Course 201:
Understanding a Business
In this course
1 Introduction
2 Barriers to Entry
3 Price Elasticity
4 Substitutes
5 Capital Intensity
6 Market Penetration
7 Regulation

Investing in what you know may not be as easy as it sounds. Legendary mutual-fund manager Peter Lynch popularized the concept of investing in businesses we see around us, such as those at the local mall. If your toddlers love Toys 'R' Us TOY, if your teenagers dig Nike NKE, if your spouse does business with PeopleSoft PSFT, grab the annual report and think about buying some shares. The more hands-on experience we have with a company, the more astute we'll be as investors. That's true as far as it goes. The problem is, our kids can't tell us whether Toys 'R' Us earns a respectable return on capital. Our teenagers may be a year behind the fashion curve as they continue to lace up their Nikes. And the sales representative we deal with from PeopleSoft may not be representative of the rest of the company. What investing in what you know really means--or should mean, for serious investors--is investing in businesses the economics of which you understand. What does it mean to understand the economics of a business? The following are some of the key issues. We'll use Starbucks SBUX as an example, since it's a company many of us at Morningstar visit all too regularly.

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