The document discusses the author's process for filtering investment ideas. It begins with idea generation from sources like reading newspapers, Value Line reports, and 13F filings. The author then uses a set of quick questions to filter ideas on a "conveyor belt" process. These include understanding the business, whether it is cheap, what catalysts and risks exist, and whether it could double. This allows the author to quickly qualify ideas and focus on those warranting further research through financial statements, reports, and other due diligence. The ability to rapidly filter ideas is key to the author's investment process.
The document discusses the author's process for filtering investment ideas. It begins with idea generation from sources like reading newspapers, Value Line reports, and 13F filings. The author then uses a set of quick questions to filter ideas on a "conveyor belt" process. These include understanding the business, whether it is cheap, what catalysts and risks exist, and whether it could double. This allows the author to quickly qualify ideas and focus on those warranting further research through financial statements, reports, and other due diligence. The ability to rapidly filter ideas is key to the author's investment process.
The document discusses the author's process for filtering investment ideas. It begins with idea generation from sources like reading newspapers, Value Line reports, and 13F filings. The author then uses a set of quick questions to filter ideas on a "conveyor belt" process. These include understanding the business, whether it is cheap, what catalysts and risks exist, and whether it could double. This allows the author to quickly qualify ideas and focus on those warranting further research through financial statements, reports, and other due diligence. The ability to rapidly filter ideas is key to the author's investment process.
My investment process can be divided into two main categories:
Idea generation Investment research and due diligence These are the two areas that I spend the vast majority of my investment time (portfolio management and execution is a distant third! There is a lot of information in the value investing public domain on how to determine the "uality or degree of undervaluation of various securities! There isn#t as much information on how to thin$ about the actual search process! In other words% before spending a lot of time going through the process of due diligence on a specific security% you need to filter through many ideas (presumably that don#t ma$e the cut! It can get overwhelming when coming up with ideas! It#s easy to float from idea to idea% gaining a cursory understanding of many ideas% but never putting yourself in a position to ma$e an educated and informed decision! &o how do you go about simplifying the search process' I#m not sure I have a great answer to that "uestion% as I tend to want to cover a lot of investment ground myself! (ut I can share a few ideas that have helped me simplify my process% ma$ing it more methodical and systematic! Where to Find Ideas Investing is part art% and part science! The art part enters in various phases of portfolio management% valuation% position si)ing% and selling% among other topics* The science part comes into play (in my opinion in the search process! There might be some subjectivity here too% but for the most part% I#ve tried to refine the investment search+filter process down to a science! I#ve discussed my search process before! (asically% to broadly summari)e* the places I often loo$ for investment ideas are: Reading, Reading, Reading (,ewspapers% (logs% -oogle news alerts% etc* Value Line (I try to flip through each issue each wee$% which sometimes uncovers an idea or two 13-Fs Screens These are the basic areas I loo$ for ideas! .retty straightforward and routine! /eading generates the most interesting ideas typically and 012F#s are a reliable way to $eep abreast of what the best value investors are thin$ing about! The Science of Filtering Ideas &etting up a search routine is helpful% but you still need a method to filter ideas! I thin$ of the search process as a conveyor belt that brings me idea after idea! 3ne after another* the ideas $eep coming so I need to have a systematic way of filtering these "uic$ly and efficiently! I#ve come up with a few "uic$ "uestions to as$ myself in order to "uic$ly "ualify an idea! These are very general "uestions that are only designed to dis"ualify ideas% rather than decide if they might be good ideas! Here are the "uestions I as$ as ideas come past me on the conveyor belt: o I understand the idea! Is it chea"! #re there an$ catal$sts! Insiders! What are the ris%s! Will it dou&le! These are very basic% but they help me "uic$ly determine if I should remove the idea from the conveyor belt and save it for further evaluation! 4nderstanding simply means that I have a basic idea of the business and understand why it might be undervalued! It doesn#t necessarily mean in depth understanding at that moment! (eing able to tell if it#s cheap should be "uite easy! If this is difficult to explain% it might not be worth moving forward! 5omplex situations sometimes provide hidden opportunities% but most of my great investments have all been "uite simple% and sometimes even obvious! /is$s are important to consider! I divide ris$s into three broad categories to thin$ about: Valuation Leverage 'usiness I want to decide right away if I am ta$ing on valuation or leverage ris$! 4sually if there are ris$s in either of these categories% I will pass! (usiness ris$ is harder to "uantify% and sometimes ta$es more analysis! If I understand the idea% I#m willing to give this some room for further evaluation! The last "uestion 6will it double'7 seems too basic% even somewhat frivolous* but I li$e to as$ myself this "uestion to remind myself that a good investment has upside potential! 8 9: cent dollar might have very little ris$% but the ris$ it does have might not warrant the : cent upside potential! I#m loo$ing for low ris$ :; cent dollars% hence the "uestion: 6will it double'7 It#s just another way of as$ing: 6Is this a :; cent dollar'7 I usually don#t $now the answer to this "uestion when the idea first arrives on the 6conveyor belt7% but I want to as$ it right away! I want to begin thin$ing about the ris$ as well as the upside% and how those two relate to each other as soon as possible! 8n idea with lots of upside but too much ris$ needs to be dis"ualified! 8 very low ris$ idea with not much upside similarly needs to get dis"ualified! I#m fond of the saying: 6Ta%e care of the do(nside and the u"side ta%es care of itself7! I live by these words% but there has to be upside available if it is going to ta$e care of itself! This is important to remember! &o I might not $now if the idea is a low ris$ :; cent dollar up front (chances are I won#t% but sometimes I can "uic$ly identify that it isn#t a :; cent dollar! In other words% I might not be able to confirm that the stoc$ has 0;;< upside% but often times I can "uic$ly identify the ones that don#t have that upside% at least not without undue ris$! &o this last "uestion just reminds myself to thin$ in these terms% right from the outset! &o as ideas come across the conveyor belt% I "uic$ly use these "uestions to determine if they should be saved for further analysis! =hen I find an idea worth evaluation% I leave the conveyor belt and head to my office where I begin doing more detailed research which involves further reading% 0;2$#s% reports% etc* This process helps me focus on the tas$ at hand! =hen I#m done researching an idea% I#ll go bac$ to the conveyor belt (reading% screens% 012f#s% etc* and inspect new ideas as they come by! The process is a balancing act between idea generation and more detailed research! 8nd of central importance is the a&ilit$ to )uic%l$ filter ideas! &oon I#ll write a post on some thoughts on ho( 'uffett filtered investment ideas% which is an incredible case study in and of itself! (uffett#s ability to filter ideas "uic$ly was% in my opinion% one of his most underrated s$ills as a ris$ manager!