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Stock Strategist

Buy Only What You Really Know

Here are some consumer stocks with long-term potential.

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In his books and speeches, legendary former Fidelity mutual fund manager Peter Lynch advises investors to "buy what you know" by looking for investment ideas during daily life--among the malls, restaurants, and other businesses you frequent, for example. After all, the logic goes, if you appreciate a service or visit a store that always seems crowded, there's a good chance others will too, and your observation could uncover an investment opportunity.

Unfortunately, in their zeal to uncover new ideas, many investors apparently didn't heed the latter parts of Lynch's message when he discusses the need to consider not just sales and growth, but also a company's business model and its overall financial performance (growth, profits, cash flows, debt levels, etc.) before investing. History has proven that for some prudent investors, "buying what they knew" could have uncovered blockbusters such as  Home Depot (HD) or  Starbucks (SBUX), while other less-discriminating stock-pickers might have just as easily ended up with one-time wonders like  Krispy Kreme (KKD) or Boston Chicken, whose stock soared 400% from its IPO before collapsing into bankruptcy five years later, where it was acquired by  McDonald's (MCD) at a fraction of its former price.

John Novak does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.