Should You Invest In Companies You Really Don’t Know?

Last week, the Motley Fool recommended Lululemon Athletica (LULU), the athletic apparel designer and leisurewear company. At first glance, I didn’t think I wanted to invest in the company. Why? Because I’m an idiot. And because I associate Lululemon with bad hair, Jane Fonda and the 1980’s. I don’t know why. I literally can’t tell you what one piece of Lululemon clothing looks like. I’ve never worn anything by the brand. I’ve never shopped for anything by the brand. I’ve just been totally oblivious to the entire thing. And then I read the company has grown revenue from $3.29 billion in 2018 to $4.40 billion in 202o … during a pandemic! The stock has gone from $14/share in 2010to $365/today.

I realize you can’t follow every company or track every trend but when you miss out on a big one, you start to question yourself. Why wasn’t I dating someone who was into Lululemon a decade ago? Why didn’t I ever walk up to a girl at a bar and say, ‘Excuse me, is that Lululemon you’re wearing?’ Had I been more aware, I could’ve made a lot of money. I like to play a little game I call Jewish Investor Guilt where I go back and look at how much money I would’ve made if I’d had a good idea over a decade ago. In this case, if I’d invested $10,000 in LULU in January of 2010 at $14.12/share, that $10,000 would be worth $256,310 today. I missed out on $246,310 in profit because I wasn’t paying attention to what women were wearing at the gym. To make matters worse, I used to go to the gym!

The bigger question here is should you only invest in companies you know. Fidelity’s Peter Lynch is famous for encouraging investors to ‘buy what you know’ but what happens when you don’t know anything about a company? I like to know exactly why I’ve invested in every stock in my portfolio but the truth is there are a few where I’m a little cloudy. One good exercise I like to do is challenge myself to be able to explain to a stranger in three sentences or less why I’m invested in a company. Here’s a few examples:

Shopify (SHOP): Amazon rival that’s leading the charge in helping small businesses sell their good online. Plus, it’s a Canadian company and Canadians are really nice people.

Lemonade (LMND): Insurance for people under 30 who want to do everything on their phone. I don’t totally believe in the concept. Don’t Geico and State Farm have apps too? But it was bright and shiny so I bought a few shares. A likely buy-out target as they amass a larger following.

MarketAxess (MKTX): Brought transparency to the bond market. I never understood why bond prices were so secretive and MKTX’s electronic trading platform is bringing the industry out of the dark ages.

Twilio (TWLO): They develop software that helps other software text and call each other. I think. I know it’s something like that. But it’s big. Really big because if you go to a website and you want customer service it’s way faster to text and TWLO enables those texts.

Paypal (PYPL): Digital payments company that also owns Venmo. If you’re bored and want some entertainment, call up any relative over 70 and tell them you want to Venmo them some money. Hilarity ensues.

ASML Holdings (ASML): I know they make technology that’s widely used to create microchips used in everything from computers to cars. I know that technology is called lithography. I know lithography involves copying patterns onto microchips and I’m pretty sure it involves lasers. And I know ASML is one of a handful of companies that uses lithography to help companies produce microchips. But that’s really as much as I know.

So back to Lululemon. I know they make athletic wear for men and women. And thanks to the Motley Fool, I know they’re about to jump into footwear and introduce a new line of shoes into the product mix. With Nike up nearly 15% today on news that shoe sales are skyrocketing, if Lululemon can get even a slither of that market, it seems like the stock can still provide nice returns from here. Is that enough to go on to invest a little in the company? Yes, it is.