Don't Know Your Next Stock Move? Turn to Stocks of Companies You Know and Love

What do you know that others don't? Do you have a job or special interest that can give you an edge on investing? Take a look at what's right in...

By Melissa Brock contributor/ - MarketBeat

This story originally appeared on MarketBeat

Have you ever thought about how your unique skills or knowledge might help you invest? For example, let's say you're an engineer for an auto manufacturer. You might have a distinct advantage when you compare the differences between the auto manufacturer you work for and the competition. You might have greater insight into the financial statements, the strengths and weaknesses of the product, know the exact competitive climate of your particular company, and more. Put simply, you have direct insight into the business.

Warren Buffett, arguably the most successful investor in modern history, says never to invest in something you don't understand.

Opportunities might rise up in your industry or in your everyday life; you don't have to solely rely on your expertise in your industry. The right investment opportunity might be within arm's reach — quite literally. What products surround you?

How to Identify Opportunities Already Sitting in Front of You

You might use a particular product every single day and not realize that you should invest in the company behind the products! (For example, General Mills Inc. (NYSE: GIS) makes everything from cereals to soups to pizzas and pet food.)

How do you find those things you're not "seeing?" Let's find out.

Tip 1: Start observing.

Pay attention to what you use on a daily basis. If you're a junkie for a certain type of product, like a particular consumer staple, millions of other people might feel the same way.

What do your kids like? Your spouse? What's trending in the wider world? Even if it sounds crazy, such as the world going ga-ga for a certain type of soup, maybe it's an investment opportunity! If you've noticed that the wider world has begun using a particular product or brand, the business has sound investing principles and has a sustainable competitive advantage, you may be on to something.

This doesn't mean that the minute teenagers start wearing the next Nike or Under Armour equivalent that you go out and buy up company shares — you still have to do your homework and vet the long-term intrinsic value of the company and dive through earnings reports.

However, keeping your eyes peeled can give you a good start.

Tip 2: Become a master of your sector.

Information technology. Health care. Financials. Consumer discretionary. Communication services. Industrials. Consumer staples. Energy. Utilities. Real estate. Materials.

What do you know well? Where do you work and what do you come into contact with every single day? Working in a particular sector gives you a distinct advantage over just about everyone else.

Dig deep and think beyond your day-to-day tasks. For example, let's say you work in manufacturing in the automobile industry. If so, you know the quality of the widgets that you work on. If you know they're terrible (and that's the reason why your company has experienced recalls on your particular widget) you might know which company makes better widgets. Further research on better widgets might result in a solid investment opportunity.

Tip 3: Read.

Again, you don't have to invest in industries that pertain to your job. You might love a particular company so use that opportunity to pore over any tidbit of information — industry blogs, news articles or blog posts might give you great information about companies you like and use.

If your interest in the company accompanies a surge in demand for certain products and commodities, it could spell out good news for you.

However, it's really important to remember the mere exposure effect, which describes our tendency to develop preferences for things simply because we know them and are familiar with them. This could spell trouble when it comes to investing, because you still have to take into account the underlying fundamentals of a company before you invest.

Tip 4: Consider value.

Value investing refers to buying stocks that trade at a discount compared to their intrinsic value. Value investing, a long-term strategy, means you buy stocks with the intention of holding them forever.

Would you feel comfortable holding a particular company for the long term? What happens when a fad ends? For example, if you chose to invest in what you perceive to be the next Under Armour or Nike, will it actually hold? (Think about the short-lived Reebok Pump inflatable shoe, or consider Reebok's entire brand, for that matter.)

Buffett believes in holding a variety of stocks and keeping them for the long haul. He has said he buys on the assumption that the stock market might close today and might not reopen for five years.

Value investing also involves selling stocks down the road, only if the price exceeds their fair market value and only if you've made money.

Tip 5: Consider which companies offer competitive advantages.

Do the companies you know and love have moats?

What's a moat? It's a term coined by Warren Buffett which refers to the ability of a particular company to hold competitive advantages over similar companies. Naturally, it involves companies' ability to turn a profit.

For example, if a company really does make better dog food because the company has actually caused dogs to live five more years on average, you could say it has a competitive advantage over all other dog food companies. What have the companies you know and love done to build moats?

Invest in What You Know

One of the keys to success in the stock market: investing in companies you know and understand. For example, if you don't understand how vaccines train our immune systems to create proteins that fight disease, you might consider not investing in Moderna or Pfizer. Instead, you might consider investing in a company that makes parts for automobiles because you build widgets every day.

If you don't understand cryptocurrency, you might not want to invest in it. (Buffett has said he doesn't invest in cryptocurrency, probably for that very reason.)

The bottom line: Never discount what you can bring to the table to enhance your investing success. It could make a major difference.

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