Like No Other Market

From time to time I will look at stock prices of companies that I like or whose products I use. The great fund manager Peter Lynch wrote a book called One Up on Wall Street many years ago. Lynch preached the message of buying stocks of companies that you know—whose products or services you actually use. So, for example, if you like Big Macs, buy McDonalds stock; if you use Band-Aids, buy Johnson & Johnson.

This strategy may or may not work. I have never back tested the stock prices of the companies that I like or whose products I use. Quite frankly, that doesn’t sound too interesting, and my hunch is that they have probably performed worse than a broad base index fund.

A few years ago Fairway Market went public. Fairway is an iconic specialty food store here in New York City with fifteen or so stores in the metro New York area. It is an amazing store of fresh produce, cheeses, olives, hams . . . It is a food lovers’ paradise. The stock went public at 13 and climbed higher. Many New Yorkers who shop at Fairway bought the stock because they used the product. Of course this is a great company, "I shop there." As of today, Fairway stock trades below $4, nearly a 70 percent drop in price. Is Fairway’s business off 70 percent from two years ago? I doubt it.

Sure, there are cases when a company you feel good about performs well on the stock market. But overall there is no foolproof correlation between stock price and how much you like or use a product. Peter Lynch is a very smart guy, and his fund, the Magellan Fund, was a great fund for twenty years at Fidelity. And then it wasn’t.

All this week the financial news has been filled with headlines of the largest IPO in history, Alibaba. Alibaba is the Chinese version of Amazon, Facebook, and Google all rolled up into one company. Everyone thinks this stock is their ticket out of here to happy street. They think they know something that no one else does and they are going to cash in on this one. The problem is that everyone is thinking the same thing. Alibaba knows this and therefore keeps raising the price of the stock it is going to IPO on Friday.

Investing is not a sport, and it should not be a form of gambling. There is no easy ticket, and the idea of investing in companies because you use the product is not logical, or at least it does not make sense to me.

There are a very few who get rich quickly from the stock market. Imagine if you were employee number 10 at Microsoft or number 55 at Walmart. For most of us wealth is built over time, with a diverse portfolio designed to handle the ups and downs that the world throws at us.