The 2-Minute Thought: Where Do Great Investment Ideas Come From?

When experienced investors are asked where they get their ideas, they often say voracious reading or careful screening of companies for characteristics they like – or both. 

But there is wide variety in what they read – and widely divergent attitudes toward screening.  Other sources of ideas include company visits, building expertise in obscure fields most people don’t care about, or studying the ideas of other investors

There’s a big wide world out there with thousands and thousands of companies and securities.  So how do investors get a handle on their universe?  John Mihaljevic’s online compilation of responses from over 50 investors, “Idea Generation for Intelligent Investors,” presents an eclectic range of approaches.  One thing is clear: these investors are not getting stock tips from their neighbors – and rarely do they invest in what’s most popular in the news.

There are some who never need to leave their desk to make a decision.  Others oppose “arm-chair investing” and must get out, travel, meet people, and exchange ideas.  There are people who start by searching for changes, events, and disruptions that could lead to mispricings.  And one elegantly simple response on how to generate ideas: “old-fashioned hard work.”

Some investors say the majority of their ideas come from screening for stocks that look cheap.  Others say the best ideas often do not screen very well because you are looking for something that doesn’t show in the numbers. 

One investor responded that he used to screen, but stopped because his screened companies didn’t produce the long-term results or earnings power desired.  And another said: “high ROE is nice, but statistically high ROE stocks have not proved to perform better than the market.” 

On the other side, one investor said he never used to  screen when he was sector-focused, but found screening useful as a generalist.

Reading though – and reading widely and enthusiastically – is what is primary. 

Many say that it may look like they are doing nothing at all most days – just sitting between four walls, reading, and accumulating knowledge that may become useful later.  Knowledge, you see, is cumulative.  Sometimes, it may take a decade of following a company before it finally gets offered at a price you like. 

Reading varies.  There are the usual newspapers and business periodicals – the subscriptions to 20 different magazines.  There is obsessive reading of annual reports.  There are corporate announcements, investor interviews, Value Line, Value Investor Insight, Grant’s, Magic Formula, Marc Faber’s “Gloom, Boom, and Doom” newsletter, and more.

And then there’s Fernando del Pino: “I try to read as few newspapers as possible.  Maybe 80% of what you read is just entertainment, 10% is pure propaganda and 10% is information, some true, some false.  Therefore, I think that reading daily news is a terrible waste of time and a dangerous source of noise and distraction.”  Instead, he favors books. 

One thing that’s clear is that good ideas don’t come at evenly spaced intervals.  There are times of plenty and times of lean, and sometimes long periods of inactivity. 

But even in the periods of “lean” when ideas are sparse, investors must continue their research and accumulation of knowledge while waiting patiently.  The beauty of investment, says one, is that you don’t need a lot of ideas every year to be an investor – just a few really good ones can mean doing quite well.