This question is not related to “How do I get a job in Eq. Research/PE/HF, etc” but more about the overall process of becoming adept at determining a good investment, and more specifically, picking stocks. As someone who currently does not work in finance (consulting), but is interested in investing (just took L3, reads somewhat avidly WSJ, Economist, and investing books like Intelligent Investor, One Up On Wall Street, New Market Wizards, etc.), I’m curious about the process necessary for becoming adept at picking good investments/stocks. How have you attempted to start down this road, and how would you recommend someone should? I find myself able to understand the logic behind other’s investment decisions, but am not as confident that I could generate these myself, from scratch. One thought I had just to get my feet wet was to pick any stock, i.e. Target or whatever, sit down, do some research and write an investment opinion on it and getting some practice this way. I’ve also looked into Value Investor’s Club but it seems to be well over my head, but good examples. I’d love to hear anyone’s input on this, especially people that invest personally in individual stocks (I currently only index), and/or people that work in equity research.
Starting from a scratch is a good idea. It was what got me some interviews, pick an easy company that you can model, alot of the L2 stuff will apply (valuation methods, porters 5, etc). have as many people possible read it, critique it, ask you about the company, competitors, all that. My thinking in terms of picking good investments is that you need to have a thesis that you believe in for what makes a stock a good investment.
Don’t try to understand the logic behind other’s investment decisions, because they aren’t always logical! Remember, when you buy a stock because you think it’s a “good” stock, you bought it from someone who thought it was a “bad” stock. Trust in your own judgment. I think your idea of picking just any stock and working with it is a great idea. Well, chose one that you find interesting at least. That’s how I put together one of my first analyses on a stock and I learned a lot. I did this on my own when I was in the BO and I think that exercise helped me get to the FO to be honest. I put together a simple model, wrote out a few pages on the salient points of the company, industry/macro trends, valuation (relative and DCF), and just overall tried to get the story on the stock.
Basically it’s like an elevator pitch. You get around ONE minute to convey/pitch your investment ideas. Think Cramer, think CNBC. TV appearances get you less than 1 minute to make a pitch, 2-3 minutes to defend your position. It’s exactly the same thing when you try to sell an idea to PMs, analysts or traders. No number crunching, modeling, industry analysis or other textbook staff should be incorporated in the pitch; people will you for those if they buy your idea. And of course, the more number crunching, modeling and research you have done the more confidence you will have.
Why not start with a global or secular theme you think will play out over some time frame? Then, start to look at companies in that space that stand to benefit and decide a value. Just get in there and work with it and develop your idea. I agree with the other poster to have someone and everyone read and critique it, if you want to poke holes in your logic. For example, you might think with the last few years of floods, bridges crashing, blackouts, etc there is an infrastucture play (or some derivative)…maybe you like BIP in that space and now figure what it is worth. You can always screen by industry/metrics/etc and if you read a lot you are bound to know some players in a lot of spaces.
a few comments from left field…fwiw 1. index funds beat the vast majority of active funds over the long term after sales commissions, fees and taxes - so you’re already ahead of the game 2. most people you are likely to come across are involved in the industry - which, by definition, destroys value for investors I’m just a private investor - run several funds, but it’s my own money. Here are some phases I’ve gone through - so far: - 1980s - got some basic training in some big global firms. Small group of friends got together and did some IPOs, M&A, property developments. Made some money, learned some lessons. One lesson is that the best way to make money from companies is to actually control the companies yourself. Start small, make mistakes, have fun. - 1990s - spend much of the time trying all sorts of technical methods - thousands of hours building & testing all sorts of models - momentum, patterns, etc, etc. (inspired by books like the Jack Schwager books) Conclusion: most are illusory in practice - especially after fees and the cost of time. Discovered some techniques with futures & options - but very boring, very repetitive, small regular gains for a lot of time & effort. Also did an IPO and a few VC and M&A deals - again being in control is the best way to make money from shares. - 2000s - use indexes as the core, then do 2 more things: 1) pick stocks in the industries I know inside out, and 2) take punts. Conclusion: have made crazy amounts of money from several lucky punts. Index funds will deliver the goods for old age and passing on to the kids, etc. Money from punts buys toys. Overall conclusions - 1. stay as far away as possible from the funds industry - never go near them or go near anyone involved in them - that includes all the hangers-on: asset consultants, economists, strategists, research analysts, brokers, advisors, etc, etc - most have no idea - that’s why they work for somebody else for a living. 2. best way to make money from shares is to be in control - put together your own companies - do your own deals 3. For passive investors - much better to use Index as the core, and take a few punts. With punts you can only lose 100%, but you can gain thousands of %. Just my humble point of view having seen it all over 25 years. cheers
Thanks null&nuller, you might want to not spread that sort of stuff around - do you want us all to lose our jobs??? just kidding
guys, thanks for the feedback A buddy and I have decided to both take a month and do a report from scratch on the same company, then compare and critique each other’s efforts.
farney Wrote: ------------------------------------------------------- > guys, thanks for the feedback > > A buddy and I have decided to both take a month > and do a report from scratch on the same company, > then compare and critique each other’s efforts. That’s a terrific idea! Maybe we could have a monthly contest on this forum where 2 people go head to head on a stock (bear case, bull case?).
I took a fundamental analysis course in my MSF taught by a hedge fund manager. He told us that if we want to try to be good stock pickers, select 3 companies every month, model them, and come up with price projections. Then follow the companies to see if you were right or wrong. Make notes about your assumptions, make changes to the models as necessary, and evaluate your projections. Do this every month. Don’t be afraid to pick up the phone and call the companies. You’d be surprised who you can talk to. Also, listen to their conference calls and go over their quarterly and annual reports with a fine-tooth comb. Look for discrepancies.
Very good idea indeed! What company did you gus pick? I’m going through the same exercise myself. Some of the difficulty I found so far: for international companies, their financial statement aren’t readily available on SEC site. Where do you guys get these information?
I’ve started to do this on my own, in the past week or so, after putting L2 behind me (we’ll see if its really behind me in 2 months!). I’m particularly focused on energy companies including oil/gas companies and companies involved with renewable sources of energy. If you guys are interested, I’m happy to expand this into a small team, as opposed to just doing it by myself. My first order of business was to order annual reports for the entire industry from WSJ. If you are a subscriber, you have access to this free service. I got a big box of annual reports, I intentionally chose to order by mail so I can read it on my long commute. Not to repeat something that you all already know, reading annual reports thoroughly is the best way to put to use the things that we learn in the CFA. After reading 5 or 10 annual reports, I felt like my understanding of how this stuff works in the real world got much better rather than just looking at a table of numbers and answering questions. If people are interested to research companies and write reports, please respond to this. I’m only focused on the energy industry.
RKG, Same situation here. I’m interested in joining the group. My current focus is on Chinese ADRs. Shot me an email at ustcer90 AT yahoo dot com. BTW, I’m in Philly.