Idea Generation for Intelligent Investors

Great ideas are the lifeblood of great investment performance. No matter the skill of a portfolio manager in controlling risk or holding on to winners, if he or she lacks access to great ideas, success is going to be elusive.

How do you find great ideas? What is your a process for feeding ideas into your research pipeline? How do you improve and refine the process?

Over nearly two decades, MOI Global has queried investment managers on their idea generation strategies. A common theme: investing is part science, part art. Granted, quantitative methods can generate lists of companies for consideration, based on criteria such as P/E, enterprise value to sales, or price to book value. However, massive outperformance has never been synonymous with picking the quantitatively cheapest companies.

Several issues arise with the use of purely quantitative methods. Screens often suffer from a “garbage in, garbage out” problem: One-time items such as non-recurring gains can inflate income, making a company seem cheaper than it is really. Even in the absence of one-time items, a cyclical business will report the highest earnings at the top of a cycle, just before income drops off a cliff. Finally, cheap companies are often “cheap for a reason”, with the most obvious that a company has low returns on capital, yet keeps reinvesting cash back into the business.

Every investor also faces a practical constraint: time. Without this constraint, idea generation strategies would be less important, as we could analyze all available ideas. Time limitations force us to prioritize. Quantitative screens are one way of prioritizing candidates for research. Another way, as David Einhorn points out, is looking for situations in which non-fundamental reasons exist for the mispricing of a security.

We are delighted to share insights from some of our conversations:

Bryan Lawrence, founder of Oakcliff Capital:

Voracious reading, talking to other investors, and looking for areas of disturbance in the markets… It has been interesting to study the records of the great investors, and see how they generated ideas. Often the great investor works alone much of the time, which makes sense given the difficulty that two people will agree on the best ten stocks to own. But it is smart to find a small number of other investors whom you respect and with whom you can share ideas. You do not have to agree on everything, and their different perspectives can enhance your own thinking. Oakcliff shares space with two other firms run by first-class people. I enjoy having a collegial environment in which to kick around an idea, but also the freedom to make my own decisions.

Mark Massey, founder and chief investment officer of AltaRock Partners:

It’s all qualitative stuff. We really don’t do screens. In fact, the only screen I find useful is one that spits out companies that have been buying back a high percentage of shares. This may be indicative of a well-aligned management team that has great conviction in the durability of its competitive moat… but it could be the opposite, too… so you always have to do a lot of work to get to the truth. I really think the key to our success has to do with our love for the game. We absolutely love coming to work every day. I literally spend almost all of my time reading. And while it, no doubt, makes me a bit of an oddball, my greatest pleasure is to be constantly searching for wonderful businesses that, for whatever reason, are mispriced. Having done this for nearly thirty years, I have built up a lot of knowledge and understanding about many different businesses, moats, and business models. The result is a long list of companies that we would like to own at the right price. And we know from experience that if we continue to be patient and disciplined, a few mouth-watering opportunities will eventually come our way.

Brian Bares, founder of Bares Capital Management:

We do exactly one computer screen on market cap that identifies our constituent investment universe. From that point it is old-fashioned hard work. Our research analysts are free to follow their intellectual curiosities. I want to foster a collegial environment where people are constantly exchanging ideas. If I constrain people to specific sectors, or task them to write up a specific idea, they may not go the extra mile to get an idea as polished as it can be. We have had ideas come to the table from researching competitors. Others have materialized by visiting management simply because we are in the area. And some have come to our attention through shared board members or founders. Anytime one of our research analysts comes up with an idea, it is presented in a formal process internally. The idea needs to meet our qualitative criteria for competitiveness and management capability. We also have a very important discussion about what our advantage is in researching a specific idea. We love it when there are behavioral reasons for pervasive contrary opinions.

Tim McElvaine, president of McElvaine Investment Management:

We don’t really have any market cap constraints. North American or Anglo-Saxon markets, as you might typically define them, would be preferred because of familiarity and governance. But the bigger the population you can select from, the better ideas you can have. I’d like to give you an example. When I worked with Peter [Cundill], or since I’ve had my own fund, I have always invested in and out of Japan — quite different culture with its own peculiarities, but we have always had very good experiences there, mostly because we were disciplined about the price we are paying. That is a market where a lot of people have negative comments, but we’re able to find stuff to do — [echoing] a recent book on Peter, “There’s Always Something to Do”.

