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- Enterprise versus Equity Multiples - July 3, 2017
- Operating Defensiveness versus Capital Defensiveness in Stocks - June 12, 2017
- Ronald Chan: The Making of a Value Investor - May 29, 2017
How do we search for ideas? I believe this is the million dollar question everyone frets about when first starting out investing. How do we find potential investments to research on? How do we know if this is a good enough idea? And the list goes on.
In the search, we adopt the same attitude one might find appropriate in looking for a spouse: It pays to be active, interested and open-minded, but it does not pay to be in a hurry.
We all prefer some characteristics we wish to see in our partners and this is how we go about finding them. As we go about life, we see characteristics in partners that we are looking for and we go about dating. Our objective would be to find the right spouse (finding that home run stock), that bit is getting to know our partner while dating. While not every date would succeed, only with patience and courage to move on, would we be able to find the right one. This is likened to how when we first start with screeners, finding a list of stocks that fit our investment criteria before we start conducting in-depth research, understanding the business to gain an edge over the markets before concluding if it is going to be a bet where the odds are in our favor. Not all investment ideas will bear fruit, some may even result in a loss. However, as with every super investor, who really gets every stock right? Now, getting to the crux of the article, how do we source for ideas?
When we first started out our investment journey, we diligently searched from A – Z, combing each company’s financials, checking if it fulfils criteria we are looking for. After all this was how Graham first started out. I believe I speak for the masses, but this is a unfeasible method. Time is money. Spending those long hours combing each alphabet greatly reduces our odds in finding a potential investment idea. Given advancement in technology, we have proprietary system screeners that would perform the task of finding such securities that fulfils our requirements set. This is something similar to that of SGX StockFacts. For ourselves, we have set qualitative and quantitative screeners up to help us source for potential investment ideas.
By quantitative, I mean just pure valuations be it based on Debt-to-Equity, Normalized Earnings, and Book Value Ratios etc. While by qualitative, I am referring to factors that are not related to valuation multiples, the part where most terms as an art in investing. These factors would be like insider buying, share buy-backs, tender offers etc.
With such a screening process, it greatly reduces the amount of work needed to be done. The more stringent your criteria, the shorter the list generated and the greater your odds. In some way, it is a form of an investment checklist. The more ticks you have on a company, the higher the odds such a company is going to be an ideal investment. One point to note here would be, be as creative and unique in your screening criteria. Break the conventional norms, dare to experiment and think out of the box when screening. For retail investors out there wishing to gain access to such screener services, ValueEdge has rolled out a Monthly Net-Net Watchlist for 3 stock markets – Singapore, Hong Kong and The United States. Do check it out here if you are interested in reducing the time required for idea sourcing.
There are many investment events out there conducted by professionals that invite top fund managers to share their best investment ideas. Even if one does not feel comfortable entering any of the ideas pitched, it is always insightful learning how these fund managers think. I do agree these investment seminars can be quite pricey, however, as with everything in life, good things don’t come free. Some of such seminars I would recommend would be the ones hosted by Manual of Ideas, Asia Value Investor Conference, London Value Investor Conference and Sohn Conference. Generally, we have always been able to walk away from such conferences learning something new.
I cannot stress how important is reading. In whatever spare time I can get, I spend it reading. Reading the News, Blogs, Magazines, Books, and Publications. Essentially any text material that I am able to get my hands on. Readers interested in knowing what articles we recommend reading for the week can subscribe for our email updates (as seen in the top right hand column).
In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero… You’d be amazed at how much Warren reads — at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.
While reading may not directly lead to new stocks, it helps develop the framework in our minds that will help us analyse stocks we encounter in the future.
The above 3 methods for idea sourcing is just a general framework we go about looking for investments ideas today. While it may be easy to source for ideas, filtering down this list to find potential investments or that home run stock is the difficult part. Lots of people have lots of first dates; however, searching for a spouse, it takes much more than this. We are constantly on the look out for new investment ideas, improving our screening process and thinking process.
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