Don’t Buy What You Don’t Understand

Thursday, March 26, 2009
By Faisal Laljee

A friend of mine asked me recently:

“Would do you think of Citibank’s stock. I understand the current situation of the finance sector, but what do you think of Citibank?”

This is not the first time someone has asked me. A cousin of mine told me he bought Citibank at $5 and I told him it was a mistake. The next day, the stock was at $6, and he called me to gloat. Of course, a month later, the stock was a buck.

My response to my friend was:

“Don’t buy what you don’t understand. None of us truly understand banks and insurance. I would not buy. If you want to gamble, that’s different. I still own my AIG and ETFC because they are worthless now.”

Now I am the first to admit that I recommended BofA in the $40′s. I have also recommended a bunch of other financial stocks including AIG over the past. But the fact is, no one really knows how these guys run their business. Leveraging a dollar 30 times over is no joke. Anyone who trades using margins knows how damaging leverage can be when the market turns on you.

So the lesson I learnt – that I hope everyone reading this has also learnt :

Don’t Buy What You Don’t Understand“.

And if someone tells you they understand, they are either LIARS or they are CRIMINALS. Because unless they are responsible for the shannanigans that has disgraced our financial system, unless they are the top brass at Lehman, Goldman, Citi and others, they DO NOT know anything about this.

Don’t believe me? Did you watch the Cramer vs. Stewart episode of the Daily Show? I will post it for those who want to watch it.

Meanwhile, please, stop looking to make a quick buck from the financials. Focus on what you know. See my post on the Growth in Digital Media and How I think Google stands to benefit. We use it everyday for search, email and even analytical tools for our websites. Moreover, we know they don’t have debt. Buy Google!

Do you have an iPhone? iPod? Mac? Look around you. Every TV show now shows a Macbook being used by their characters. Every coffee drinker at Starbucks now has a Mac. Everyone wants to compete with the iPhone. Buy Apple!

Do you or someone you know love Tiffany’s? Do they go crazy for those turqoise colored boxes? Would they spend their Christmas bonus on a pearl necklace from Tiffany’s? Buy Tiffany!

There are plenty of things we know and understand from our daily lives. We see it everyday when our spouses or kids go crazy over something. Be patient. Watch out for those opportunities. Stop trying to buy AIG or Citigroup. I am out 80% on my AIG position and 50% on my E-Trade. I still own it and I regret getting into them.

– Faisal Laljee
Full Disclosure: Of the stocks mentioned here, I only own Apple, AIG and ETFC. My position however, can change anytime without notice.

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One Response to “Don’t Buy What You Don’t Understand”

  1. stocklady82

    Great advice — what a well-written and interesting blog!


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