How to find stocks?
Honestly, I’ve myself made the big investing mistake of wasting time on unsuitable stocks.
Thankfully, there are 4 ways that work:
1. Start with price
Some great value investors begin with cheap price.
- Howard Marks: “For a value investor, price has to be the starting point.”2Howard Marks, The Most Important Thing Illuminated, Page 24
- Li Lu: “I started out looking for cheap securities. When you start out, you really have no choice.”3Li Lu, Graham & Doddsville, Issue XVIII, Page 25
If you start with price, you get 2 benefits:
- 1. The chances of you finding actionable ideas are higher. Your time won’t be wasted.
But, if you start with quality, the price will usually be too high, and you may not find anything actionable.
- 2. You’ll at least get the benefit of mean reversion (which cigar butts get) or that of a catalyst (which special situations get).
And while that is playing out, you can listen to the earnings calls, to check if it additionally has fundamental momentum (which moats have).
- If not, sell once mean reversion is over.
- If yes, hold on for a lollapalooza. In other words, for high quality stocks, you want both mean reversion (or the catalyst) and fundamental momentum, to work for you.
2. Start with quality
Many value investors prefer to begin with quality.
- John Templeton had standing buy orders for his “wish list” stocks. That is, high quality, but currently expensive, stocks.4Lauren Templeton, Investing The Templeton Way, Page 183
- Chris Mayer: “I used to put valuation first, quality second. Now I put quality first, valuation second. Subtle, maybe. But very important.”5Chris Mayer, Reflections on 100 Baggers
- Bharat Shah: Use qualitative filters, rather than quantitative filters, to make the universe more manageable.6Bharat Shah, Interview with Saurabh Mukherjea, Time 6:56
Joel Greenblatt’s earnings yield.
Joel Greenblatt suggests, when you’re just starting out, you should focus on special situations.
These are stocks, where corporate events, create deep bargains.
Greenblatt, specifically recommends the following 3 special situations:
B. Merger securities
What’s interesting is, these securities go through forced selling. Because:
- Nobody asked for them, in the first place.
- They form a small piece of the puzzle. Investors focus on the bigger pieces – cash & shares.
- Institutional investors often can’t keep them. No mandate.
- Make a list of live M&A deals
- Ask yourself, “How is the buyer paying? Only cash, or also new securities?”
- Evaluate these securities.
- Stop losses
- Reduce debt
- Focus on better business
can be a Catalyst, BECAUSE
- Unveils a more profitable business
- Loss making segment can be sold for cash
- Creates a focused company
- Such managements are very shareholder oriented
- Before the announcement
- Recognize a potential candidate.
- Especially if management own a lot of shares.
- My thoughts: ITC might do something with its Hotels division.
- After the announcement
- If you notice, analysts are slow to appreciate.
- Especially for small caps.
- My thoughts: You could buy Tata Steel, after its decision to sell its Netherlands plant to SSAB. You could buy Unichem Labs after it sold off its brands to Torrent Pharma.
- Disclosure: A few of the stocks mentioned above, might be a part of my portfolio. Kindly assume, my views on them, are biased.
- Disclaimer: This blog post is for educational purposes only. It’s not a research recommendation, or investment advice. Kindly read the full disclaimer.
|↑1||NSE, Historical Data on Equities|
|↑2||Howard Marks, The Most Important Thing Illuminated, Page 24|
|↑3||Li Lu, Graham & Doddsville, Issue XVIII, Page 25|
|↑4||Lauren Templeton, Investing The Templeton Way, Page 183|
|↑5||Chris Mayer, Reflections on 100 Baggers|
|↑6||Bharat Shah, Interview with Saurabh Mukherjea, Time 6:56|
|↑7||Joel Greenblatt, You Can Be a Stock Market Genius, 1999 ed., Ch 4|
|↑8||Joel Greenblatt, You Can Be a Stock Market Genius, 1999 ed., Ch 5|