Brian Boyle, president of Boyle Capital:

We really don’t have a rigid process or use screens to generate ideas. However, there is usually a common linkage among our investments. For example, Fairfax Financial has been a major holding for years, which led us to Sandridge Energy. We owned Canadian Oil Sands Trust in the past because of Seymour Schulich. Likewise, when he became a significant investor in Birchcliff Energy, we took notice. We also study the investments of other great investors. I have files on over 50 other investors we respect, so we look at what others have been doing to see if anything might be interesting. At the end of the day, you must do your own homework.

Drew Edwards, partner and portfolio manager at GMO:

The majority of our ideas come to us through screens. We run lots of different screens on different industries. What we’re looking for are the same core criteria. We are looking for companies that trade at attractive levels relative to their net asset value or their tangible book value; companies that have strong balance sheets, limited leverage, and have shown an ability to generate consistent operating profit through cycles. Those are the basic criteria, whether it’s a bank or a manufacturing company… At a tactical level, the way we handle this is: I run screens on a daily basis, I take the output of my screens, and I drop the tickers into an internal database we maintain. And we’re looking for situations where the company is triggering new criteria. There could be a company where we like the business fundamentals and the valuation, but we have concerns about the management team or the debt levels. We’re looking for those criteria to be triggered, and at that point we do additional research. Or alternatively, if the company has never populated our database, that’s an exciting situation because it’s an idea we haven’t researched before. We very quickly go and meet with management.

Massimo Fuggetta, chief investment officer of Bayes Investments:

I do unconstrained screens from a sectoral point of view. And what I look at is situations where the valuation metrics, P/E or price to book, or price to cash flow, are in sharp contradiction with the history of profitability… when I can relate the undervaluation in a particular situation to a change in management, a scandal, or something that has happened around the company—that becomes an opportunity.

Sahm Adrangi, founder of Kerrisdale Capital Management:

We’ve made some of our best investments by becoming experts in weird and unusual areas of the public markets, and using that deep understanding to our advantage. For instance, we generated strong returns on SPAC warrants in the second half of 2009, and accomplished that by becoming experts on how SPACs operated.

Barry Pasikov, managing member of Hazelton Capital Partners:

Originally, a majority of my ideas were generated by a screening tool using metrics like price/sales, revenue growth, margin expansion, cash on the balance sheet, debt reduction, 52-week lows, etc. The results were as you would expect: names of companies that met my criteria but frequently did not have the long-term results or earnings power I was looking for. My searches then began to progress from quantitative to qualitative valuations. Unfortunately, I don’t know of any screening tools that can search for a company with a sustainable competitive edge, operating in a niche industry with high barriers to entry, requiring little to no capital expenditure, and of course, is cheaply priced when you fully understand their business model. I found that the trick to finding these companies is not to search for them. Instead, study the types of industries where investment opportunities may be hiding; an industry that could conceal an unloved, abandoned, sometimes vilified company lacking sex appeal. I also do a fair amount of reading, and two of my favorite magazines are BusinessWeek and Fortune. I am not reading them for investment recommendations; I read them because both magazines do a great job of giving a quick and concise overview of different companies and their industries.

Pablo Gonzalez, chief executive officer, Abaco Capital:

In many cases we find opportunities in companies we owned in the past, and we sold when they reached our intrinsic value. Occasionally we get the opportunity to invest in them again. This happens quite often in highly cyclical companies. We keep a list of companies we like to follow. It is formed by enterprises with outstanding businesses and strong competitive advantages whose shares aren’t cheap at the moment. We follow them on a quarterly basis, to make sure we are ready if the opportunity arises. Most of the companies in the list have already been part of our portfolio at some point. In other cases, we find ideas talking to other investors, who have a similar way of thinking and with whom we like to share opinions, we like to attend to events where we can learn and contribute with some of our experience. MOI is an excellent source of new ideas, too. Sometimes, being in touch with companies can be very helpful as well. We usually ask management teams about other enterprises in their industry, no matter if it is a competitor a supplier, or clients that have outstanding profiles and can be interesting to us. We also do this when studying the competitive dynamics of the industries, we don’t only focus on the company we are analyzing, we try to keep our eyes open when comparing it to its principal competitors, and other companies it works with. We are also attracted by stocks that have fallen sharply in the last three to twelve months in different markets. We look for cheap opportunities, so this is always a good reference to start.

