As a private investor I do not have the luxury of using institutional platforms/tools such as Bloomberg terminal, CapitalIQ or any premium market research report that costs $1000 each. When I first started out picking individual stocks I had limited tools available to generate investment ideas…
…It turned out though that ideas can be generated without these tools if you have:
1/ an investment philosophy
2/ a long-term investment horizon
Number 1 enables you to filter out quickly things you don’t want to read and number 2 keeps you away from thinking that you must have an “edge” to do well in stock market.
In fact all private investors have an “edge” that institutional investors don’t: PATIENCE. But let’s save that for another post.
Once the above 2 are set you can spot/generate ideas quickly using virtually any free/affordable investment-related source on the Internet.
Some of the tools that I use frequently include (from least to most useful):
Any website that covers companies/ stocks/ financial markets would do. These could be yahoo finance, google finance, Financial Times (if you happen to pay for it or your company pays for it), Wall Street Journal (similarly to FT) etc.
Reading news to generate ideas is difficult if you don’t have an investment philosophy. This is because you will be overwhelmed by the amount of news that get featured daily. Virtually any news would sound so important that you end up thinking you have to read them all.
As a quality-investing disciple I have an investment philosophy that I can stick with. As such I will be quick to filter out useless news such as political, macro-economic or technological news. In terms of company news I won’t spend any time reading companies that are described by journalists as “one of the fastest growth companies” or something similar. I would opt for news that feature companies being described as the largest, the number 1 market share, etc.
News won’t generate many ideas as you can only read so much news per day and it’s not structured in a way that you can spot it easily. I would only use the news at the end of the day, normally just to kill boredom and pass time.
At the moment I’m paying for Morningstar monthly subscription which costs £22 a month. I don’t think this would be a troublesome amount of money for anyone looking to invest actively. This is roughly 1.4% of the average monthly take-home pay of a typical graduate.
Morningstar is a superior research investment website. I think they are the best amongst all the sell-side equity-research houses. This is because 1/ MS is independent. They don’t sell reports just to get you to place a trade. They do not have any trading desk/business and as such if they don’t like a company they will say it loud and clear, 2/ the company pioneers in research into economic moats, which fits perfectly to my philosophy and is a good reference source for value/growth investors and 3/ the website is very user-friendly.
I normally do a quick search on companies with 4-5 star rating which indicates they are at discounted price. Then I check if the companies have wide or narrow economic moats. If a company has a wide moat and 4-5 stars I will be down researching it. Right now Morningstar covers a lot of stocks, virtually any big-cap stock in developed markets around the world so you can generate ideas pretty easily.
Warning: This however shouldn’t stop you from doing your own homework. It is easy to follow their advice voluntarily because they are unique in the business of researching stocks, but they sometimes do get things wrong. This is judgemental of course but the companies they love may not be one that you feel compelled to have in your portfolio. One example is L-Brands which I wrote in my last post here.
- Fund’s holdings
Looking at your favourite fund manager/investors’ holdings is also a great way to generate ideas. More often than not I find that this can help you uncover some very interesting companies. At the end of the day fund managers have teams of analysts looking at companies from all corners of the stock market, so funds’ holdings can act as a stock filter for the retail investors…
…But don’t be like “oh if he holds it, it must be good”…
…This is because great companies do not equal great investments. They must be bought at a cheap to reasonable price.
Looking at fund’s holdings helps you uncover names that you should be looking at and add to your watch list, not to buy it with your eyes closed thinking if your master has bought it, it must be right.
At the moment I have a list of investors that I like (you can see them here), each holds a concentrated portfolio of 20-30 holdings. That should give me roughly about 50-100 unique ideas to think about!
- Your experience with the company
In my opinion this has got to be the best source of ideas. It helps you tick the most important criteria of any long-term investing checklist: “do you like the product?”
This is also the best aspect of investing. Overall investing keeps you aware of your surroundings. You will pay attention to almost anything you come across. If your mom uses a particular skincare brand (Shiseido in the case of my mom) why don’t you go and check out the company’s website? Have you paid enough attention to the companies that manufacture things you use every day like the elevators that you climb up and down the Tube, the toothpaste you use every morning, the luxury car your friends like to talk about, the brands that your girlfriend likes to wear or the coffee shop that you love to go to?
My most recent discovery was from today when I realised almost any door lock I came across had “Yale” or “Assa” branded on them…Googled it and Assa Abloy popped up – The biggest lock maker and the most successful lock/security system provider in the world! Why did I not think of this much earlier? Why did this never get featured on the news?!
Your experience with the product gives you so much confidence and conviction in a company. After all successful investing is all about having strong conviction.