Friday, July 15, 2011

How To Generate Good Investment Ideas

With 15,000 or more public companies in the United States, how should investors go about finding undervalued companies? Finding companies to invest in is not easy considering there are around 10,000 hedge funds and 7,500 mutual funds scouring the stock market. One of the most important components of being a good investor is the search process. One of the most common questions I get is how I find the companies I invest in. Here are the ways I find companies to research:
1. Check what other successful investors are buying. If Warren Buffet, Charlie Munger, Joel Greenblatt or other great investors are buying a certain company then its always the first place I look. The best site to check what great investors are buying is Gurufocus. For funds not mentioned on this web site, checking the 13f fillings on the SEC web site is a great resource. For example, here are Berkshire Hathaway’s equity investments.
2. I’ve generated a few ideas by asking people I think are very smart, what they are investing in. This is one of the quickest and most effective idea generators.
3. Oftentimes successful money managers will discuss what they are investing in in their letters to investors. Here are a few web sites that post hedge fund letters: MarketFolly and Value Investing World. In addition to these, going to the web site of the fund may lead you to its letters. For example, here are Third Avenue’s letters.
4. I frequently scan the 52 week low list. This is a great way to find distressed companies that could be cheap. I use Morningstar’s 52 week low list.
5. I also read through online investment report sharing sites such as Value Investors Club and Sumzero.
6. Another great resource is scanning the Value Line Investment Survey’s list of “Bargain Basement Stocks, ” “Lowest P/E Ratio’s” and “Widest Discounts From Book Value.”
7. Joel Greenblatt’s Magic Formula screen is another source I use to generate ideas.
8. I subscribe to Forbes, Fortune and the WSJ. These publications are all a great sources for ideas.
9. I also set alerts online for specific events such as delistings, earnings misses, spin offs etc.
10. Blogs and message boards are also a place I go to generate ideas. Some of my favorite are: Corner of Berkshire and Fairfax, Greenbackd and Above Average Odds.
11. Here are some web sites I scan for spin Offs and other special situations: The Online Investor, Arbitrage View and Spinoffs. In addition, the SEC web site is useful for finding out about spin offs. Every spin off has to file a form called a 10-12b with the SEC. Searching the SEC web site for these fillings will give you a list of all the recent spin offs.
12. I don’t use stock screens very often but they can be a great starting point: Yahoo’s seems to be the best. Although, the only decent stock screeners I’ve found you’ll need to pay for.