Stop Looking For “Stock Ideas”. Do This Instead… by Jae Jun
I call it home, and it’s also nicknamed “Emerald City” city for a reason.
In his book, The Dhandho Investor: The Low–Risk Value Method to High Returns, Mohnish Pabrai coined an investment approach known as "Heads I win; Tails I don't lose much." Q3 2021 hedge fund letters, conferences and more The principle behind this approach was relatively simple. Pabrai explained that he was only looking for securities with Read More
Beautiful luscious trees, glimmering lakes, tall handsome mountains.
I’ve been here for 10 years but I went fishing here for the first time this year.
Having grown up in Sydney, Australia, I regularly fished on the coastal rocks and cliffs – hauling in all sorts of goodies.
So with the weather warming up, I bought myself a nice little rod, basic tackle to catch at least 10 fish, and a fishing license.
Felt like a kid again because I couldn’t wait to get to the lake the next morning. Saturday morning comes, I get everything ready including a couple of buckets to bring that fresh catch of the day home.
Got to the lake, found an awesome spot on a dock and cast away.
2 hours later….
Not even a bite.
I realized I’ve never fished in freshwater before. Didn’t know anything about the lake and what bait works best. I got caught up in my excitement and went there without a plan. Just casting and hoping there was fish in that big expanse of water eagerly waiting for my hook.
And that’s what it’s like for a many investors.
Getting excited about catching at least 10 fish in the stock market is fine. But in practice it’s much more difficult to what you read in books and articles.
The truth is that there are thousands of people thinking and doing the same thing.
The stock market doesn’t exist in a vacuum.
I don’t like the term “contrarian” because it makes it sound like you are going against the tide. Purposely calling red, when everyone is calling black.
The business word for contrarian is simply “staying ahead” of the competition.
Staying ahead does not mean you should do the opposite of what everyone else is doing. It simply means, “don’t be a lemming”.
One of the easiest ways of eliminating noise is first to make your own terms. Instead of letting what the market and others dictate what you should think and do, you take control.
Before looking for low PE, low PB stocks like everyone else, take a step back and quickly plot out your plan.
- What type of stocks are you looking for?
- What stocks are you comfortable analyzing and following on your own?
A method I took was to develop a scoring algorithm that I call the “Action Score” with a math PHD.
The idea behind the score is to come up with a single number and grade that I can use to quickly identify stocks that are worth “acting on”.
It’s now part of the Old School Value Online stock analyzer and is used to look at a stock from 3 angles.
And current members love it because it’s an awesome “secret fishing point” for a value investor.
If I focused on the same metric that everyone else looks at, where’s the edge in that?
My research and knowledge would be a mile wide and an inch deep
But what my Action Score helps me do is cast where the fish are. In less traveled waters.
And I created it by following this simple guideline.
All I did was start backwards from my end goal, and then chose 3 of the best criteria for each category.
a.k.a. Reverse engineering.
And because you’re on this email list, I’m also going to open up the details of how I created the Action Score system in the following emails.
Thankfully, I no longer search for a low PE or low P/B stocks. Instead of just playing at the surface layer and doing what everyone else does, I’ve taken it further.
I focused on what I demanded from a stock and went an inch wide and mile deep.
Now that’s being contrarian.
To ignore what the media and market is screaming at you and what they want to cloud your mind with.
My advice? Focus on drilling deeper, not wider. I’m going to give you a template further down.
Whether it’s wanting to improve your investment returns, having greater success and increasing confidence, it all starts with eliminating the non-essentials and focusing on the important things that will achieve your goal.
Then having a plan and executing.
Then you’ll see all the side benefits that come along with it.
Things like being able to ignore the noise and saving a ton of time because you have a focused agenda of what to look for.
You won’t wander aimlessly for hours getting distracted by this article, that article, comments, reading news.
Because before you know it, the day is gone and you’ll feel like this…
Here’s what I want you to try.
Draw up this diagram again on your own.
In the Goal box, write down a single type of stock you want to find today. Each time you want to search for a new type of stock, create another version of this.
Then constrain yourself to 3 factors that are most important for you to define Quality, Value and Growth.
This is exactly how I got started. I then took it to another level by finding a math PhD, backtesting and then going through countless iterations of adjusting numbers and calculations.
But going a mile deep with creating a calculation was worth it.
The backtests show this clearly where it’s whipped the market over the 17 year test period.
For right now, draw up that quick diagram and fill it in. I drew that image on my phone in a couple of minutes.
Don’t worry about trying to make it perfect or trying to find unique metrics.
That’s not the point.
Use what you know and what is important to you.
Here’s a quick template and example you can use.
- GOAL: Cheap dividend stocks with potential to grow dividends
- Piotroski score > 7
- CROIC > CROIC 3 years ago
- FCF/ShortTermDebt > 1
- Dividend Yield > 2% but < 4%
- FCF Yield > 10%
- EV/EBIT < 13
- Enterprise value growth > 0%,
- Dividend increased for 5 years
- Sales growth over 5 years is positive
You’ll experience how powerful this simple exercise of putting down your thoughts on paper really is.
Don’t just let it float around your head.
Then when you’re ready, hit reply and share what you’ve got. I’ll be more than happy to provide feedback. I read all my emails so you won’t be ignored.
And check the next email I send you. I’ll provide more details into how the Action Score was built and how you can apply it yourself.
Captain of Old School Value