Rahul Saraogi, managing director of Atyant Capital Advisors:

I use multiple methods to generate ideas. I do not, however, aspire to know every single thing about every single listed company, it is just not possible. Even if one’s analyst team does it, it doesn’t help the fund manager because he or she cannot internalize that much information effectively. The beauty of the investment business is that you don’t have to kiss all the girls. If one can find a few investment ideas that meet one’s investment criteria, one can do very well over time.

Scott Barbee, portfolio manager of the Aegis Value Fund:

We generate ideas in a multitude of different ways. Our primary methodology is a simple stock screen looking for companies trading at discounts to tangible book value. Additionally, we run screens in search of companies trading at low multiples of leverage-adjusted cash flow. Speaking with other similarly oriented fund managers, examining their regulatory filings, and reading industry-specific research are other channels through which good investments can be found. Additionally, we are all voracious consumers of business news, and we occasionally find gems through this general reading.

Sid Choraria, Asia-focused equities portfolio manager:

I like generating original ideas, companies that are off the beaten path and with potential to grow, but the underlying theme is always finding value. I look to source ideas constantly, through a variety of sources that keep me intellectually curious. Some of my ideas can come from just paying attention to companies in Asia in day-to-day life. I developed an exhaustive screening database that assists me for key factors I look for in a forensic way, quantitative and qualitative. These can include return on invested capital, quality of earnings and free cash flow, significant share repurchases, insider buying, brand, customer captivity, and pricing power. I also generate leads by asking companies “Which of your competitors do you fear the most?” Finally, I regularly read value-oriented publications. […] I also follow prominent value and private equity investors to see if they might be shareholders in a business. While their presence is not necessary, if the value discrepancy is large, it can be an advantage to have an informed investor engage in value creation.

Peter Kennan, managing partner of Black Crane Capital:

Our universe of companies is in Hong Kong, Singapore, Southeast Asia, Australia, New Zealand. That includes Taiwan. We look at enterprise value above $200 million. We don’t care how small the market cap is, so they can have a small market cap. That generates a screen, and then we scan out financials because we can’t get really comfortable with what assets are inside financial organizations. That results in about 1,800 companies in our universe and we then sort through those looking at various criteria. One of the key criteria for us actually is a big fall in share price, so we take a look at any company that has fallen more than 50% versus a 52-week high. It might be five minutes, it might be five hours, but we take a look at all of them almost without exception. We get used to screening things that are relatively lower quality businesses. We are looking for a quality business at the heart of it, but it can be pretty ugly in terms of leverage, corporate governance concerns, cyclical issues, etc. It can have lots of problems, but at the heart of it, it must be a core, good quality asset, which could be cash, properties, infrastructure, a strong cash flow business with a solid market position. We also look at things like a bigger portion of minority interests, which would be indicative of a large conglomerate, which might have a sum-of-the-parts discount and might have some activity to unlock that value. Big associate earnings — this is another thing the market will miss is that a lot of the earnings are coming through associates and are not in consolidated form. These are the things we look at.

Aaron Edelheit, chief executive officer of Mindset Capital:

Insider buying, spinoffs, turnarounds, restructurings, and reading what other really smart money managers are doing.

Ed Wachenheim, chairman, Greenhaven Associates:

It’s hard to do, but often one idea leads to another. I mentioned houses in 2011. I will go back to housing in the late-1990s and when we by accident got involved in the housing business through a company called US Home, at that point I was just running screens. US Home was selling at about 60% of book value and about six times earnings, but anytime a company is selling at 0.6 times book value and six times earnings, I’m going to go to my Bloomberg and I’m going to do a little work on the company to see what’s going on. The company seemed to be a real company with a reasonably good balance sheet…

David Baran, co-chief executive officer of Symphony Financial Partners:

We visit every company. If we are interested in a particular company, it is not because we have done a screen and found it cheap. Finding what’s cheap is easy because that algorithm is well-known. Unless you meet management and understand why the company is cheap, your investment process hasn’t even started. I would tell most investors to throw away their screens… [sometimes] we visit companies year after year after year, and they are still cheap. Until you can identify what is going to cause them not to be cheap, there is no point in investing.

