Buy What You Know

Adam M. Grossman

KANYE WEST, IT TURNS out, is one heck of an investor. According to a recent analysis, a group of West’s stock picks has beaten the overall market by 40 percentage points this year. It’s an astonishing result. What, if anything, can we learn from his performance?

First, some background: As you may know, West is married to Kim Kardashian, who is one of the dominant personalities on social media, so it was via Instagram that the world gained a window into these investments. Last Christmas, when West presented Kardashian with a gift box filled with stock certificates, she posted some pictures to Instagram. In those pictures, the names of the stocks are visible: Amazon, Adidas, Apple, Disney and Netflix. Since the beginning of this year, all but one have beaten the market by a wide margin. Of particular note, Amazon has gained 64% and Netflix is up more than 80%.

What should we make of this? Decades of research have shown that it’s extremely difficult to do what West did. In fact, the majority of both individual and professional investors fail to beat the market. This has been proven over and over. Yet West’s results seem to fly in the face of that research. As if to further discredit the research, his portfolio makes stock-picking look downright easy. After all, anyone could have observed that Amazon packages and iPhones are everywhere, that kids love Adidas and Disney, and that everyone loves Netflix.

How do we resolve this apparent inconsistency? The research says it’s hard to beat the market and yet Kanye West just did it in spectacular fashion. Is the research wrong—or is West maybe just the exception that proves the rule?

It would be easy to attribute West’s success to luck. The research I’ve cited on investors’ results refers to their performance on average over time. One person’s results over a short six-month period certainly don’t invalidate the research. In fact, this portfolio, comprised almost entirely of high-growth consumer companies, was the perfect fit for today’s booming economy, but it probably would have struggled if the economy had soured.

That said, I’m not willing to simply dismiss West’s results. In fact, there are two elements to his approach that I think you can apply to your own investments.

First, use your expertise to your advantage. Peter Lynch, who for more than a decade managed the world’s top-performing mutual fund, wrote an entire book dedicated to the premise that—when it comes to picking stocks—individuals have a distinct advantage over professionals. I agree. I firmly believe that you should not pay anyone else to pick stocks for you.

As Lynch points out, you can draw on your own expertise in ways that Wall Street pros cannot. “If you’re a surfer, a trucker, a high school dropout, or an eccentric retiree, then you’ve got an edge already,” he says. Exceptional stock-picking success “comes from beyond the boundaries of accepted Wall Street cogitation.”

In Kanye West’s case, he has a business partnership with Adidas. He may also have had unique insights into some of the other companies he chose. You may be able to do the same thing. If you know how to build buildings or design software or perform surgery, you probably have specialized knowledge about companies in your industry that others don’t.

Second, manage risk. Keep in mind that West’s stock purchases totaled about $300,000. For the average person, that’s a lot. But in the context of West’s and Kardashian’s overall assets, it did not represent a great risk. They have multiple businesses and income streams. These stock picks, even if they had failed, would not have impacted them materially.

Don’t get me wrong. I still believe that the best path for investors is to stick to low-cost index funds and to steer clear of stock-picking. But if you want to add a few individual stocks to the mix, be like Kanye: Stick to what you know—and make sure you keep your bets manageable.

This is Adam M. Grossman’s 50th article for HumbleDollar. His previous articles include Staying FocusedEight Heroes and Separated at Birth. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.

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