Crucial to any successful investment process is having a good "search" or "origination" strategy, i.e. ensuring that you are constantly seeing a good "funnel" of investment targets. Part of that search process is having a well-through through set of investment checklists so that you can quickly filter out the low probability time-wasters. But equally, it's important to think about the top of the funnel - how to find new ideas?
Are you getting enough good investment ideas coming in? Are you losing out because you don't have the right sources? Or are you missing out because you're not paying enough attention?
A famous example of this kind of "sin of omission" was given by Warren Buffet who said he committed a major mistake by not buying Wal-Mart at the right time - he suggests that this oversight may have cost his company, Berkshire Hathaway, more than US$8 billion!
Where can I find the good ideas?
That's the million dollar/pound/euro question and unfortunately, there is no one deﬁnitive answer. It just requires a lot of hard graft but, as ever, having a systematic approach helps. In no particular order, here are 7 search paths that may be worth building into your process, if you aren't already. Using others? Let us know in the comments below.
The 7 Best Places to Look
- Your Own Backyard - Peter Lynch was famous for arguing that you should buy what you know, ensuring that you stay within a defined circle of competence. Lynch says he would rather invest in "pantyhose rather than communications satellites," and "motel chains rather than fiber optics". It's worth reflecting in your daily life experience to see if this throws up any ideas or opportunities. Note - this is not the same thing as accepting tips from your mates - see below.
- Screening - It will come as no surprise that we are big advocates of quantitative screening as a way to generate ideas. This can come into three forms, all of which are worth considering:
- Checking daily hotlists or a simple single criteria screens like the 52-week low list if you're a contrarian, or single metric value lists like Low P/E, P/FCF, P/B or relative strength lists if you're a momentum investor.
- Following Guru screens based on the approaches of investors you respect (like Benjamin Graham or Warren Buffett). We now run over…