Having a good investment process is key to keeping yourself busy. If you don’t have a good process you will spend your time over trading, looking at charts, and at the mercy of market movements. Rarely have I met an investor that can consistently perform well without a process.
An investment process should include the mental models you use to think about the market and a healthy amount of idea generation.
How I Think About Investing
My investing roots come from Ben Graham. Stocks are pieces of businesses and my job is to figure out how much cash they’ll throw out during their life. A simple value investment style with options to spice things up.
The ultimate goal is to beat a low-cost index fund. I find that the more I try to do that, the worse my returns become. I am extremely selective in the trades and investments I take on and generally rely on options to obtain certain risk profiles. While I don’t know if I’ll beat the market in the long-term I understand the risk and I like investment as a hobby so I don’t mind losing out on millions in compounded returns over my lifetime. I fund my retirement accounts every year and invest those in indexes or long-term investments that I think will outperform so I don’t worry too much about it.
I do think that retail investors have an advantage in their portfolio management so I rely heavily on doing the things that institutions can’t afford to do. When I have no value add I like to just keep cash, I don’t mind losing out on purchasing power since the opportunities I expect to come will make up for that loss.
Tracking
I spend most of my time observing the market. I find that a high level overview is much more beneficial than sporadically reading WSJ articles or Jim Cramer on CNBC.
I copied Roaring Kitty’s tracking Google Sheet more or less. While it’s not as advanced as his, I liked the idea of having an entire page to just get an overview of what happens across markets every week. Most of the data is pulled off of the Google Finance functions and scraping investing.com using the IMPORTHTML() and IMPORTXML() functions. I don’t find it necessary to have real-time data because I mostly look at the spreadsheet after market close or just to get a sense of what is moving that day.
You would be surprised to see how correlated everything becomes on large down days. Everything from Equities to Commodities to Crypto drops. That’s usually a good sign to distinguish isolated market events from entire market corrections where there is nowhere to hide.
Idea Generation
I find ideas everywhere. I make no distinction from finding a complex investment on Value Investors Club as I do from just copying an investor I admire. There is also the occasional Peter Lynch idea of “investing in what you know”, taking into account that my job is to analyze the business and not just blindly buy Dunkin’ because I like their new Pumpkin Spice Doughnut.
Here’s an example: once while watching a random vlog, the person was talking about Aritzia (ATZ:TSX). I took a look at the company. At that time they were struggling with their Australian suppliers due to the forest fires rampant back then. The business was intact, the brand was strong, and they were growing like hell in the U.S. The stock went from about CAD$12.50 to over CAD$60 now in 2022. That is a Peter Lynch type of idea.
Here is a list of some of my favorite idea generation sites
- https://www.dataroma.com/ – Tracking Investor Portfolios
- https://www.valueinvestorsclub.com/ – Value Investment Idea Forum
- https://seekingalpha.com/ – More General Stock Ideas
- https://twitter.com/ – Market Commentary
FinTwit (Finance Twitter) is a great place to see market commentary as well as finding the odd stock idea. A number of famous investors have taken to twitter to share some insights. Michael Burry tweeted throughout 2021 about a coming market bubble. While I don’t generally like to invest solely on commentary, it’s a good way to gain perspective. I admire Burry immensely as a value investor and I like having the odd rabbit hole to pursue. I’ll speak more on copying other investors below.
Cloning/Copying Other Investors
Copying great investors is an idea I took from Mohnish Pabrai. For several of his investments he took a look at other investors he admired. From there he would look into those companies to try and get a sense of why those investors would take a position.
You could have done extremely well blindly following Buffett’s 13-Fs and investing along side his equity portfolio. It’s not something I like to do because they could change their mind at any point and I won’t find out about it until 30 days after a quarter when they file their 13-F. But I use it as a starting point for some ideas. Again, observing what is happening around me.
Once more, you can generally have a greater degree of certainty that the stocks in these portfolios have been vetted by teams of analysts — depending on the investor, a lot of value investors work alone (as they should) — as well as their own filters. To me that was greatly valuable when I was first starting. The first stock I bought was Fiat Chrysler back in May of 2017. I bough the stock at around $10.50, it dropped to below $10 and later doubled. I sold it for a 100% gain 6 months after my purchase. That experience gave me the confidence that investing was something I could do. Maybe I was naive, but I still have yet to lose a sizable chunk of my portfolio and I’ve made it through 2020, my first substantial market drop.
I like Dataroma.com because it leans to value investors. Usually I take a look at investors like Ackman, Burry, Buffett, Pabrai, and Li Lu. Just seeing any changes they make maybe entering positions or selling out of others. Not as a buy or sell signal but as a signal to do more research.
That’s how I found Micron bought around $40 and the stocks is now over 20% of my portfolio. A nice double in just over a year. BAC is another I took on when Buffet and Li Lu bought last year. I already had some holdings so I took it as a chance to add to my position.
Now I must stress that I don’t rely entirely on their portfolios. I will always do my own research because ultimately its my money at risk and I should understand the risks that I’m taking. There are dozens of reasons for a famous investor to sell their position other than being wrong or changing their mind so it’s important to find your reason to buy or sell a stock.
Daily Activities
Most days I don’t do much. I’ll take a look at my watchlist, read some articles, and look at the tracking spreadsheet.
For my watchlist, I’ve got price targets for about two dozen stocks at any point in time. I’m looking for good buying points so I’ll wait for large down days to buy. Occasionally a large move up is a good time to sell and come back later on a pull back. I don’t like to do this with my entire position, I may take 10-20% of a position and trade in and out on volatility (see How to Invest as a Retail Investor) in case the move continues I like to retain exposure. I like about a one standard deviation for selling puts or calls on big moves.
Weekly Activities
Sunday’s I spend my day thinking about what is happening in the market and if I need to make any changes during the week. Most of the time the answer is no. I’ll have two or three major “themes” that I think are driving markets so I’ll see if there have been any developments.
Most of my investments are in single stocks which aren’t really correlated with the overall market. I’ll devote Sunday’s to think about the market but any more time and it really only leads to fear mongering or wasted time. I think it’s more important to take a look at individual investments than try to forecast macro-economic events.
So that’s how I approach research and idea generation. It ain’t much but it’s honest work. Leave any of your ideas below.
