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If you don't understand an industry or company even after reading brokers' or annual reports, don't invest.

Warren Buffett, the value-investing guru who heads investment company Berkshire Hathaway, has largely avoided tech stocks in the 90s. He prefers businesses he understands, such as food and beverage or insurance. When dotcom, software, chip, and biotech stocks rocketed way beyond their fundamentals in 1999 and early 2000, Buffett under-performed other large diversified funds. He even apologised humbly to Berkshire's investors for not trying hard enough to understand tech stocks. But after the tech sectors collapsed to generally about a tenth of their early 2000 peaks by late 2001, Buffett's long-term strategy of investing in "understanddable" businesses regained the respect of investors.

If you believe in long-term value investing the Buffett way, stick to businesses you understand and whose products you can eat, sit on, or use in other ways.

Extracted from the book "Value Investging" by Sebastian Chong