A good writer follows the rule of "write what you know," and a good investor should think the same way. Investing in a sector that you understand, or that you work in every day, can help you pick the right assets for your portfolio.
When you understand the ins and outs of an industry, you know exactly what factors cause a company to perform well or poorly. Some attributes, like revenue, profit or growth, are obvious. Other qualities aren’t, however, and knowing a firm’s products or customers intimately gives you a real advantage.
Take the video-game industry, for example. The typical investor will buy stock in a company like Take Two Interactive (NASDAQ: TTWO) or Activision-Blizzard (NASDAQ: ATVI) based on its earnings and its share value, among other things. But if you work in the industry, or just follow video games closely, you might be able to predict that an upcoming game will be a huge hit – like Take-Two’s famous Grand Theft Auto IV – and guess that the earnings from the game will generate huge profits. By investing in the stock before the rest of the market realizes how much money it will make, you can make a killing.
Again, look at Take-Two: GTA IV was well-publicized long before its April 2008 release, but the stock jumped from $17 in January 2008 to over $27 by June.