Allan Mecham, president of Arlington Value:

[I generate ideas] mainly by reading a lot. I don’t have a scientific model to generate ideas. I’m weary of most screens. The one screen I’ve done in the past was by market cap, then I started alphabetically. Companies and industries that are out of favor tend to attract my interest. Over the past 13+ years, I’ve built up a base of companies that I understand well and would like to own at the right price. We tend to stay within this small circle of companies, owning the same names multiple times. It’s rare for us to buy a company we haven’t researched and followed for a number of years — we like to stick to what we know. That’s the beauty of the public markets: If you can be patient, there’s a good chance the volatility of the market will give you the chance to own companies on your watchlist. The average stock price fluctuates by roughly 80% annually (when comparing 52-week high to 52-week low). Certainly, the underlying value of a business doesn’t fluctuate that much on an annual basis, so the public markets are a fantastic arena to buy businesses if you can sit still without growing tired of sitting still.

Larry Sarbit, chief investment officer of Sarbit Advisory Services:

There are many ways of generating them. It’s called searching. It’s just a long-term search process of opening yourself up to different ideas, don’t be closed off. Ideas come in many forms and many types of businesses, and even the way you evaluate them can be different on a case-by-case basis. There’s no perfect template that you can use to be successful.

Fernando del Pino, private investor:

I run value screens mainly focused on valuation rather than on business quality-oriented measures. For instance, high ROE is nice, but statistically high ROE stocks have not proved to perform better than the market. I also avoid extremely indebted businesses, except when the market is pricing a bankruptcy that I see improbable, making the risk-reward ratio extremely asymmetric and, therefore, attractive. I try to read as few newspapers as possible. Maybe 80% of what you read is just entertainment, 10% is pure propaganda, and 10% is information, some true, some false. Therefore, reading daily news is a terrible waste of time and a dangerous source of noise and distraction. I follow a few outstanding investors (partly through MOI) and a few selected newsletter writers from around the world whom I’ve followed for many, many years. I also keep reading a lot of books on anything from religion, psychology or history to investment, economics or medicine. Apart from enjoying reading from the point of view of culture, I hope (and believe) that it builds the right mental model overtime. Information is the lowest use of man’s intellectual capabilities; then higher up you find knowledge; and at the summit, there is wisdom. You have to aim at the latter. Too much information hinders knowledge, and very often, too much knowledge hinders wisdom — because of hubris. Today we live in a world with overwhelming loads of stupid information and very little wisdom.

Mark Cooper, portfolio manager of First Eagle Investment Management:

My number one thing I do for generating investment ideas is reading. Different people learn differently and different people process information differently. As students of mine have heard in the past, I don’t hear very well so I don’t process things audibly very well. I don’t spend a lot of time talking on the phone to people, having conversations with other investors as smart as they may be, and often smarter than me or who have very good ideas. Sharing ideas is not something that I spend time doing. I want to look for ideas and read various sources of information, and try to have an idea of what’s going on in the world. How do I see things? Where do I see opportunities? Reading probably is the number one thing. I will use screens as well, and the reason I do that — I didn’t use it as much in the past when I was focused really exclusively on one sector and one industry — but as I’ve become more of a generalist and I have positions in companies in pretty much every sector around the world, in many different countries, I find it harder and harder to filter out from 6,000 or 7,000 maybe possible equity securities that trade above $1 billion [in] U.S. market cap. I want to filter that list down to a more manageable list, which we can watch. We use a quantitative approach to narrow down the universe — it’s all about saving time, improving our search process, and focusing on those ideas that might be potentially interesting at the right price.

Don Fitzgerald, fund manager of DNCA Finance:

Investment ideas come from a number of sources, such as regular quantitative screening, tracking of investments that have been portfolio holdings in the past, monitoring of the financial press, management meetings, and conferences. Opportunities caused by disappointments of short-term market expectations are good targets. Also, spinoffs and demergers where existing investors often sell without doing their homework on the new company’s real value, or situations where you have a forced seller pushing down the stock price are good hunting grounds for fundamental investors.

Josh Tarasoff, general partner of Greenlea Lane Capital:

I have a routine that I repeat on roughly a monthly basis, which includes many of the same things that a lot of investors do. This routine generates a list of companies that are worth more work. I prioritize the companies that seem to be attractively priced, but a lot of the time I find myself researching companies in order to be prepared if the price becomes attractive in the future. Because of the very narrow focus on great businesses, I do not find as many interesting situations as many other investors do. A great deal of the work I do is simply expanding my knowledge base.

