YOU DON'T have to understand how silicon chips work to buy a silicon chip maker, but you do have to understand what they are used for, as well as some of the basics of manufacturing process such as the inputs and costs. On the other hand, simple products like mortgages can be wrapped in businesses that are hard to understand. If there is something about a business that doesn't make sense, such as how an industry with low barriers to entry creates profits well in excess of the cost of capital, walk away. As the old adage goes, if something looks too good to be true, it probably is.
Hugh Young is managing director at Aberdeen Asset Management Asia.