Friends often ask me where I get my stock ideas, what kind of work I do to find ideas and most often, they don’t know what stocks to buy.
To be honest, I think I’m one of the most lazy investors out there (Please don’t bash me?). I read pages and pages of others’ blog posts about how they have projected Company X’s future profits and cashflows based on assumptions A, B and C and then discounted back to current value, the price should be $Y.YY and the stock should be bought. Or how the 20, 50 and 200 day moving averages is forming a golden cross, further confirmed by the RSI and MACD indicators and based on fibonacci ratios they expect Company Y’s stock price to move to $Z.ZZ and meet resistance at $D.DD.
I look at all of this and I yawn like this cat.
Don’t get me wrong, doing in-depth homework to form your own thesis on your stock picks instills discipline and takes luck mostly out of the equation. You live and die (mostly) by your analysis and based on your analysis, you can find the price for your disciplined entry and exit.
However, for the new or lazy (like me) investor, this takes a lot of work and it can be overwhelming. You’ve got your day job to worry about, your girl/boyfriend, spouse, family, parents, in-laws and friends to entertain, that Netflix show you want to catch or that video game you want to beat (Assassin’s Creed Origins – 76 hours and counting). Ain’t nobody got time for that right?
Make it a way of life
When I first started investing, I generated stock ideas by making investing a way of life, and not something you go out of your way to find and do.
What that entails is simple, you go about your day as per normal and do the things that you love. Just be aware about investment opportunities as you go about your day.
Let’s go through an example to illustrate what I mean. You grab your daily coffee from Starbucks, go to work at your employer (insert listed company here). During lunch time, your colleagues decide to settle on McDonald’s when you see a long queue at Domino’s Pizza (Probably doesn’t happen but hey, just go with it ok?). It’s 6pm and your Apple Iphone vibrates with notifications from Whatsapp. It’s your friend asking you to look at this video on Youtube about a turtle doing godknowswhat with a Croc. You return home bored, so you fire up your Sony Playstation 4 to play Electronic Arts’ Star Wars Battlefront 2.
In the above example, you would have encountered at least 9 different products/services produced by 9 different companies. And that’s just from your own day. By talking to your friends/colleagues/family/random people, they might mention a new movie they’re anticipating, a new service they found useful, an app they found ultra cool. All you need to do is think about who makes these things daily. Do you love their products? Are they indispensable to you? Is there great demand for their products and services?
That is how an investment idea is born for me most of the time. My US portfolio is littered with such examples:
- Google – We use it all the time, Search, Gmail, Youtube, the list goes on.
- Facebook – The pre-eminent social network we all use.
- Disney – I love their content as described here.
- Apple – I’ve used their Iphones since Iphone 4. I own a Apple Watch Series 2 as well.
- Domino’s Pizza – They have the best pizza among all the pizza chains imo.
- Tencent – My interactions with the Chinese convinced me of their influence here.
Warren Buffett is very much a proponent of this style of investing, with his investment in Coca-Cola all those years ago very much related to the fact he consumes about 5 Cokes a day.
Of course investing simply because you love the product is not the most disciplined way of investing. I still do a limited amount of homework on the companies, reading their annual reports and reading up on their business model before ultimately investing. Nothing too fancy like Discounted Cash Flows or deep dive Technical Analysis. Invest in good companies and all the fancy numbers don’t really matter in the long term.
Benefits of this approach
1) Investing this way makes investing fun, interactive and easy to pick up! It keeps you emotionally engaged and interested in your investments, thus making the following of each company’s news less of a chore. I always look forward to watching Apple’s keynote addresses and watching the latest Disney movies as a part of me knows that I’m contributing a tiny bit (ok nano-sized bit) back to their earnings and my investment.
2) Wall Street doesn’t necessarily have a monopoly on ideas. They are not really in touch with the common man sometimes. A few years back, I saw and loved a segment on CNBC about Lionsgate Entertainment, as it was an excellent example of this approach.
(Courtesy: Yahoo! Finance)
Lionsgate Entertainment was a struggling movie production company back in 2009 when they acquired the movie license for the future blockbuster The Hunger Games. As you can see above, Wall Street scoffed at this deal and paid no attention. Every book of The Hunger Games series were already New York Times Best sellers by the time the first movie was released. If you loved the books, it made sense for you to invest then to bet on the success and popularity of the movie. That was what some of the CNBC viewers did and bagged a close to 400% gain over about 4-5 years.
Downsides of this approach
1) It may keep you attached to under performing companies which should be sold as soon as possible. Always remember that nothing is forever, technology can easily make the product you love so much obsolete in a flash.
2) You are less likely to be able to identify an undervalued company from industries that are B2B (Business to Business) as people usually interact with companies that are B2C (Business to Consumer).
Finding ideas for investing can be simple if you put your mind to it. New investors can consider looking at their daily interactions for ideas and inspiration to look into. Just do your personal due diligence before investing and you should be fine.
Do you have a unique way of generating stock ideas? Do let me know!