Idea Generation
Making the random walk a little less random
I’ve spent the past couple of weeks reviewing another interesting Israeli company that was brought to my attention by a group of subscribers who, funnily enough, own almost every company I do. Their portfolio is a little more expansive when compared to mine, but pretty much everything they own is on my watch-list. The internet is an incredible tool to find like-minded individuals - the degree of like-mindedness can be pretty startling.
This particular exchange got me thinking about idea generation, all the way from the top of the funnel down to those favoured companies that find their way into the portfolio. I think that fundamental, long only, and (relatively) concentrated investing differs from other market approaches in that it requires very few ideas to be successful. The only qualification there is that those few ideas need to be excellent. The idea of lounging around while my investments effortlessly compound is an extremely stimulating. In this respect my late great-Aunt is my hero: she purchased significant stakes in both CSL and BHP on their respective IPOs, 100 bagged in each, and held them until she passed away. In an interesting twist of fate, no one in my family knew this until we had to settle her estate. Talk about being tight-lipped with alpha.
The question becomes: how do we find really good ideas?
There are 10s of 1000s of securities available for purchase on stock exchanges globally on any given day. As many studies have indicated, and the success of cap-weighted indexes has vindicated, a small minority of these securities drive virtually all the returns available to investors as a whole. A great many of these successful business will be virtually impossible to identify ex-ante. Some fraction will be.
Top of the Funnel
Success in many pursuits comes down a pure numbers game - dating, sales, getting a job, starting a new business etc. I give you the investing funnel:
At the top of the funnel is the broadest possible cross section of available investment opportunities. Buffett is famous for ‘starting with the As’ in the Moody’s Manuals of old. Now that we have slightly more advanced technology, I think we can find more effective ways to parse the investment universe.
There’s a tendency for many well known investors to make their research process sound circuitous. I think this is unavoidable - we’re looking for a needle in the haystack after all. A few tools I have found helpful in loading the top of the funnel with new ideas:
Twitter/X is still very good - especially if it is used correctly. Putting Lists together where you can curate your feed with genuinely insightful accounts is an excellent place to start. There is an extremely large community of professional investors on Twitter/X that are usually either criminally under-followed or are using the platform anonymously. As with most social media platforms it goes down in the DMs. Putting your ideas out there is a good way to find the ones that think like you. Like everything, the good content is unevenly distributed. You have to sort through a lot of garbage to get to the good stuff.
Something of an underutilised modality is the group DM based around single stocks. Bringing a collection of informed opinions to bear on a single topic can be extraordinarily helpful.
Substack - I am biased here. In my mind Substack is an extension of the Twitter/X ecosystem, although it is a superior forum for long form writing. Almost every niche, sub-niche, and style is covered by talented analysts. Good information is worth paying for, and I certainly pay for a good bit of it.
Blogs - there are a handful of blogs that precede Substack and these can also be great sources of analysis (findthemoat comes to mind).
Discord - there are a few servers out there that replicate something of the Twitter group DM dynamic. This can be great for gathering information on a name that has regular and constant updates. I am part of server that focuses exclusively Amazon and it is an excellent way to keep up with the news. Although I haven’t been successful at creating a server myself.
Many investors who I respect start their day looking at various exchange announcements.
Coat-tailing - building an extensive network of interested and intelligent investors is probably the best use of time that you would dedicate to idea generation. So long as you are able to provide value to others, you’d be very surprised how strongly they will reciprocate. One should always want to do the primary research themselves, but you’ll cover far more ground as a network, than as a lone wolf.
Tools which I have found that are pretty mediocre:
YouTube - prominent finance YTers, in my experience, are not of similar quality as those found on platforms that lend themselves to promoting niche interests. Lowest common denominator engagement and mass appeal are prevalent. I would categorise this more as financial entertainment which has a time and place.
Stock Screens - mostly useless. For a stock to be of even peripheral interest there needs to be context that isn’t easily communicated in near term or historical financial metrics.
13F filings - these aren’t completely useless but for the most part if you aren’t managing hundreds of millions of dollars (or equivalent currency), you should be looking further afield than just the most liquid large cap US stocks. Having said that, I have found excellent opportunities there too.
Newspapers - many are becoming less relevant by the minute.
Ultimately I have found that covering a large amount of ground at the top of the funnel and being ‘a mile wide, and a inch deep’ to be the most useful approach. From here I maintain two watch lists. Once I have applied my own broad filters (you should know these pretty well by now!), then names will immediately go onto my Research Watchlist. This is like a form of purgatory where these names wait until I feel like I have a read on their unique business context. Once I have done enough of the primary research where I feel like the name is investable, I will move it to the Final Watchlist. Then the napkin math takes place!
Larry.
Respect to Great-Aunt Buyback!