Sep 28th, 2008
When Someone Would be Better Off Buying Ann Taylor than Google
One of my friends at work was asking about investing and had an interesting question: “How does Google make money?”
I told him that nearly all Google’s income is ad revenue; they have some paid for products (like their rackmount search appliance) but for the most part everything they do for consumers is free. He was considering investing in Google but aside from search, didn’t know a whole lot about the company.
A different friend of mine loves Ann Taylor. It’s close to the only place she buys clothes from. She has a MBA and knows how to read balance sheets and knows some business basics; she sees the share price and the price per earnings ratio but also believes that the company makes products she loves, uses, and buys.
In this situation, my first friend, while intrigued by Google, needs to learn more about the company before deciding if it’s an investment for him; my second friend would, however, really be a candidate to purchase some Ann Taylor stock.
While understanding things like balance sheets, share prices, and dividends matter, it also matters that you understand the company, what their products are, who their customers are, and believe in what they make or do. If not, the investment is more like speculation. So do your homework and understand what you’re buying; I firmly believe that if a company is profitable and you think they’re the best in the world at what they do–so much so you’re a customer and sold on them yourself–owning them will, over the long run, not hurt your portfolio. Only buy what you know!
[For what it's worth, shares of Ann Taylor (ANN) have outperformed both the S&P 500 and Google (GOOG), even though all are down year to date.]
This is an important reminder of what Warren Buffett calls staying within your circle of competence. Just remember not to buy something your know that is expensive. Thanks for submitting this post to the Festival of Stocks.
[...] When Someone Would be Better Off Buying Ann Taylor than Google posted at Uncommon Cents. An important reminder that one should understand a company before buying their stock. It’s what Warren Buffett calls staying within your circle of competence. Stocks: GOOG, ANN [...]