Value Investing

The Search Process

The Search Process

 

Manual-of-ideas Manual-of-ideas (1) Manual-of-ideas (1) Manual of IdeasManual-of-ideasThere has been a good discussion on the search process from several members of the Deep-VAlue Group at Google Groups.   Join so you can learn and share with them. http://csinvesting.org/2015/01/14/deep-value-group-at-google/ then follow the link in that post.

Here is part of the discussion

Detective-with-magnifying-glass

There’s more than one way to skin a cat, so I’m curious how others decide on where to focus their initial research efforts. 

Do you start with an industry you’re familiar with or have an interest in? Do you go off of recent news? Do you look at 52 week lows and go from there? Do you look at insider trades first and go from there?

This is a great question.  I’m an amateur (who hopes to someday go pro!).  I usually get my initial ideas from other investors.  I spend a lot of time reading investment theses.  If I like the company and its competitive position, I add it to my watch-list, then perform my own regular research updates.  Blogs, investment pitches for conferences, podcasts, magazine articles – all are great resources to discover new companies which have attractive economic characteristics.

An example is Input Capital, a canola streaming company based in Canada.  I initially heard about the company from reading a blog article, approximately 18 months ago.  The article piqued my interest, and from there I begun to conduct my own research.  Over the course of the 18 months, I gained an understanding for the business and drivers of value.  Then, in Nov. 2015, the price dropped over 40% in one day when it was revealed that 3 contracts were defaulted upon.  I updated my research over the weekend, talked to management, then made it my largest position.

The danger of sourcing ideas on other’s work is that you may not do your own.  But I think it can be a greater starting point for sourcing ideas, especially smaller, boring companies with little news or analyst coverage.  Just make sure you resist the temptation to get lazy.  I’ve gotten burned on that when I began investing in companies and not just ETFs.  It was JC Penny.  My investment was based on reading far too much into Ackman’s thesis and doing far too little of my own research.  I made the mistake of confusing the number of slides with the quality of research.  Not once did I, or Ackman for that matter, ask if JC Penny’s customers LIKED used coupons and buying items on sales.  Neither of us did the necessary “scuttlebutt” of actually *GASP* talking to JCP customers.  Lesson learnt: retail investing is a lot like political campaigning, it’s all about the ground game.

Hey all,

This is a great thread. I do a lot of what Ian talked about, but recently have started feeling that just reading investment pitches all day long isn’t the best idea. Not saying it shouldn’t be a serious tool in your arsenal, just I feel I need more balance. The old fashion way of just researching companies and industries where one can remain unbiased by outside opinion helps me recalibrate. Being able to maintain independence of thought is critical in investing. This might be obvious to some, but I figured I’d put it out there to see what the group thought.

We also need to a thread on investment process, a subject that is really fascinating to me. It’s an very individualized process that still can be honed by ideas from other investors.


CSInvesting.org:

Mr. Munger/Mr. Buffett would suggest that you start with the A’s and white-knuckle yourself through the 2,500 companies in Value-Line and Small-cap Value-Line.  Any major library in the USA should have it online. Better yet, page through the hard copy at the library. The_In-Depth_Guide_to_Reading_a_Value_Line_Research_Report  Now, many overseas readers may not have access to such a database, but some stock exchanges provide lists of companies.

Search is tied in intimately with your investment process which should contain:

  • Search
  • Valuation
  • Risk Management
  • You

Starting out with Value-Line is a great idea for a new investor. Eventually, you will have about 150 companies that are worth watching.

You can eliminate (with practice) many within seconds, but you will

  1. find unusual opportunities that may not be picked up by screens.
  2. build a wish list.  I would love to buy BCPC (Balchem) 35% lower. Ditto with CFX
  3. you build up a knowledge base in your head of various industries and the general financial metrics to compare.
  4. You can come up with your own investment ideas vs. being a late herder into ideas.

A full discussion is here: THE SEARCH PROCESS

DEVELOP YOUR OWN STYLE LIKE CHARLIE WATTS

For you non-drummers out there–did you pick up the Charlie Watts pattern?

https://youtu.be/1kUN1bYdplk?t=2m51s or view the legend: https://youtu.be/WT5uAIPFft8

HAVE A GREAT WEEKEND!

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