into. It's this mindset shift that encouraged me to consolidate my portfolio into 8 stocks – with the exception of an ETF – that I'll invest in for the next 20+ years.

Do you understand each company you own well? And, if not, why are you invested in those companies? 

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