Presently, I have four ways of sourcing buy ideas in the stock market. Here they are:
1) I read widely, and when I see something interesting, I either jot it down, or hit the “print” button. I put it in the pile for the quarterly portfolio reshaping.
2) Preston Athey gave me this idea. I set up a bunch of Googlebots to let me know when a CEO leaves a firm. For companies with a lot of underused assets, that can be an incredible catalyst to unlock value. Print, add to pile.
3) My industry studies produce a list of out of favor companies with better prospects than most — the challenge is to separate out the “buggy whip” industries, from those that are genuinely cheap.
4) Finally, I study 13Fs, and try to understand what bright investors are holding and buying.
After I assemble all of the companies that might be worthy investments, I try to forget where I got the idea from. That forces me to analyze the company my own way, and not merely trust someone or some method that I think is bright.
After that, I engage Portfolio Rule Eight, and make my current portfolio holdings compete against the new ideas. This is a much better way, a more businesslike way to choose companies to buy. It forces managers to make explicit decisions that improve the characteristics of the portfolio, improving the probability of winning.
Do you have better ways of sourcing ideas? If so, leave them in the comments.
By David Merkel, CFA of Aleph Blog