Generating ideas and gathering information is an ongoing process for our investment team. We analyse data from a broad range of sources available to any investor with a keen market interest and a desire to learn.
In fact, investors now have an unprecedented amount of information available to them to expand their knowledge base, which is especially important to those who are managing their own superannuation money. We generate our investment ideas predominantly from the following 10 sources:
The media provides a wealth of information on individual stocks, market themes and economic trends. Our investment team starts each day reading media reports that include local and international news.
Valuable media sources include financial newspapers, radio, television and online newsletters such as Cuffelinks and Livewire. Market data provider Bloomberg, which is universally used by institutional and professional investors, has free daily email alerts and newsletters available on its website.
2. Market tables and price movements
After the market closes each day, we review share market tables to identify companies with share prices that have reached 12-month rolling highs and lows. In our experience, when a price hits a 12-month high, it can indicate a degree of momentum (particularly in a bull market) that will drive it higher. Conversely, if a company hits its 12-month low, this is often a sign of fundamental company issues and the price is likely to fall further.
3. Word of mouth
While company executives can provide a biased perspective, personal and business contacts with knowledge of a company or industry can be more objective. Some of our most illuminating investing insights have come from personal and professional connections such as family, competitors, sell-side analysts and other fund managers.
4. Stock brokers
Stock analyst reports provide valuable and well-researched business insights. If a company is covered by sell-side research analysts, we spend considerable time analysing their reports along with understanding the consensus forecasts. Once we’ve determined what the market anticipates the company will earn, we build this into our modelling.
5. Directors buying
As a general rule, a company’s directors know more than others in the market. Therefore, directors buying shares is a very strong signal about the business. The announcement of a Change in Director’s Interest Notice revealing a company director has substantially increased their holding may prompt us to examine the company further.
6. Observations of a business
Everyday observations can also offer insights into a company. To my wife’s frustration, a visit to a shopping centre becomes a fact-finding mission including quizzing retail staff.
Apple’s share price languished for many years until after the release of its portable media player iPod. Around this time, the casual observer would have witnessed thousands lining up to buy the iPod and an increase in foot traffic at Apple stores, however this strong demand was not reflected in Apple’s share price. Apple subsequently sold 55 million iPods, generating US$9 billion in revenue and spurring the share price.
7. Life experiences, behaviours and preferences
Our own life experiences, behaviours and preferences, and those of the people around us, can also reveal a consumer trend, or structural industry change, that leads us to an investment idea.
Last year, I tried to buy a tin of infant formula only to find there was a considerable shortage. This experience demonstrated demand for this particular product was vastly outstripping supply. This insight was the catalyst to investigate the company and subsequently invest in it.
8. Company meetings and site tours
Company meetings and visits offer insights into a business such as the quality of management and its culture. Individual investors can sometimes join site visits arranged by the company. For example, an executive’s remark that a certain competitor is giving them a ‘run for their money’ could prompt us to investigate that competitor business as a potential investment.
Any investor can contact a company and ask to meet the CEO or other executives and, while access to executives at larger companies may be limited, micro and small-cap companies should welcome interest from potential shareholders.
Retail investors may also have the option of listening to earnings results teleconferences, giving them the opportunity to interpret the executives’ tone, as well as their words. Larger companies often host investor days for shareholders.
9. ASX announcements
We have found previously undiscovered investment gems through our regular scan of ASX company announcements. Company announcements can be a particularly good source of micro-cap investment ideas during reporting season, and are available to everyone.
10. Ask a lot of questions
Having a fascination with the market and an inquisitive attitude are indispensable attributes for investors. In my experience, the most successful investors ask a lot of questions and are driven to gain an in-depth understanding of a company, trend or investment theme.
It’s possible to generate a worthwhile investment idea, or a piece of information that leads to one, from a vast range of sources. Constantly gathering insights to develop a broader knowledge base and being alive to potential investment ideas is key.
Do you have any other sources for investment ideas? Share them in the comments below.
Image credit: © Paramount Picture, The Big Short 2015