Jake Rosser, managing partner of Coho Capital Management:

The great thing about investing is you get to cultivate your curiosity about the world at large. I once described my job as sitting between four walls, reading, and thinking. That truly represents the majority of my day. At its heart, investing is a multi-disciplinary endeavor. Thus, one has to know a little about everything to make informed decisions. I often joke that one can become a real Cliff Claven in this business. Our reading diet consists of The New York Times, The Wall Street Journal, Forbes, Fortune, Business Week, Bloomberg, Barron’s, and various value-oriented investment blogs. In vacuuming up large quantities of information, we keep our antenna alert for informational inefficiencies. […] Apart from reading, we utilize a number of sources as a starting point to sift through ideas. These include Value Investors Club submissions and SEC filings of investors we admire. We also find that informational inefficiencies are often present in spinoffs, busted IPOs, or post-reorg opportunities. Last, we keep an “on deck” portfolio of companies that are worthy of further research and a “punch card” portfolio of what we consider the world’s best businesses. This allows us to keep tabs on the world’s best companies and position ourselves quickly should opportunities materialize.

Charles de Lardemelle, chief investment officer of FINIVA:

I have found over my career as an investor that the best ideas often do not screen very well. Basically, you are spotting something that doesn’t show in the numbers yet and will show over time. That happens from time to time, those tend to be larger positions or we would build them over time. Unfortunately, we don’t find enough of those. These situations are few and far between, require judgment and a vision. Those inflection points can be sources of great gains or losses in any industry.

Adam Steiner, former head of research of SVG Capital:

A mixture of customized valuation screens, industry contacts, and by monitoring private equity transactional activity. It’s quite hard to get the sell side to understand what we are looking for, except for a few exceptional brokers.

Jeroen Bos, former investment director of Church House:

The funny thing is that it is often said that finding these so-called net-nets is very difficult, but I find that if that is the only area that I look for in a relatively small market like the UK, if you look hard enough, you’ll find them. And that is exactly what I do. By looking at companies that I think look attractive but are at levels I find too expensive, I’m already in a much better position because I’m only having to wait for the price to drop to the level that I’m willing to pay for them and make up my mind instantly to buy them. I have done the process beforehand. By just sitting there and watching, there are always stocks that can be bought at these extreme levels. That is all I do. If I can’t find them, then we’ll just wait in cash until the period comes that they are available.

Philip Best, Chairman of Quaero Capital:

One of the things we believe is there’s too much investment from people who are basically just sitting behind a Bloomberg screen and doing armchair investing. They are sitting there and they are waiting for ideas to come to them. We believe a great deal in getting out there — in getting out there and meeting companies and talking with managers. We spend a lot of time traveling. (a) we like that, and (b) that is what we think brings the most to the job… We try and read as much of the local press as we can. Whether it’s in France or the UK, Switzerland, and also a bit of the trade press. Plus, it is classic value investor stuff. A lot of the ideas have come from “idea clumping.” You find one cheap software company in Germany, and suddenly you find a bunch of others.

Professor Dr. Max Otte, founder of IFVE Institute:

I’m generally a man of too many ideas. So my challenge is rather how to narrow down my ideas systematically. My discipline is to stick to a rather limited universe of stocks — 200 German, Swiss and Austrian, maybe 100 international stocks — which I follow intermittingly and which change only slowly over time. I’d rather profit from price fluctuations in the securities I know than try to find new ones all the time. I read papers. I read annual reports. I have an excel-database with approximately 150 stocks. Over time, you develop expertise in certain markets. You acquire a “feel” for those stocks, when a sector or stock might become interesting and when its price is getting too high. I am also looking at a list of relative losers over five years to find interesting cheap stocks. And sometimes I take home an interesting idea from value conferences or a publication like yours. That’s not forbidden by law! Success is what counts.

Lisa Rapuano, former portfolio manager of Lane Five Capital:

Idea generation is fairly idiosyncratic. We run screens of high-return, low-multiple names (the so-called “magic formula”), and of low-multiple names that have recently moved down aggressively in price. My favorite screen is the new lows list — at least it tells me what is truly out of favor. From there, it’s a fairly labor-intensive process of going through the names and seeing if any of them look like they would be down for temporary reasons, and that there are decent business models on the other side of what is causing the controversy. More often than not, we come up with ideas from much more random sources than screens: magazine articles, talking with other managers, randomly typing the wrong ticker in Bloomberg, sell-side downgrades that might signal capitulation, looking at spinoffs or recapitalizations, tracking management changes and turnarounds. In my experience, the nice neat little funnel of screening to portfolio doesn’t really work. Undervalued things are sometimes hiding under expensive-looking or very complicated rocks.

