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Generating Investment Ideas

Course Section 3 - Lesson 1

Every time I sit down to write, I go through the same process. I grab my laptop; I find a comfortable chair; I lift the screen, and I open a text document. Without exception, there is a 30-60 second period where I die just a little. The feeling of dread looking into the white void of a blank text editor is real. Where do I start, where do I go, and how do I get there.

You would think that having gone through this process many times, I would be mentally prepared for it. But alas, I never am.  

Starting the process to identify investment ideas is very similar. The first time you do it, and probably many times after, you will sit down and think to yourself, "Where do I even begin." This lesson is for that moment. As soon as future-you finishes that thought, please think back to this very moment and remember what you are about to read.

Generating Investment Ideas

Throughout the following four sections, we are going to review four strategies for identifying investment ideas. By periodically reviewing each strategy, you should have a consistently full hopper of ideas to vet for your investment portfolio.  

Because you never know when a great idea will strike, begin a habit of recording interesting products, brands, and companies for later investigation in the notes app of your phone.

Companies You Know

One of the most obvious places to look for investment ideas is at the companies & products you interact with daily. If you are a typical first-world citizen, products and services that publicly traded companies produce constantly surround you. As a consumer of said products and services, you have first-hand experience with whether or not they are any good. If the quality of your life would materially decline if you lost access to one of these products, then add it to your list you may be on to an idea.

In fact, this strategy is so valuable that you shouldn't just stop at yourself. Anytime someone recommends a product to you, or you see someone choose one brand over another, pause for a second and ask them why that widget is so great. Nine times out of ten, the product won't be associated with a public company, or if it is, it will be such a small part of the companies business as to be almost meaningless to the stock. But on those rare occasions where you find a fantastic product that represents a sizeable portion of a public company's sales, you may just have discovered the next great opportunity.

This strategy is listed first because it is one of the best opportunities to generate unique insights. Unique insights are hard to find, but once you do find them, they can be incredibly valuable.  

Trends You Believe In

A second source of harvestable ideas comes from our beliefs about how the world is changing. We all have opinions about what the future will bring, and we all have experiences that inform those opinions. If we take time to think about what these changes will mean for the world, then we may be able to translate those opinions into investable ideas.

For example, as I write this, society as a whole is recovering from the Covid-19 pandemic. The pandemic has forced us to rethink how we live and work. One of the biggest realizations is that employees for many jobs can be just as productive working from their homes as they can from offices. Remote work makes companies happy because they can reduce their spending on expensive real estate and expand access to talent pools. It also makes employees happy because they can eliminate time-draining commutes and access new employers and opportunities outside of their immediate locale. I believe that the pieces are aligned for a multi-decade change in how employers and employees work together. What might this mean for the future? Here are some ideas:

  • employees & employers will need tools to communicate effectively, like video conferencing and workflow tools,

  • employees, spending more time at home, will consume more content: TV, Streaming Services, Audiobooks, Podcasts,

  • Lunch at home, instead of out or in the office, will raise demand for food delivery or at-home options,

  • Access to high-speed internet will become very important

From this quick list, we can identify at least a few brands and companies that should be in a position to benefit from this trend. For example, Zoom, Slack, Netflix, Spotify, Audible, Blue Apron, Uber Eats, and Starlink immediately come to mind. From here, we can add these companies to our notes app for further vetting.

Companies in the News

The national news cycle can have a powerful effect on publicly traded companies, especially when the coverage focuses on a very visible but likely short-term issue. National or even worldwide media coverage can be enough to cause massive movements in a company's stock price. In some cases, it can be enough to turn a ho-hum investment into a winning opportunity.

The challenge with finding opportunities by following news coverage is knowing when the move in a company's stock price is unjustified given the situation. Gauging this in real-time is almost impossible unless you have some insight into the company, industry, or environment. Because of this, you will likely have to pass on a lot of stocks that see major price declines simply because you won't know if the drop was justified. However, every once in a while, you will see a company that you love make a public misstep and experience a dramatic share price decline. These are the opportunities you want to catch.

Stock Screeners

The last idea generation tool I'll mention is stock screeners. Stock screening tools allow investors to input criteria they desire and outputs a list of investment options that meet those criteria. An example of a free stock screener is Morningstar's tool (Morningstar Login required). Such a tool allows you to quickly identify companies that pay a particular dividend or trade below a specific P/E multiple.  

While screeners provide a source of investment ideas to begin researching, you need to be careful about what you do with the results from screening. Often, companies that filter to the top of the screening results look attractive on paper but face severe business challenges.  

Final Thoughts on Idea Generation

I hope the content of this lesson helps get you over the feeling of not knowing where to start collecting investment ideas. But I also hope that once you have a list of ideas in hand, you will treat them as just that: ideas. Some ideas are good, and others are not.  

Once you have a list of ideas, it's time to validate them. Throughout the rest of this section, we will be validating the strength of the businesses you've identified. Only once we are confident in the strength of the companies we've identified will we begin to figure out an attractive price to make a purchase.

Mark Complete