The Nasdaq, NYSE, and AMEX (the major U.S. exchanges) list 6,704 publicly traded companies. Each of these companies will publish four 10-Q quarterly reports, and one 10-k annual report. That’s 33,520 financial reports annually.
No one, and I mean absolutely no one has time to read all those reports. And we’re talking just stocks here.
When we add mutual funds into the mix, there are over 15,000 available for investors (as of 2014).
Holy crap! That’s a metric shit-ton of investment options….and I’m only looking at the United States! Once we start looking at international options, the investment opportunities continue to grow!
Have you ever wondered how to find great investment ideas in the gigantic mess of potential investments? Or, perhaps you wonder how people have time to find great investment ideas? Today I’m going to share with you a big shortcut for separating the investment “wheat” from the “chaff”.
Imagine (for a moment) that you’re back at school, and it’s time once again for final exams — The tests given at the end of the school year that everyone dreads because of the intense pressure and the intense level of studying required.
What if there was an easy way out? What if the professor offered an option to every student — They could either study and take the exam OR skip the studying and receive the average class score instead.
For someone who doesn’t have time to study, that’s an incredible option. You can pass the class and do very little work. The investing world gives us an option like this: Index funds.
Clearly there is an overwhelming number of investment possibilities available, and most people aren’t going to be interested in spending the time to manage a portfolio. They have other things to do…
So, I offer-up Strategy 1 — Invest in index funds and call it a day. These are large funds that invest in hundreds of companies and keep their costs very low. High diversification, low time investment, low risk, and average returns.
Most personal finance blogs mention this strategy, and many decent financial advisors will too. Why? It’s a good strategy!
Frankly, taking the ‘C’ average score and heading to the nearest party is lazy. You won’t learn anything by taking Strategy 1.
Unlike most personal finance blogs, Mr. Tako isn’t going to tell you “that’s the only strategy”. There are other strategies for people who don’t mind being different.
I was never one of those people that called a ‘C’ grade acceptable. In my college years, I spent my nights at the library studying. Every night, until the library closed at midnight. Call it a curse, but average was never good enough for me. I would rather study (and possibly fail the exam), but at least I learned something.
With so many possible investing options, how can a individual investor possibly do well? There’s no way he has time to study even a tenth of the listed companies or mutual funds!
The answer is Strategy 2 — Cheat! How do we ‘cheat’ at investing and find the really good investment ideas?
Think back to our school example. We could optimize our studying by looking at old exams (from previous years) and focus our studying on only the important areas.
The investing world provides a similar solution.
Strategy 2 isn’t my original idea. The idea came from a hedge fund manager called Mohnish Pabrai. In addition to being a successful fund manager, he’s the author of a few great investing books. You’ll find his book, “The Dhandho Investor” up on my Recommended Books list.
I like Mohnish. He’s different — he admits his investing mistakes, and he’s very generous with his time. There are literally dozens of multi-hour talks about investing he’s given to universities up on Youtube.
Monish doesn’t call it “cheating” of course. He calls it “cloning” — Borrowing the good ideas as a shortcut to good investment returns. Mohnish frequently says “I have no original ideas”. In fact, his own hedge fund is a clone of the early Buffett Partnerships.
He gave a recent talk to Boston College that’s full of great insight:
The talk is over two hours long. If you’re an investor, I think it’s worth your time.
One of Mohnish’s great investing insights is this borrowing of ideas from the world’s great hedge fund managers. Cribbing from hedge funds is a great way to generate quality investment ideas that have already passed the filters of those great investors.
Hedge funds employ the smartest people coming out of the world’s best business schools to do business analysis. Why should we try to replicate all that work they’ve already done? We can borrow from it!
Every quarter, hedge funds are required to file a Form 13F document with the SEC. The Form 13F details the individual hedge fund’s holdings. These are publically available, and can be accessed via the SEC.
Please remember: We don’t know the reasons behind any 13F filing investments. Any investment idea you find in a 13F filing still needs to go through your own investment analysis. It takes work, but this makes the process significantly easier.
Looking For Ideas
Years ago, I used to read individual 13F’s of my favorite investors. This was a great way to follow the movements of the world’s great investors, and look for outstanding ideas. But it was also a ton of work. I limited the investors I followed to just a select few.
One day I solved this problem by stumbling on Guru Focus — a website dedicated to watching and tracking the movements of the world’s great investors. It’s saved me tons of time over the following years by not having to look up individual 13F filings.
Don’t worry, I’m not paid for recommending that site. I mention it because I use the site. That’s it.
Ultimately, good investing ideas don’t come along very often. There’s a lot of reading involved, but not a lot of action. Thankfully, both strategies can be used. Strategy 1 can be used while we wait for good Strategy 2 ideas.
I see maybe one or two ideas a year that qualify as a “good idea”, so there’s plenty of waiting.
Most of the time, hedge funds do not invest with conviction — They make small and frequent investment positions in many companies. Each individual position may be 1-2% of their portfolio. Those are not high conviction investments. Meaning, the funds don’t believe in the investment enough to truly commit a large portion of their capital.
I try to avoid low conviction ideas, and stick with the high conviction ideas. Sometimes I can go an entire year without making a single portfolio change. While I’m waiting, keeping excess money parked in a Strategy 1-type index fund is a good way go. Cash is another option.
I keep waiting until I see a truly good idea, and then I will invest with conviction — around 10% of our portfolio (or more). Money is pulled from the index funds (or cash) and moved into the “good idea”.
The Most Important Step
However you do it, saving is the most important strategy to start with: Live below your means and save money. Lots of money. Without money to invest, all the strategy and analysis in the world won’t do any good.
If you haven’t started some serious saving, NOW is the time to start. Compounding works best when it has a looonng time to work its magic. Save 50% or more of your annual income and you’ll have some serious money to invest after just a few years.
How do you invest your excess capital? Do you borrow ideas from others?