Zeke Ashton, founder of Ashton Capital:

We get ideas from all sorts of places. We used to get a sizable number of leads from statistical screening, and we still use screens, but we have found them in recent years to be more productive in sourcing short ideas rather than long ideas. Nevertheless, we still scan through lists of stocks that appear to be cheap from a statistical basis and occasionally we find a good one. One of our major idea sources these days is from the inventory of the many ideas we’ve owned or researched at some point in the past — many times, after we’ve sold those stocks, the price will come back down to a level that makes them very interesting again. Since we generally already know the company, it is just a matter of getting quickly up to speed with the latest developments to determine if it is actionable. We also find occasional ideas by doing industry overviews to get to know a number of players in a specific sector or niche that we think may be out of favor or neglected for some reason. Often we will find a gem or two. Finally, we get some ideas through our network of value investing contacts, and through a number of specialized research publications that we have found are compatible with our approach, of which your own publication would be one example. But no matter the source, the ideas are merely candidates until we’ve actually produced a piece of internal research that covers the bases and gives us confidence that we understand the business, can reasonably value it, and also gauge the risk factors involved.

Ori Eyal, former portfolio manager of Emerging Value Capital Management:

The short answer is I read everything and talk to everyone. I subscribe to about twenty different publications: Forbes, Fortune, Barron’s, The Economist, Value Investor Insight, Capital and Crisis, Complete Growth Investor, etc. I also surf the leading investing websites: Value Investors Club, SumZero, Market Folly, etc. I attend great investing conferences: The Value Investor Congress, IRA Sohn Investment Conference, The Rodman & Renshaw Global Investment Conference, etc. And perhaps most importantly, I regularly talk with other smart fund managers and discuss ideas.

Simon Denison-Smith, co-founder of Metropolis Capital:

We get our ideas from two sources: (1) a proprietary screen that we have built with assistance from Thomson Reuters, which works off their Reuters Knowledge platform. This model processes over 80 historic financial variables and uses these to calculate a first-cut intrinsic value, from which we derive a first-cut margin of safety for each company that we run through the screen. We use cash flow and debt filters to further refine the screen. (2) Reading widely in business magazines (e.g., Investors Chronicle), newspapers (e.g., the FT) and various online sources — to see if there are any companies that we have missed, which we then analyze.

John Lambert, former investment manager at GAM:

The principal method of idea generation is through the use of very long-term performance charts, which help to identify areas of currently depressed sentiment and hence probable low valuations. Ideas also come through more quantitative screening, subscription to quality newsletters, and general reading. It is best described as eclectic, and there are no hard criteria for qualification as a potential idea or inclusion in the portfolio.

Amitabh Singhi, founder of Surefin:

It is a combination of reading newspapers, screening, talking to friends, looking at investments made in the past, reading annual reports, etc. The process of getting ideas is often lumped together, so long periods of inactivity are (fortunately) interrupted by brief periods of hyperactivity.

Igor Lotsvin, managing partner of Sage Rhino Capital:

All of our ideas our internally generated — we never use the sell side to come up with investment ideas. We frequently listen to conference calls or meet with management of companies.

Paul Sonkin, portfolio manager at GAMCO Investors:

I have seen a lot of companies [in the micro cap space]. There are companies I’ll look at for five or ten years before I even own a share. I got an email from one of my former students who said, have you looked at such and such company? It’s been on the periphery of my radar for ten years. We do look at them, and I keep track of their progress. I read through their press releases, and if the stock price falls to a level that becomes extremely attractive, or there is some corporate event, then it moves to the top of the inbox. I have a very big inbox, but you have to do triage or prioritize. Then there is also maintenance research on existing companies. Sometimes we have to go back and do a lot of research if there is something that has changed, but much of the time nothing has really changed. A lot of these companies take very long-term views in terms of their business plans, so we just want to see if they are executing against their plan.

Paul Johnson, professor at Columbia Business School:

We are always on the lookout for new opportunities. We source many of our investments from screens and sometimes we get ideas from the Street. We are also constantly reading the news and investment forums. We run a low-turnover, concentrated fund with approximately twelve core positions. As such, we only need to find a few great ideas a year. We have a clear sense of our target investment and can filter ideas quickly. Few make it past the initial screening, but those that do get intense scrutiny.

