When studying the behavior of some of the most successful investors in history, we will often find one common denominator – they invest in what they thoroughly understand.

For equity investors like Warren Buffett or Peter Lynch, it was all about business models they understand and products they like. Mr. Buffett invested in The Coca-Cola Company in 1988 after his ex-neighbor and Coca-Cola’s COO convinced him to switch from Pepsi. He has been consuming their beverages ever since.

Due to the broad scope of the market, alternative investments are different. They can be anything from collectible sports cards to non-fungible digital goods. Yet, such diversity presents an opportunity to find an asset within one’s field of interest or expertise.

This article will discuss three reasons why it’s important to prioritize asset classes investors have existing knowledge on.

Sole Decisions

An old proverb says two heads think better than one. In many cases, that might be true, but investing is a game of incomplete information. As such, it is susceptible to the subjective interpretation of the same data and potentially unlimited numbers of hypothetical scenarios.

Furthermore, sourcing ideas in crowds makes one susceptible to groupthink. This psychological phenomenon occurs when the desire for group consensus overrides people’s common sense to present alternatives, critiques, or express an unpopular opinion. Thus, it is particularly dangerous for those with contrarian tendencies as rationalization and peer pressure can prevent them from pursuing their investment ideas.

If an investor feels confident in their own decisions, they will be more likely to ignore groupthink and stick with their instincts. If they have existing knowledge and expertise in a given area, they are more likely to be confident.

Smart Decisions

Understanding the underlying asset and its current buzz can give you a significant edge over the average market participant. In his classic book “One Up on the Wall Street,” fund manager Peter Lynch urges readers, and potential investors, to look around them and consider investing in companies behind their most beloved products. Mr. Lynch learned this lesson by observing his wife’s shopping behavior which helped him identify prospective investments.

In his case, these were companies with barely existent analyst coverage and little institutional ownership. That sort of data will seldom be available for alternative investments, but if anything, you might get an even bigger edge as an informed investor. These are often niche markets that do not have a lot of experts, so pre-existing knowledge can give investors a leg up on other market participants.

Fun Decisions

In the long run, investments are about generating wealth, but that doesn’t mean they have to be boring. When it comes to investing, alternative assets offer an unprecedented variety so that everyone can find something within their area of interest.

Whether you’re a car enthusiast, a sports fan, a wine connoisseur, or an early adopter of virtual reality (VR) – you will find opportunities within that field. Beyond the inherent investment edge that you’ll possess due to your interest, participating in those alternative investments can be particularly exciting and engaging due to social effects and opportunities to interact with individuals who share the same hobbies.

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