Working out is good for your health, but it can also be good for your portfolio if you want to invest in the fitness industry.
Warren Buffett’s famed advice to invest in what you know has alternately inspired and haunted do-it-yourself investors for decades. Like most words of wisdom, it’s been both misattributed and misinterpreted.
It was actually Peter Lynch, former manager of the Fidelity Magellan Fund, who said “invest in what you know.” But what he meant was not how many investors interpreted his advice.
“Most people think of ‘what you know’ as being experts in that product,” says Chicago-based John Rekenthaler, vice president of research at Morningstar. “I know a lot about coffee, so I’m qualified to talk about Starbucks (Nasdaq: SBUX). I’ve been to many gyms and am involved with fitness, so I know the fitness industry.”
While this insider knowledge can be advantageous to investors, it’s not the type of “knowing” Lynch intended for you to base your investment decisions on. What Lynch meant and Buffett actually said was that you should only invest in companies whose business models you understand. Knowing Planet Fitness (PLNT) has the hottest instructors is great, but it doesn’t necessarily make it a good investment.
The right way to invest in what you know is to use your knowledge about gyms and fitness as a launching off point to researching investment opportunities. From there you need to ask the right questions about the company and its industry to determine if it’s worth investing in.
Warren Buffett’s scuttlebutt approach to investing. Buffett and Lynch “can ‘know’ about coffee without ever drinking it, and know about gyms without ever working out,” Rekenthaler says. But they have to do a lot more work to gain this knowledge than a customer would.
Buffett uses the “scuttlebutt method,” a term coined by investing pundit Phillip Fisher, which entails learning all you can about how consumers and other market participants feel about a company’s products. To gain this knowledge, Buffett speaks to anyone and everyone with helpful insights. Buffett seeks out customers, suppliers, competitors and sometimes even ex-employees about the businesses he considers investing in. This is how he chose to invest in Apple (AAPL) without owning an iPhone and International Business Machines Corp. (IBM) without using its cloud service.
You may not realize it, but you’re doing this every time you go to the gym, says Jay Jacobs, senior vice president and head of research & strategy at Global X, a New York-based provider of over 50 exchange-traded funds, including the Global X Health & Wellness Thematic ETF (BFIT). As you talk to people at your gym, and to your friends and family about their gyms, “you’re essentially conducting research about these companies and how their clients feel about them.”
As a consumer, you’re in “a better position to judge the quality of [a company’s] products and services,” Rekenthaler says. And you’ll likely be able to spot when changes are coming to the industry and if they’re likely to succeed.
How to invest in what you know. You can use these first person insights to start your investment research. The next step is asking the right questions about the company and its industry, such as:
- How does the company make money? How will that be transferred to me as an investor? Will I get regular dividends or interest? Or is my return based on capital appreciation?
- What are the biggest costs and challenges the company and its industry face? How is this company in a position to overcome them?
- How does the company compare to its peers? Is it smaller or larger? More profitable or less? Is it growing faster or slower?
- What are your goals for the investment? Define what success and failure look like so that you know when to sell, Rekenthaler says.
- What is the outlook for the industry?
The outlook for the fitness industry. What does this mean for your gym investment? There’s no doubt the fitness industry is hot. It’s been growing faster than GDP since 1997, even through recessions. Much of this growth has been driven by increasing consumer discretionary income coupled with the recent emphasis on healthier living and push to combat obesity.
“It’s also being driven by economics,” Jacobs says. With health care costs rising, “people want to take their health into their own hands,” and they’re doing this by being more active.
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