One very important rule in investing is to only invest in something you understand! This allows us as investors to form a clearer and more accurate picture of the business’ future. So in some sense, when we look into our own “circle of competence”, we may feel that one area we should choose to invest in is where we are making money from. For e.g., if we are working in Mircosoft, it may be a good idea to analyse and consider investing in Mircosoft since we have an edge over any other investors who are not working in Mircosoft in terms of understanding it. That being said, I would like bring out 3 possible dangers when we choose to do that:

1) Not enough diversification:

By investing in our industry, we are confining ourselves to making and growing our money in that industry. And we already know that no industry is totally infallible. Thus if the industry goes down, both our job and our investments are jeopardized.

2) Too bias towards the company or industry.

I have met fellow investors who are very positive towards their company and “feel” that their company is really strong. This is good for th company of course but such biasness in an investor can and will affect our judgement.

3) Too bias against the company.

I met a man working for this gigantic business and he was so certain that this company is on its way to its doom and thus want to have zero investments in this company. This company is IBM, one of Warren Buffett’s biggest holdings. Based on fundamentals, IBM is doing really well but this gentleman is somehow convinced that it is doing very badly and is missing out one of the great investment that is right under his nose.

So having said these, what is the implication? These are merely warnings for us to take note as investors so that we will manage our portfolio wisely, and take note of possible biasness and do our best to look at the investment from an objective stand point, backed by track records.

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To your dreams,

Mind Kinesis Research Team