How do you find investment ideas? When meeting with other investors, that is the most common question asked. It’s a topic nearly every investor finds interesting and challenging.
Good investment process is about striking the right balance between being exposed to hundreds or thousands of potential ideas, and in-depth analysis of the most highly prospective targets that result from that higher level search.
The value is at the extremes. We want to spend as little time as possible stuck down unproductive rabbit holes—doing detailed analysis of ideas unlikely to pan out.
The in-depth analysis part of the process is beyond the scope of a blog post. Maybe Steve will write a book one day. How to turn the world’s tens of thousands of listed stocks into a shortlist for more detailed research is a much simpler, though far from easy, process. Here are a few of the ways I go about it.
Filters to the rescue
Filtering is using computer systems to search for targets. In our case, Capital IQ is generally the system, but there are some free or lower cost options online. Some investors swear by their filters, others have sworn it off. We fall somewhere in between.
Almost every Monday I spend a few hours looking at some standard filters, such as ‘European stocks down more than 50% from their yearly high’, ‘European stocks up more than 50% from their yearly low’ (not an obvious one for a value investor, but you’d be surprised), ‘German stocks trading below book value’, ‘UK stocks trading below book value’, ‘German high quality’, ‘UK high quality’. Tuesday is for different geographies. Later in the week is reserved for more nuanced stuff, some regular and some ad-hoc.
Because filters are available to everyone, it’s a competitive space. So we try to combine things we’ve learned from past successes to specifically target ideas that ‘don’t filter well’. Without revealing the secret sauce, it is about constantly trying to find things that might be prospective that are unlikely to look prospective (to others).
But don’t neglect the basics. One of our bigger successes in recent years, Austrian tolling technology company Kapsch TrafficCom (WBAG:KTCG), ended up on our radar because it turned up on our 52-week lows filter in early 2015.
A to Zs
This is where I get a list of every stock in a particular market, remove the tiddlers too small for us (~€50m market capitalisation) and quickly go through them one-by-one. Most companies can be ruled out in a minute or two. I read the company description, the abridged financials and maybe zero in on one or two items on the balance sheet or cash flow statement. Maybe 1 stock in 100 makes it through to a more thorough ‘to do’ list.
Europe was a fairly new market to me when I moved over from investment publishing to funds management in early 2013. Doing A to Zs has been a useful way to build up market knowledge in a short amount of time, and it’s something I will continue doing going forward. But don’t take my word for it.
Adam Smith interviewed Warren Buffett back in 1993. Smith asked how a youngster should get started in the investment game. Buffett says get a list of every stock listed in the United States and learn about each.
Smith: ‘But there’s 27,000 public companies’.
Buffett: ‘Well, start with the As’
The only thing not relevant to me is the focus on the USA. In the past few weeks I’ve trawled through Slovenia, Czech Republic and Poland. Nothing has come of that as yet, but the time is rarely a complete waste.
News and media
Of course the Financial Times, the Economist, Wall Street Journal, Grant’s Interest Rate Observer and many others are useful. I can’t think of an investment sourced directly from any of them, but the mind isn’t particularly accurate at attributing sources. An interesting article about something new to me might lead to a few related stocks, a sector or a transaction of interest. It’s a different form of filtering.
On the coat tails of giants
Steve once said he finds it difficult to poach other investors’ ideas. My repertoire doesn’t share such shortcomings. Poaching is not quite the right term anyway. I’m talking about considering ideas that others share, either voluntarily or according to law. And it is only ever a starting point for further research. The idea must become your own if it is to progress. After all, attribution for any mistake will be all yours too.
I methodically comb through the investment letters of more than 50 investment firms, and look at more on an ad-hoc basis. US money managers must lodge 13F filings with the SEC each quarter. Always worth a read. I follow blogs, not only in English but in German, French, Swedish, Norwegian and more (thank you Google Translate). And there are plenty of interesting investors posting ideas on Twitter, as well as more fully formed ideas on investing websites like Value Investors Club. I attend several multi-day value investing conferences each year. I discuss ideas with investors I’ve met over the years, or at least those happy to play quid-pro-quo.
While I agree with Steve that our very best investments have been unique insights, we’ve made some large gains from investment ideas that we ‘poached’. Veripos and EL.EN (BIT:ELN) immediately come to mind.
In Karmic return, I could point to a few not-so-small fortunes others have made off our ideas. Good luck to them, we only tell the world about an idea once we’re ready. I just don’t want to hear any complaining when I steal their next original insight.
Some fund managers seem to think that the more companies you visit each year, the better you’ll perform. We’re definitely not of that ‘we visit 1,500 companies this year’ mentality. I’m not even certain company visits add a lot, beyond those times where you have a series of very specific things you need to get to the bottom of after much research.
But nonetheless we do regularly visit new companies in new lands, and as long as you maintain a sceptical mindset the pluses tend to outweigh the minuses.
The Atlas of Public Stocks is a great tool. It shows all the publically listed stocks by geography. We’re in Milan or Madrid or Oslo anyway, who else is based here that it might be worthwhile visiting?
Broker conferences are also a useful way to engage with many companies in a short space of time.
Observation and experience
Not a methodical process so much as a state of mind. We did quite a bit of work on Associated British Foods (LSE:ABF), whose most important asset is rapidly growing clothes retailer Primark.
When Primark intended to open in Austria, I saw some of their recruiting process firsthand in 2013 (my then office was in a Regus facility that they overran for three months). It seemed detailed and potentially unique. Then I visited their first store in Vienna and had to beat back punters to get my young son out of the place. And I noticed some unique processes, such as the stacked cash registers (more like a traditional bank teller setup than typical retail), which made it far more efficient for customers than the equivalent at H&M.
It turns out most of the buzz was already in the price, but cultivating an interest in business is essential.
Steve and I meet up once every three months or so. Once the ten-minute pleasantries are done with (wives, kids, colleagues, flight, book recommendations), he’ll be telling me about the shower gel in the hotel, or that brand of jacket taking over Italy, his mate’s pet insurance or what he learned about eBay’s competitors in Africa. Good investors are always curious about business.
Betfair was perhaps our biggest win on that front. We bought it when it was losing money and the financials looked pretty rough. It was Steve’s familiarity with the product, and the realisation there must be a great business underneath, that allowed us to look past the terrible headline numbers to find the real insights.
Kapsch TrafficCom (WBAG:KTCG) is perhaps another—familiarity with the tolling business forced a ‘hey, wait a second’ moment when it popped up on our filters in early 2015. We might have missed it otherwise. Even Google owner Alphabet (NASDAQ:GOOG). OK, our insight was far from unique there, but from 2002 to 2014 Steve and I watched more and more of Intelligent Investor’s advertising budget diverted away from traditional media to Google. That experience undoubtedly influenced our investment in Baidu (NYSE:BIDU) too.
Good investing is a balancing act
While my blogging and hilarious tweeting are hopefully useful to some, my job is to find great ideas to buy on behalf of our investors, and avoid bombs. To that aim, I shoot for a 50:50 split of time between the sort of high level searching outlined above, and detailed company analysis required before a company makes it into our portfolio. I don’t hit that split every day or week, but I think that’s about right for our brand of value investing.
How do you find your best ideas? Tell me, I really would love to know. If it’s a good process, I’ll steal it. I promise.
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