Thursday, October 8, 2015

Where Investing Ideas are Born

By now, if you're reading this post and it's not your first time to this blog, you've already gotten started with your portfolio. (If you haven't, start with this post: Three Lies You've Been Telling Yourself.) We've covered a lot of ground over the past few months. We've talked about

One thing I haven't spent much time on is where to get the ideas for new investments. As I've said before, I avoid accepting stock tips. Most tips are bogus, pushed by someone who stands to gain a commission or similar if you buy, regardless of whether the suggested stock appreciates. I hate salespeople.

So where do the ideas originate?

First off, I read a lot. I read online and on paper, and I spend most of every day on it. Business analyst reports and financial blogs and the Wall Street Journal and Bloomberg BusinessWeek and Business Insider and The Economist. Throw in a little New York Times, Financial Times, Fortune magazine, my local business paper and Yahoo!Finance. The stuff that could be relevant is everywhere.

I also listen to several podcasts when I'm in the car, a combination of stock analysis discussion by The Motley Fool crew and general interest (NPR's Fresh Air and Planet Money are favorites).

Many news stories have an investment angle beneath the surface: hurricanes on the east coast-- what does that mean for insurance companies' costs, revenues for local tourism? Twitter got a new (former) CEO, which relieved a point of market stress and popped its stock price. Consumer credit tracker Experian was breached, allowing hackers to steal T-Mobile customer data-- bad for both businesses-- but another breach is proof positive of the need for network-security companies like FireEye, Fortinet, and Barracuda.

So I cross paths with a lot of companies, all day. I'm keeping up with the ones I care about, whether I'm a current shareholder or a former/future shareholder. But of course I also find new ones through this process, and once I've read about something enough times or heard it discussed a bunch, it might merit further investigation and I'll do some digging on my own. That's where a lot of the ideas hatch.

But you can't do this all day, you probably have a more traditional job to worry about, separate from your investing. So let's consider some other places I find ideas.

I'm a consumer, like anyone. I buy clothing and food, shopping in stores and online. I buy entertainment and travel, I use a smartphone and a laptop, own a car and appliances and a house. I bank, I get medical care and prescriptions, play sports and use a credit card. Every one of those products and services I just listed is offered by a multitude of companies in which I could buy stock. Stands to reason. But why would I do that? How can I know they're right for my portfolio?

As I've discussed in a previous post, I like to buy stock in companies I've transacted business with. Obviously, it starts with a product or a service which impresses me-- I think my tastes and tolerances are pretty mainstream, so if I like something, others will as well. That means the company has at least a fair chance of pleasing its customers, which is a great place to start. for me, this approach has worked out with Netflix, Under Armour, Amazon, Disney, Apple, Google and others.

With Amazon, for example, I started with an excellent online shopping experience: books, then CDs and DVDs, then some kitchen stuff. Then I had some returns (clothing) and a complicated exchange (wrong gas grill), and those went surprisingly smoothly. So I dug into the company's competitive position, management, strategy, and financials. It was actually the financials where I got hung up-- almost 20 years in business today and barely earning a profit-- but I liked everything else about the operation and so chose to overlook that in favor of greater profitability later on. And I've been happy as a shareholder.

I get still more ideas by trend-watching. I've got teenagers, and teenagers are the
pinnacle of trendy. They pay attention to fashion, to technology, to entertainment (movies, music, TV, games), to professional sports. Teens are tomorrow's primary consumers, so as an investor I want to know where they'll be spending. I pay attention to what they're into, how they like to relax and what they buy. Lots of useful clues there: they hate the new version of EA Sports' best-selling Madden game; they love Starbucks'; they complain about their Lululemon yoga pants unravelling; they avoid McDonalds, they want iPhones (Apple) but not Android phones (Google).

Social media (Facebook, Twitter, Instagram, etc.) is another good source for ideas. What's been happening and what are people talking about online? Are there business implications? What does that mean for investment?

For example, The Volkswagen emissions scandal is still playing out and getting a lot of public attention. What does VW's behavior mean for car manufacturers and dealership service centers? Will Ford and General Motors benefit by converting VW owners? Or will it be Toyota, Nissan and Tesla-- each of whom sells clean vehicles-- that get those customer who will run from German makes?

There's a new movie about Apple founder Steve Jobs, and the word on social media is that it's an unflattering portrait of a man our culture has turned into an icon. Will the movie turn off buyers of Apple's pricey products in the U.S.? What about in China, where most of the stuff is actually made? What will that do to the stock price?

It really just goes back to one of my earliest posts, Awareness. If you make a habit of looking for a business angle, you'll often find one. Of course sometimes you'll discover that the investing takeaway is to sell a stock, or at least to avoid owning it (Volkswagen right now). But you'll be on the right path just to be thinking about the impact that current events, trends, news stories and conversation topics have on shares you own, or could own. You'll be looking at the world like an investor.

Please write me or tweet with questions or comments. I welcome the feedback as I work to make this blog a more helpful and easy-to-use resource. It is my goal to respond to you within 24 hours.

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