Brian Gaines, founder of Springhouse Capital:

For the most part, we keep our eyes open and use past experience to quickly identify what could be interesting. If you follow stocks as actively as we do, you really find yourself in the flow of many different potentially interesting names, and using past experience prevents you from wasting time on ideas that have a low likelihood of securing a place in the portfolio. We also look for ideas in many of the areas that Joel [Greenblatt] has written about, as well as some of the more standard channels for value investments, such as insider buys and new low lists. But we have found that most of our ideas have come from simply following many stocks over a long period of time. Our experience has been that good ideas don’t come in perfectly spaced installments — they tend to ebb and flow. It is always more fun to have a long list of great new ideas, but when the ideas are sparse, you have to continue doing company research and wait patiently for opportunities that meet your criteria. The environment for new ideas can change rapidly. The only thing we can do in the meantime is learn about more companies so that we are better prepared when the tide changes.

Ciccio Azzollini, private investor:

I’m always checking the new low list, not just stock prices but also lows based on P/E, P/S, etc. I also find ideas by reading constantly — I regularly read the Wall Street Journal, Financial Times, New York Times, Barron’s, Fortune, Forbes, Value Line, SPACAnalytics, Gemfinder, Value Investor Insight, Superinvestor Insight, The Manual of Ideas, Outstanding Investor Digest, Value Investors Club, SumZero, Distressed Debt Investing, Merger Arbitrage Investing, Magic Formula, and Grant’s. I’m always eager to read shareholder letters, news, and interviews with some of my favorite investors, including Whitney Tilson, Bill Ackman, Lloyd Khaner, Seth Klarman, Joel Greenblatt, Mohnish Pabrai, Rich Pzena, David Einhorn, John Paulson, Marty Whitman, Howard Marks, Bill Miller, Bob Olstein, Francisco Parames, Eddie Lampert, Jeremy Grantham, and of course Munger and Buffett.

Scott Callon, chairman of Ichigo Asset Management:

We invest only in Japanese small caps, so we need to build our understanding of our portfolio companies directly. The sell-side is a business, and Japanese equities have underperformed for so long that the sell-side has retreated (along with a good chunk of the buy-side), so our investment universe has no research coverage to speak of. If one is investing in Toyota, there are plenty of folks out there expressing a view, but our universe is under-researched, under-known, and under-owned.

Mike Pruitt, Matt Miller, and Joe Koster. former principals of Chanticleer:

We read a lot, pay attention to what other people we respect are buying, follow stock idea websites, watch for insider purchases, but we generate most of our ideas by running screens in Capital IQ. Even though it is a pricey service for a small fund, we realized in the beginning that we could get a big edge with a powerful screening tool and the ability to quickly filter results to try and find attractive things. What we have found is that especially in the small and micro-cap space, you have to turn over a great number of rocks to find something truly interesting, and Capital IQ helps in that regard.

Eileen Segall, senior investment analyst at Ensemble Capital:

The majority of ideas are generated from a quantitative screen based on free cash flow as a percentage of enterprise value, and on the metric return on invested capital (ROIC). The remainder of ideas I find through reading value investment publications like The Manual of Ideas, talking to other stock pickers, investment websites, blogs, and conferences. Every now and then, an idea that doesn’t make it into the portfolio will lead to a better investment in that same industry.

Adam Weinrich, private investor:

Generating ideas in Asia is no different than in the U.S. I look for changes, events, and disruptions leading to mis-valuations. The changes may apply at the company level, to an industry, or to an entire country. I read a lot of news and company reports. I talk with friends at other funds. I listen to what insightful people on the sell-side have to say. Part of the appeal, and challenge, of investing in Asia is that each market and economy is unique. Each country is at a different stage of development and has different trading dynamics.

Doug Barnett, president of Quest Management:

We screen for stocks with high growth using Bloomberg, then go and visit the companies, and construct our own financial models. We read broker research to see what companies are doing, but we never rely on broker earnings estimates as they are usually wrong. We also read the newspapers, The Economist, Fortune, Forbes, and Marc Faber’s Doom, Boom and Gloom newsletter.

Wong Yu Liang and Victor Khoo, managers of Lumiere Capital:

Our primary source of ideas is from reading corporate announcements and annual reports, especially during the earnings results season, because this will allow us to pick up ideas that may not be found using valuation screens or from the media or broker reports. We look primarily at the Singapore and Hong Kong markets, which have similarly high standards of corporate disclosure, hence the approach is pretty similar. For other markets like Indonesia and Malaysia, we will scrutinize corporate governance and management motivations a lot more closely.

