I Shop at Costco All the Time. Here’s Why That Inspired Me to Buy Its Stock

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I've been a Costco member for about 18 years now. But shopping at the store on a regular basis wasn't always a habit of mine.

Before I had kids, I would visit Costco once a month or so to load up on household essentials and snacks. Since having kids, the need to replenish my fridge contents is pretty constant. I tend to do a weekly Costco run where I buy everything from fresh fruit to milk to school lunch supplies.

Meanwhile, years ago, I decided to take my love of Costco to the next level by buying shares of the company's stock. It's a move you may want to emulate, only perhaps in a different context.

When you invest in a business you understand

As a Costco customer and big time fan, I understand very well how Costco's business model works. Costco makes a lot of its money from membership fees. It then uses those fees to offset its costs so it can offer competitively priced products to shoppers.

It's not exactly a traditional business model in the context of retail. Most chains don't charge a membership fee and make more of their money on the products they sell. So Costco does things a bit differently.

But Costco's system seems to work quite well. Over the past five years, Costco's stock price has climbed about 240%. That's been a nice thing to see as an investor.

But back when I bought the stock, I couldn't see into the future and know it would do well. Rather, I bought the stock because I understood Costco's business model and had confidence in it.

It's OK to invest in the companies you know

As a general rule, it's a good idea to invest money in businesses whose models you understand. If you're interested in adding a given company to your brokerage account but you aren't sure how it makes money, you may want to pass (either that, or try to further educate yourself).

Now, this doesn't mean that buying shares of Costco stock is a smart move for you. But you may want to think about the businesses and services you use regularly. That gives you a baseline understanding of how they work. From there, it's a matter of research.

Of course, my decision to buy shares of Costco stock wasn't solely based on the fact that I understood its business model, nor was it solely based on my love for the store's delicious muffins (because those are outstanding). Costco also happened to fit nicely into my portfolio.

Another savvy thing it pays to do as an investor is to maintain a diversified portfolio. At the time I bought shares of Costco, I didn't own many retail stocks. So adding Costco made sense from that perspective, too.

I'll be the first person to tell you that you might save serious money by shopping at Costco. But I'll also be the first person to tell you that shopping there doesn't automatically mean you should buy the stock. You'll need to do your own research and assess your portfolio to see if that makes sense.

My point, though, is that investing in businesses you understand is a good approach to building a portfolio. And it's a strategy I've used many times over in the context of businesses I frequent a lot less often than Costco.

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We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.