How I generate my ideas is probably the question I get asked the most. So I figured I should do a blog post to answer this once and for all. The honest answer is that I usually don’t really generate any idea’s: I simply wait for someone else to write-up a convincing thesis. I thought that this was pretty obvious because a lot of my write-ups start with something along the lines of “Previous week blogger X took a look at company Y…”. The handful of blogs that are displayed at the right-hand side of this post are a major source of inspiration, and I follow another 50 blogs or so as well using Feedly.
Blogs are of course not my only source of ideas. I also follow a bunch of authors on Seeking Alpha and I follow even more people on Twitter. There are also a couple of funds that I follow (again using Feedly) and the great thing about running a blog yourself is that people often e-mail interesting idea’s as well. Like minded investors are in my opinion a great screen for potential idea’s.
Buffett is known for advising people to simply start with the A’s and look at everything while a stock screener is also a popular method to find potential interesting companies. I rarely do this. I have no doubt that this can be successful as well, but I doubt that it is a time effective method. When you look at everything you also spend a lot of time looking at stuff that isn’t even remotely attractive. When you use a screener you often run in data quality issues for micro caps and foreign stocks, and another problem is that usually the cheapest stocks don’t show up on a screener. I’ll happily let my fellow investors do the heavy lifting.
The number of ideas that I can research is limited, and by mostly looking at stocks that like minded investors find interesting I think I’m significantly increasing the odds that I’m looking at a company worth investing in. You don’t get points for originality as an investor. The only score that matters is the risk-adjusted return that you are able to achieve.
I also think that a lot of investors have a bit of a misplaced believe that they need to buy something that is truly undiscovered, and that going through all stocks or using a screener is a way to accomplish that. But the reality is that a stock is almost never undiscovered. Unless you are buying in an IPO there is always a group of people that already know the stock and own the stock. Doesn’t matter how obscure a company is: there is probably someone out there that has owned it for years and knows everything there is to know about it.
What should be noted is that while I almost always borrow my ideas from someone else I never invest without doing my own research 100%. When I find a potential interesting company I always start my research from scratch. If you don’t read the annual reports yourself you don’t know what someone else might have missed, and when you don’t built your own valuation model you don’t know what kind of assumption were exactly used. It’s in my opinion critically important to fully understand the investment thesis. If you don’t it will be hard to interpreted news releases and to decide what to do when the price changes. Do you have the conviction to buy more when the price drops but intrinsic value remains constant? Is it even possible to know what happened to intrinsic value without fully understanding your investment? Seems like a though task to me.