Why you shouldn't invest in companies whose business you don't understand?

You shouldn't invest in companies whose business you don't understand because you won't be able to judge their future potential and vulnerabilities.

While intimacy with a company's business is not essential to making a decision to buy the stock, later "hold" or "sell" decisions may be clearer if you understand its competitive position in the marketplace, the value of its products or services, and the character of its industry's problems.  These are common-sense issues for which a simple understanding of the business will suffice.

Why Our Chimp-Like Brains Lose Money on the Stock Market

You have to Know the Story: Confusing the price with the story is the biggest mistake an investor can make.

If you're going to invest in a stock, you have to know the story.  This is where investors get themselves in trouble.  They buy a stock without knowing the story, and they track the stock price, because that's the only detail they understand.  When the price goes up, they think the company is in great shape, but when the price stalls or goes down they get bored or they lose faith, so they sell their shares.

Confusing the price with the story is the biggest mistake an investor can make. 

• It causes people to bail out of stocks during crashes and corrections, when the prices are at their lowest, which they think means that the companies they own must be in lousy shape. 
• It causes them to miss the chance to buy more shares when the price is low, but the company is still in terrific shape.

The story tells you what's happening inside the company to produce profits in the future - or losses, if it's a tale of woe. 

• It's not always easy to figure this out. 
• Some stories are more complicated than others. 
• Companies that have many different divisions are harder to follow than companies that make a single product. 
• And even when the story is simple, it may not be conclusive.

But there are occasions when the picture is clear and the average investor is in a perfect position to see how exciting it is.  These are the times when understanding a company can really pay off.