John Burbank, former chief investment officer of Passport Capital:

Looking at China or looking at Silicon Valley, it’s [about] understanding what is the leading edge of change as well as what is being hurt by change — either part. Anything moving quickly will have those two things happening. It’s generally most useful if you can figure out what is changing that’s different than people understand. Anything that’s changing differently than it happened before — it’s an important point — is inherently not understood very well, because most things regress to a mean. Most thinking regresses to a mean. It expects things to go back to a level [they were] before. The things that change market prices, more broadly — it’s the signal that diverges from reversion to the mean. That is where you should put your attention. The problem with “value” is that, relative to growth, it often can keep you stuck in a lack of change, unless it’s value for positive change reasons, but that’s rarer than just “value”.

John Heldman, president of Triad Investment Management:

We annually review thousands of companies by reading corporate annual reports, SEC filings, and reviewing Value Line reports. In addition, we subscribe to an extensive number of newspapers, magazines, and periodicals. We read extensively, including general publications, to understand broad economic trends and specific periodicals to deepen our understanding of certain industries. We are always looking for businesses that meet our criteria, with the understanding that one day we will likely get an opportunity to invest in the business. We have accumulated a body of knowledge about a wide range of businesses. If we can understand the business, it demonstrates growth and durability, has above-average profitability and shareholder-oriented management, it becomes part of our roughly 250 company universe. Once a business makes the qualitative cut, then we focus on valuation.

Vitaliy Katsenelson, chief executive officer of IMA:

I have a watchlist — a few hundred stocks that I researched at some point in time, some of which I owned in the past, and which I want to own when they hit my price target. I look at the list weekly. I screen. I learn what other investors I admire own. I have a good circle of friends who are value investors; we share ideas. I look at stocks that are making 52-week lows. None of these things are earth-shattering. Before I buy a stock I need to figure out what the street is missing. With very few exceptions, I find little value in street research. I read it on occasion, but mostly to find out the consensus.

Robert Vinall, founder and managing director of RV Capital:

I generate ideas by speaking with like-minded investors, screening (in particular for 52-week lows), and reading newspapers. I am particularly keen also on referrals from competitors and suppliers of investee companies. I do not view my circle of competence as static. I am permanently trying to expand the edges of my circle of competence to encompass new companies, sectors, and countries. For example, I have felt for a long time that China is beyond my circle of competence as I am unfamiliar with the culture and, frankly, the issue of property rights scares me. But Buffett has made a few investments there and stated categorically that all investors should have it on their radar screen. You ignore Buffett’s advice at your peril, so I have started ordering annual reports for some Chinese companies. I hope that one day I can claim that certain Chinese companies are within my circle of competence.

Richard Cook and Dowe Bynum, founders of Cook & Bynum:

Idea generation is a fairly eclectic process for us. We read a variety of domestic and international publications, travel internationally to expose ourselves to new markets and ideas (for example, we have developed some competency in Latin America), and ask executives and managers we meet, who is the best competitor in their industry or what is the best business in their geographic region. Because we run a concentrated portfolio and have low turnover, we are only looking for a handful of great ideas each year — which is a good thing because only a few ideas typically survive our iterative process of trying to think of all the ways that a company may “die”.

Charles de Vaulx, former chief investment officer of IVA:

Compared to many of our peers, it would be fair to say that we rely a lot less on screens. It would be easy every week to run screens globally about stocks that trade at low price to book, high dividend yield, low enterprise value to sales, enterprise value to operating income, and so forth. Generally speaking, a lot of our value competitors begin the investment process — by that I mean the search for ideas — by trying to identify cheap-looking stocks. Sometimes using screens they look for cheap-looking stocks and once they have identified a list of cheap-looking stocks, then they decide to, one at a time, do the work and investigate each of these companies. The pitfall with that approach is, typically, those cheap-looking stocks will fall into two categories. Either stocks that are of companies that operate in overly competitive industries or overly regulated industries, where the regulator may not always be a friendly regulator. So you may find steel companies, or some retail companies, or the insurance industry in many parts of the world is notorious for its overcapacity and lack of barriers to entry. So, either you’ll find companies in overly competitive businesses where it’s hard, or even worse, you’ll find typically some of the lousiest competitors in their respective industry. If you had run a screen a day before a company went bankrupt, the stock probably looked cheap on an enterprise value-to-sales basis. The problem with these cheap-looking stocks is that it’s going to be hard for these stocks to see their intrinsic value go up over time.