A reader sent me this email:
"So, where do you get your investing ideas?"
I can’t answer that.
Some fiction writer – I’m going to say it was Stephen King in On Writing but I’m probably wrong – said writers can’t tell you where they gets their ideas. All they can really do is tell you where they got this one idea.
It’s the same with investing ideas. I can tell you where I got a specific idea. I can’t tell you where I get my ideas generally. Because I don't know.
I got the idea for Bancinsurance (BCIS) from a screen.
Back in 2006: I screened for insurers trading below book value. I threw out most insurers that passed the screen. I wanted an insurer with a long history of low combined ratios.
Bancinsurance had a low combined ratio – that means a high profit margin – in most years. And it had a niche.
This was during Bancinsurance's bail bond reinsurance problem. So I just followed the stock. I didn’t buy. I kept Bancinsurance in mind. It got real cheap during the 2008 crash. But I was busy looking at other stocks. Then: the bargain stock herd was thinned by the 2009 rally. So my options were limited. My opportunity cost was low.
The SEC dropped their investigation. And I bought Bancinsurance stock.
The original screen was simple:
Industry = Property/Casualty Insurance
Price-to-Book < 1
I got the idea for George Risk Industries (RSKIA) from another blog post. This one was by Ravi at Rational Walk. It sounded interesting. The stock was stupid cheap. So I expected to find George Risk’s actual business was worthless. I looked at the 10-Q and the past 10-Ks. I saw the business was worth a lot. The stock price was 95% covered by George Risk’s stocks, bonds, and cash. If you bought the stock: you got the business for free. So I bought the stock.
I got the idea for Birner Dental Management Services (BDMS) from a screen. Actually: 2 screens.
I always screen for stocks that buy back enough stock to lower their share count year after year. And I screen for stocks that have free cash flow year after year. One day: I combined the two criteria. Birner passed the screen.
So where do I get my investing ideas?
I got 2 of the 4 ideas I talked about in an earlier post from blogs. I got the other 2 from screens.
I don’t know if that’s a good sample.
I’ve checked the last 10-Q and 10-K for thousands of stocks. I’ve glanced at their 10-year histories. If that’s an investing idea: I’ve had thousands of them.
But that’s not an idea. An idea is when something in that SEC report says this is a special stock. This is something worth studying for more than 15 minutes.
Those ideas come from sitting and thinking about a specific stock. Do that a few hundred times with different stocks. You’ll start getting ideas.