How to Generate Ideas

There are so many ways to generat ideas as there are investors. A lot says that some investors use computer screenings extensively, for example, while others use them at all. Every investor should find the most appropriate method for themselves and their investment style. Regardless of methods employed, everyone is working to analyze the information available as efficiently as possible. Here are some ideas:

 

Screening

Screening is popular with investors who rely on quantitative information. The ever-increasing financial and market databases and the technology available has made it easy for investors to screen all kind of attributes which can be found in corporate financial data. Investors can look very different metrics depending on company characteristics on which they focus.

For many investors screening is good starting point. It is an effective way of reducing the investment universe to a more manageable entity. And after this initial research most investors start to do more detailed analysis. If you are deep value investor and hunting bargains, by screening you will find right away all the companies seliing under their NCAV (net current asset value) or book value (P/B < 1). Once you have that list, then you start to research if there are good reasons the stocks deserve to be cheap or if it’s an real investment opportunity.

Screening is not so popular among the value investors looking for quality stocks. It’s understandable since the evaluation of qualitative factors requires a lot of other research work. However, quality investors can also benefit from screening. Revenue, earnings and cashflow growth gives you important information. Also return on capital, ROE %, margins and amount of debt of the company are very relevant information. There’s always great degree of honestly about numbers and then it’s easier to be disciplined and keep your emotions out of decisions.

While using screening be awere of data and statistics used. Not all information is always correct and reliable. Check them from official financial reports of companies before making your investing decision. Also, do not use too many different metrics for screening; it usually weakens the end result. Often a few or even just one metric will give you the best result.

By screening you can also build up your own special watchlist. With the market as volatile as it is now, it’s huge advantage to have a well-maintained list of companies you want to own at the right price. Even the high-quality companies can get remarkably cheap quite fast – and you surely want to be prepared for that.

 

Reading

All the great investors have been fanatic readers. You have to have your eyes open all the time and devote yourself to lifetime learning.

Today, the media information flood is absolutely overwhelming. It’s very important to define where you are going to look for opportunities. You need to be really careful about how you spend your time. Time is a precious resource and if you make it your task not to miss anything, you set yourself up for failure. There is no right way to hunt for ideas. You can read books, newspapers, economic magazines, investing blogs, investment websites, company reports and filings. Find your own way but make sure your sources are reliable – that’s really important.

And today, the same information is available to all investors almost concurrently. That’s why what matters is often not what or how much you read, but how you process information. Rather than trying to fight with all other investors on numbers, investors should instead focus on improving their knowledge. You need to develop your second level thinking. Look at behind the numbers and the company information. To get the edge you have to interpret some information differently than the crowd.

Independent thinking is a much needed feature if you want to succeed as an investor. The investor must learn to process information differently and more effectively than to consensus to achieve a higher than average market return.

 

Follow the leaders

During the years some investment managers have gained superstar status and following the moves of those investors has become somewhat of a hobby sport in the investment industry. If done correctly, following the moves of great investors can be profitable affair.

It’s clear that some of the best investors have so good track record for so long, that they have surely done much better than market average. Even if we accept that the above is true, it’s not entirely certain that copying superinvestors also leads to outperformance. We may not know the exact time and reason why the investment was made. And when superinvestor position becomes public knowledge, the price may have already risen so high that we may be unable to buy at a reasonable price.

The old good advice in investing goes like this: “Do your own reserch work and don’t trust the tips of others.” In case of imitating your heroes, we may be able to moderate it as following: “Following superinvestor’s share purchase, analyze and get to know why it is done.” Our ability to stick with an investment is diminished, if we don’t have certain level of own conviction after doing necessary research.

As an investor the most important decision is which investing star to track. The number of alternatives is large. And it’s maybe not wise to choose by best track record alone (what is difficult to confirm absolutely). It’s clear that several factors figure into this decision. In my opinion similarity between your investment approach and superinvestor you are following is perhaps the most important criterion for decision. We are much more likely to understand with the investment rationale of a investing star who has similar investing approach to ours.

It could be deep value, quality value, concentrated portfolio, broadly diversified portfolio, large or small portfolio turnover, great interest in special situations, employ short selling or not. The opportunities are many and you just have to choose the most appropriate ones for your investment style.

And after the recent market crash, it start to be a good time to generat ideas!

2 thoughts on “How to Generate Ideas

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