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Bill Freehling is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Bill Freehling.

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This week’s (3/28) Business Browser column

I had an interesting chat the other day with a friend who works for the U.S. Postal Service and enjoys investing in the stock market.

Several years ago he started noticing a bunch of red envelopes labeled “Netflix” showing up more and more amid the mail he was delivering. As the volume grew, he decided to look into the company. That led to an investment that has made him good money, though he wishes he’d jumped in right when the first envelopes started appearing.

Netflix, of course, is the phenomenally successful company that sends DVDs directly to your mailbox for a monthly subscription. It has largely destroyed the storefront movie rental business.

I tell this story not to boost Netflix’s ego, but to illustrate how observation can be one important meth-od in successful investing.

In his autobiography “Made in America,” Walmart founder Sam Walton describes how he used to drive around town seeing what stores had the busiest parking lots. Then he’d go inside and see what that business was doing that attracted so many people. And often he’d use those methods at Walmart. Walton would also fly around in his small plane watching traffic patterns and looking for good real estate to start the next store.

This is a common-sense way to size up a business with one’s own eyes. There are many ways to do this.

Want to know what kind of drywall people are using? Go to Lowe’s or Home Depot and look at the brands people choose. What phones are hot? Walk around the mall and notice what teenagers and young adults are using. What are the top automotive companies? Look out the window and see what kind of cars are on the road.

There are many limitations to this method. The naked eye can take in only so much, and it’s possible that the trend you’re noticing is exclusive to one particular town or region. Investigation by observation doesn’t remove the need to carefully read the financial data that the company puts out every quarter and year.

Further, it’s quite possible that countless other investors have noticed the same trend that you spotted. For example, it doesn’t take a genius to see how many iPhones and iPods are around these days and to know that must mean Apple’s sales are booming. If everyone else has also noticed this, the stock price has probably already been bid up to reflect it. Remember that just because a company is firing on all cylinders doesn’t mean its stock will be a great investment. Just ask anyone who invested in Cisco or Microsoft in early 2000.

One final warning on investment by observation: People are probably most likely to take note of trends in the industry they work in. That could lead to putting too much of one’s portfolio into that one sector, or even into just one company (often the one where they work). Given the fact that a person’s job is already a crucial part of his or her financial stability, it isn’t wise to put all one’s investment funds on the line in that same field.

For all these reasons, as I’ve stated many times in this column, most investors should probably stick to low-cost index funds for the bulk of their portfolio.

But let’s face it, stock-picking is fun. And observing one’s surroundings is a great start in doing this successfully. It’s certainly a better method than picking a stock just because it’s touted by some talking head (who probably owns the stock and wants to see it bid up) on CNBC or elsewhere.

You might just find the next Netflix.

Permalink: http://news.fredericksburg.com/businessbrowser/2010/03/28/this-weeks-328-business-browser-column/

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