How I look for Investment Ideas

Yesterday I was talking with someone about the merits of using the 13-F as an investment tool, and it prompted me to briefly review my process that I use for searching for stocks to invest in.

For those that don’t know, the 13-F is a form that the SEC requires investment managers of a certain size to file each quarter. A lot of people watch the 13-F’s, and I think there are research studies that show that if you follow the best ideas from the best investors, you’ll outperform the market. One study shows how if you simply followed Buffett’s every move in stocks, you would have made 20% per year for 30 years- Buffett-Imitation is sincerest form of flattery.

So maybe it’s worth copying the pros, but I like to use the 13-F’s as a simple idea generator, from which I then do my own research and come to my own conclusions. The 13-F is a new tool I’m beginning to track this year, but it’s just one thing I use. Starting this year, I created a few simple spreadsheets to track the ideas of a few funds I follow, and I’ll see if this process improves my overall investment search process.

Aside from adding the 13-F to my investment routine each quarter, the rest of my routine is the same as it has been. This year I decided to focus more on efficiency, so I’ve put a lot of effort into streamlining my investment searches and routine. I think it’s very important for investors to write down their investment process. Every investor should have a written investment philosophy, and also a written investment process or routine. Think of it like a process flow that doctors or pilots use. You need to know how to process information on a daily basis because otherwise you’ll end up wasting time doing things that aren’t adding value. (That’s what I found myself doing too much of: getting sidetracked on twitter, blogs, etc… all of that is great, but you need to consciously decide how you’ll use it).

I’ll discuss my investment process much more, but for now, here’s a quick list of the tools I use on a daily/weekly basis in my investment routine:

News, Articles, Ideas

  • Wall Street Journal-I read it with the morning coffee. It’s the best place to get general news, ideas, corporate announcements on mergers, buyouts, spinoffs, etc…
  • Blogs-I use Google Reader daily to quickly scan a list of blogs I follow to see if there is a specific idea to look at, or something generally interesting. I then open the links I want to read, and I might read a few of them immediately, or mark them to read later.

Specific Stock Idea Generation and Tracking

  • Value Line-I regard this as my most important tool. I page through about 60 stocks each day, going through 3500 each quarter (Value Line updates its list each quarter). This practice I’ve become more diligent at, and it is a great way to learn about a variety of companies that may or may not show up in your standard screens. I also use Value Line’s weekly lists and scan the list of stocks with lowest P/E, P/B, biggest free cash flow generators, worst performers, etc… I go through those lists each week.
  • Morningstar-This is also a very important tool. I use Morningstar daily for quickly glancing at the 10-year balance sheet and income statement histories of stocks. Lots of great information to quickly have in one place. I also use Morningstar for my screener and watchlists. I have 9 or 10 saved scans that I track each month for new ideas. I also look at a few different watchlists daily for stocks that might be getting close to my buy point.
  • Google Spreadsheets: In addition to Morningstar, I use Google for a few focused watchlists. Morningstar gives me all of the data in one place, but I can write quick notes on Google (i.e. notes to jog my memory on why I like the stock, etc…)
  •  Magic Formula Screener: In addition to my Morningstar monthly scans, I use Joel Greenblatt’s Magic Formula site to go through a couple of the list of stocks each month. This list usually changes slowly, but always has new ideas, and takes just an hour or two each month to investigate new ideas.
  • Spinoffs-I try to research each stock that is involved with spinoffs. Spinoffs collectively outperform the market, even today as that anomaly is well known. They also can occasionally offer really good hidden value opportunities. This is one area that I spend a lot of time actually reading the Form 10 filings and other more in depth research. I follow a few blogs that specialize in this area for ideas, and I also keep a Google spreadsheet watchlist of stocks that were recently involved in a spinoff.
  • 13-F: This is a new part of my routine as I mentioned above. It takes a few hours each quarter. I’ll update Google spreadsheets on this blog as I develop them. My plan is to input the top 10 ideas from a few value funds I follow, to see if there are any ideas worth researching further. This is the first quarter I will actually make a concerted effort to track them.

So that’s the overview of the tools I use in my daily, weekly, and monthly investment process. Feel free to share any ideas. I also do a lot of reading (books, blogs, etc…) as well as company specific reading (annual reports, etc…). This reading I usually do in the afternoon. I try to do my searches, scanning, etc… in the morning.

This is one area that I’m always working on, and this year I’m going to really focus on executing this routine in the hopes that it improves my efficiency…

3 thoughts on “How I look for Investment Ideas

  1. Very useful thanks, John. Has your process changed at all since you wrote this? I am a fledgling investor and, knowing myself pretty well at this stage of life, am setting myself up for a fairly structured approach so I can know I’m being effective rather than finishing the day and wondering if I invested it well.

    Have you come across any other articles outlining the daily / weekly etc routines of value investors? I’ve been googling for days with little luck.

Leave a Reply

Your email address will not be published. Required fields are marked *