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.
14 thoughts on “How to Find Investment Ideas”
As an amateur investor with a day job unrelated to financial services, I unashamedly ride on the coat tails of giants. I pay for a couple of research services like Intelligent Investor and I follow what Forager has to say 🙂
My own investing mindset seems to match what you guys do exactly. So for something you write about, you take your positions first, publish something on it for your investors, I have a look and decide whether to follow you or not. Its a symbiotic relationship. Your investors get in first, and like minded investors follow. Win win really.
I’m not a professional investor so I tend to go for the poach approach and I also subscribe to some investment newsletters, both in Australia and overseas. It’s nice to know that you don’t play in the sub $50 m space, as I like to poke around there. I have a small number of people I follow on Twitter, some of whom are generous with their ideas and also a few value blogs that I follow too. I also keep a spasmodic eye on the ASX announcements , and occaiosnally will stumble across something interesting. Eg TCN. Every now and then I’ll take a thematic approach to the asx, for example, go through all the companies in a particular sector, see if their story resonates and then see whether they are making any money. I tend to be a sucker for biotechs, knowing full well that many won’t make it. It’s a shame asx has a minimum $600 unlike the US. Ditto the French market, though they have some gems. I also like to look at the management team. I might google them to see if there is any dirt, particularly asx companies with large family ownership that don’t always seems to act in the best interests of shareholders, unlike say in Europe. High remuneration is a red flag. My performance ranges from 12 to 16 % for the portfolios I manage. Selling remains the hardest part as does buying more after a stock drops.
What a great article Gareth.
Love your openness and transparency in the same way that I loved the way IKEA ‘democratised’ good design.
This is one of the best features of value investors, which in itself says something.
I’m with Carl as I too unashamedly ride on the coat tails of giants (Forager, Intelligent Investor, Motley Fool) who have better tools at their disposal than I ever will (capital IQ for example) and then just focus on controlling the one thing I have control over – my emotions as Investing is overwhelmingly a game of psychology.
27,000 companies? Sheeeeesh….How many stocks can an individual follow in a sufficiently deep way so that you understand the underlying value of the business?
Here’s a contrarian approach that David Einhorn uses to find ideas (I’m sure he won’t mind if you steal it, in fact he might of taken it from you as you kinda touched on it on your betfair analysis!)
He takes the traditional value investing process and just flips it around a little bit, starting by identifying situations in which there is a reason why something might be misunderstood, where it’s likely investors will not have correctly figured out what’s going on, then does the more traditional work to confirm whether, in fact, there’s an attractive investment to make. That’s as opposed to starting with something that’s just cheap and then trying to figure out why, he seems to think it is more efficient in trying to look for the straw hats in the winter as in the winter, people don’t buy straw hats, so they’re on sale.
Great blog article Gareth. I think a number of people here are still following yourself and Steve from your II days (myself included). Apart from the methods above, I like to look for significant on market purchases by directors. Preferably the director will be putting a decent chunk of their wealth at stake. This has worked quite well for me in the past.
Interesting. I have a day job but been also been investing for over 25 years. I subscribe to Intelligent Investor and have done since it’s inception.
But I also periodically trawl the listings of the ASX. I just run through names and wonder to myself: what do they do?
It’s not quite random. I start with a mental filter of: must actually have earnings. After that I just start looking to see what they do. Do I understand it? Are the directors people on my mental list of unscrupulous numpties?
Passing those filters leads me to look further. What is the competitive environment? How does my gut tell me that will change? How much do management pay themselves? And same for the board.
Then are they making a profit? If not (but have in the past ) what changed? Is that a permanent or temporary thing?
After all that I consider the financials….
This process is very ad hoc. It has found a few gems. A lack of time to do this in great depth means there have been some spectacular businesses that I did not invest in and which got away.
My worst performances have been acting on “hot tips”. Thats why I am very wary of chat groups and Internet forums. These things can lead to “auction euphoria ” where emotion and a good story easily leads to paying too much.
Appreciated your insights. Your research approach is why I invest alongside with Forager. Cheers and keep up the good work
Thanks Gareth. Good post.
I came across one of my best investments in recent times after being inspired by something you or Steve had said: “To be the smartest person in the room, find the room with the least number of people”.
So, I went hunting on the National Stock Exchange (NSX) instead of the Australian Stock Exchange (ASX).
Great article . You only need two great stock ideas a year if you are a concentrated in investor. As a small investor with limited resources it’s basically not possible to come up with 10 great stock ideas each year. 30/30/10/10/5/5/5/5 is the allocations with the last 5% being cash.
That makes a lot of sense Ivan.
I did have one question though in relation to cash held.
I know Steve (and possibly most investors talk of keeping cash on hand for a ‘potential drop in the mkt and getting great value buys’ sort of thing), which I agree makes a lot of sense.
But the critical thing is being able to pick when that time is to hold on to more cash than normal. So, for example, is now a good time as the stock mkt is pretty high and all the talk is of an easing back of the QE of the last 7 years which has certainly stoked the mkt?
The ‘human’ or perhaps ‘business’ approach to sitting on cash is that it’s being lazy and not a productive use of an asset, hence the constant temptation to keep investing it. Certainly in my business that is a dominant driver.
I’m sure no miracle answer but interested in your thoughts given the ratios you suggested.
Start with the A’s. Love it.
When I started out I ready every annual report on the Asx except for resource companies which I considered beyond my zone of competence. Some companies could be dismissed quickly. At the end of the day, relevance is what I consider a company’s greatest attribute. I was never going to outsmart an accountants balance sheet. Nanosonics was my biggest investment because I considered it a no brainer trading circa 45 cents some 3 years ago.
As a non professional, I don’t think my time is well invested going straight to annual reports or running filters. This stuff puts me to sleep. I limit my focus to what’s covered by the trusted analysts I follow. I like to rely on their forensic accounting skills and BS detectors in initial stages.
Most of the time I have no special insight to add to what they say, but on occasions I do. Eg. An opinion about the brand or the products or the company’s sustainable competitive advantage. Then I might do my own research after that.
I keep another small part of my portfolio as a gambling section where if I know of an interesting start up or idea, I might speculate with a tiny sum. Kind of a little bit of a barbel strategy.
Interesting Gareth. I am a former hedge fund manager/analyst that is starting a service for small institutions and high net worth individuals whereby global value ideas from a variety of sources (primarily other value managers, news, public filings, blogs, assorted research services) are “curated”, vetted, and presented in summary form with pertinent financials real-time. If you care, I would be interested in any input you may have as I refine the service.