Geoff Gannon December 23, 2010

How to Come Up With Investing Ideas

A reader sent me this email:

Hi Geoff,

…I was wondering if there was any other advice you had on how to pick what companies I should look into. You mention a few blogs that I should look to for ideas but what about stock screens? Should I employ those in order to get a rough list of stocks and then choose a few and analyze them by reading their 10-K, etc.? I am just worried I am not sure how to get all the stocks to read their 10-K…


You won’t run out of ideas.

Start with one idea and follow that thread wherever it leads. Don’t obsess about any one stock. Just sketch the investment idea quickly in your mind. Does it grab you? No. Then move on.

You can use screens. I recommend Magic Formula InvestingGuruFocusMorningstar, and RobotDough.

GuruFocus also has 2 newsletters for subscribers to the site. One is about Ben Graham NCAV bargains. The other is about Warren Buffett / Charlie Munger bargains.

Use Bloomberg to “watchlist” stocks. Whenever you find an interesting company, go to Type the company name in the blank box in the upper right of the screen. It will give you the symbol (and exchange) of the stock you want. Click on that stock. To the right of the stock price, you’ll see an option that says “+ Add Security to your Watchlist”. Do that. You’ll need to create a account for this. It’s free.

The beauty of the watchlist is that Bloomberg tracks the stock’s percentage price move since you watchlisted it. Once a week, log into Bloomberg and just look at the stocks that are red. If the company was interesting when you first saw it, it’s even more interesting now that it’s cheaper.

Bloomberg is the best place to follow foreign stocks. So enter any names you get from reading Richard Beddard’s blog over there. Don’t try to track foreign stocks at sites like Yahoo and Google. Or at your American broker.

That brings me to another point. Pick the right broker. If you’re looking to invest like Benjamin Graham and Warren Buffett, don’t use Charles Schwab. Go with an online discount broker that does international and over the counter stocks well like Noble Trading or Interactive Brokers.

Here’s the big mistake most investors make. They refuse to follow their best ideas!

Right now, some people reading this thought: “Really? I have to switch brokers?”

Nutty, I know. But totally true.

Someone will hear about some little company that trades in New Zealand or Denmark and realize Morningstar, GuruFocus, EDGAR, etc. doesn’t have financial data on that stock. Or their broker won’t do a trade there. So they don’t follow up on the idea.

Never limit yourself because you can’t get data on the company. Screens limit you. Pretty soon you’re focusing only on screens that are running in just the universe of stocks known to the website you happen to use. Don’t do that. Lots of companies have their own websites with archives of their annual reports.

Here’s all the financial data you need on Egetaepper, a Danish carpet company. And here’s the financial data you need on Delegat’s, a New Zealand wine company.

Where did I find these companies?

Here’s a list of small-cap companies trading in Copenhagen. Start with the A’s.

And here’s the entire New Zealand Stock Exchange.

I’ve got as many stocks to choose from in New Jersey.

Investigating a list of stocks from your own home state would be pretty cool, right?

It’s also easy to do. If you’re a Morningstar subscriber just go to Tools > Premium Screener > Stocks > State – Location of Company and select the abbreviation for your home state. Now, you’ve got a list of stocks for your home state. For Michigan, I’m guessing it’ll take you a little over 3 months if you go through the list at a speed of one stock a day without taking any days off.

Do you subscribe to any trade publications?

Warren Buffett does. He reads American BankerBeverage Digest, and Furniture Today, among many others. If you liked my Barnes & Noble (BKS) posts, you can subscribe to Publisher’s Lunch for $20 a month.

Really, you don’t even have to spend money to do this kind of research. When I type “2010 combined ratios” in Google, the 6th result down is a list of the top 100 insurance groups and their combined ratios for 2009 and 2008 from National Underwriters.

Read company presentations. They often mention customers, competitors, and suppliers.

Walk a grocery store. Store aisles are visual representations of industry structure. Look for the manufacturer names on breakfast cereals and soft drinks. Notice how many “competing” brands are made by the same company. Look at the store brands. Some carry specific warnings like: “This product is not manufactured or distributed by Prestige Brands, Inc.”

Don’t you want to own a trademark that drugstores are so desperate to infringe on?

You can. Prestige Brands (PBH) is a public company.

Think of the name of a big business you think also happens to be a great business.  Maybe McCormick (MKC).

Google Finance kindly provides the names of “related companies”. In this case, you get:

Campbell Soup (CPB)Tree House Foods (THS)Heinz (HNZ)Conagra (CAG)General Mills (GIS)Ralcorp (RAH), and J.M. Smucker (SJM) among others.

Always have a pad of paper with you. Write down company names you come across when researching a stock.

And that’s the problem with screens. I don’t mind you using them sometimes. But your best ideas are going to come from reading blogs, annual reports, investor presentations, trade magazines, and all sorts of other things that get you thinking about the business.

That’s why I say you should move quickly and just sketch your investing ideas. You can tell if it’s interesting or not from a sketch. I knew I was interested in Bancinsurance at the right price. Because it was a niche insurer with a good combined ratio. That was the sketch. If Bancinsurance had been a reinsurer, I wouldn’t have followed up on my sketch. It wouldn’t have excited me.

Researching stocks is a lot like writing. You start with a quick mental sketch. Then you ask: “Is this a good idea? And does it excite me?”

If the answer to both questions is yes, then you can worry about really analyzing the company in detail. But you want to start with a good idea and the feeling that you can squeeze something good out of that idea.

That’s why you need to pick your spots. It could be specific screens like net current asset bargains. Or it could be specific industries.

Usually, the connections are more abstract than that. It’s more like working in the same genre. It’s hard to define a genre. But you recognize the members of that group when I name them.

Think about some of the stocks I’ve owned and mentioned on this blog: IMS Health, Omnicom (OMC)Fair Isaac (FICO).

Think about how similar those businesses are.

Technically, they may not be in the same industry. But, they’re very much in the same genre of investing ideas. Each company immediately excited me when I sketched the idea.

That’s what you’re looking for. You want to learn a theme. And then just keep looking for variations on that theme.

Talk to Geoff About Investing Ideas