Friday, 29 March 2013

Where do I get my investment ideas from?

I've recently been thinking about my sources of investment ideas and how that's changed over time. Given I'm not a full-time investor time is a big constraint when it comes to finding good ideas given a lot of my time goes in to researching existing positions and checking and re-checking my current thesis. When I first started, I got essentially 100% of my ideas from two sources: The Motley Fool UK message boards and anything that came up on my share screener results. I used to use the Sharelockholmes screener but the new Stockopedia one is just brilliant - they have a selection of pre-prepared screens but you can customise and save your own so I've got plenty looking for things like negative enterprise value, low EV/Sales, low P/B & high 5y ROE etc.

As I've learnt more about investing I've slowly added more strings to my bow and now I get ideas from a much wider range of places: Blogs, twitter, bulletin boards, stockopedia, newsletters, company presentations, email contact and more. It's incredible the amount of ideas I have access to from a wide range of investors and a testament to the power the private investor can have in the internet age.

Right now I find I'm using blogs more and more as a great way to find initial ideas. I've got round to adding a 'Blogroll' to the site which contains all the investing blogs I regularly read - I recommend taking a look through them if you're interesting in finding more ideas from other investors (predominately small cap value investors, but there's a few others in there too) who are frequently far better than myself. Even if I don't find myself agreeing with the author's thesis I always find myself learning something so it's a great way to develop as an investor.

You may have noticed a fair few non-UK blogs in my blogroll (especially a number of US investors) and also noticed a distinct lack of any non-UK listed investments in my last portfolio update. This is not because my international counterparts have failed to convince me of the merits of their markets but, I'm embarrassed to say, largely a failure of my own investment process.

In the UK market I subscribe to two services (Stockopedia and Sharelockholmes) which together allow me to quickly investigate a company's financials within minutes and form a general picture of how the business has been run over a long time period. I find this is a great way to cover a lot of ground in a short period and to compare the numbers with the investment thesis I've read elsewhere. (As an aside, I'm a great believer in the ability of financial statements to tell the diligent investor a great deal about the business without even having to know anything about exactly what the business does. I can form an opinion rapidly on management's capital allocation ability, the underlying attractiveness of the historic business characteristics as measured by ROCE, margins, cyclicality etc.) I can also see at a glance all the usual 'core metrics' I'm interested in such as P/E, EV/EBIT, P/TB etc which is handy.

If I'm still interested after this quick check, then I go in to the next 'phase' and dig in to the original reports and detailed financials. The problem I have with international markets is I lack this 'quick investigation' phase which I rely on as a great filter of investment ideas already. Thankfully Stockopedia are looking to expand internationally soon so this should help on this front in time. I'd be interested to hear about what other private investors do when they invest outside the UK markets and what data sources & tools they use? (Or if any international readers have any tips for how best to screen data in their markets) It also doesn't help that my broker, TD Waterhouse, offer horrific FX rates for converting to international currencies!

Anyway, rant over. So what about the other methods I use? Bulletin boards are handy to keep up with news bits you might have missed on specific stocks but the signal-to-noise ratio can be terrible. I use ADVFN and they cover the UK markets (are there any good international BBs worth looking at?) but beware - some of the boards venture in to YouTube comment territory - I'm often worried that the stupidity might be contagious. That being said, often the companies I'm most interested in tend to be off the radar and it's a bullish signal if the only posters on the board of a new company I'm looking at are familiar value investors I recognise and not the ramptastic muppets. Also, I'd wager that the level of posting activity is inversely correlated with future investment returns - busy boards tend to signal that the crowd has arrived.

Twitter's a funny one, because you can't really convey an investment thesis in 140 characters but it does allow me to track specific investors I respect and see what they are buying and selling and why. I've already had one investment idea which I got off twitter (GFIR / SIGG courtesy of @marben100) but probably the other big intangible benefit has been from finding other investors who I end up following (both on twitter and on their blog, if they have one) and often end up communicating with about other investment ideas.

Despite all these modern internet methods of finding investments I've gotten a surprising number of ideas from the old fashioned method of attending company presentations and meeting management. I live in London so it's fairly convenient for me to attend the various private investor events that get organised around here and I only wish I had more time to attend these! My staple diet here consists of recurring dinners known as 'Mello' events. These are organised by @carmensfella who is a well known active UK private investor and I highly recommend going if you live nearby. There's also plenty of other company presentations going on all the time, as well as ShareSoc events, Blackthorn Focus events and more. I only wish I had more time to see more of these!

I am, however, highly cautious of being overly swayed by over-bullish management speak so I tend to try and form an opinion of the business first from the numbers and then use the Q&A time to understand specific aspects better and try and then try and get a feel for how competent management seem at important attributes like capital allocation. Management can talk and talk but it's their actions (which are reflected in the financial statements) that I'm most interested in.

What methods do you use to find good investment ideas? Which do you think work best? Ideas in the comments please!