The Investment Universe is like one gigantic megastore. Think about the last time you went window shopping. You were just browsing through the racks for something to wear.

A salesperson approached you and asked, “Is there anything specific you’re looking for?” and you politely replied, “No, thank you. I’m just browsing.”

Unfortunately, this approach doesn’t work when it comes to investing. As an investor, you need to have a better idea of what you are looking for. With a global public marketplace of over 60,000 companies, you can’t just window shop your way through your investment options.

Of course, you don’t need to have a 100% precise idea of what you’re looking for, as investing rarely operates like that.

The first and perhaps most important step in the investment process is knowing where to look for opportunities.

Seth Klarman

Trying to invest based on a list of requirements is not ideal. You can’t just say, “I’m looking for this, this, this, and this, and also this, this, and this, and that would be great.” Good luck with that!

When I say you need to know what you’re looking for, I mean you should have a general idea of where to focus your attention to start filtering down your options.

For example, when I went shopping for a shirt recently, I didn’t have a particular colour in mind, but I knew I wanted a certain style with cufflink holes and that it should match what I was going to wear. When the salesperson asked me, “What are you looking for?” my response was…

“I’ll know it when I see it!”

I didn’t have all the specifics, but I knew what I was aiming for. Investing is very similar. You may not have everything figured out, but you should have a general idea of what you’re looking for.

If we compare the investment process to shopping, it can be seen as the part of the journey where one browses the aisles looking for a particular item. In most cases, people do not go shopping without a specific item in mind or a shopping list. They have a general idea of what they want, and then they narrow down their selection by going to a certain section of the shop. Such as clothing, and then further narrowing it down, for instance, to Men’s business shirts. Finally, they come across something that catches their eye, and they say, “That’s the one.” Just like I did when I found my shirt that day.

The haystack is the Investment Universe and you want the needle.

It’s not about the needle representing any one thing, style, or company. Every investment philosophy and style will have a different “needle” to look for. Depending on what you gravitate towards, finding “it” can be a challenge. Solid undervalued companies are hard to come by, fantastic growth companies are not easy to find, and long-term quality compounding machines are rare. In short, finding the right investment takes work and patience.

It’s important to determine what you want to own. This will be influenced by what you learned from the Investment Philosophy and Strategy section. For instance, you may find that markets can be inefficient at the bottom end of the market such as Small-Caps. You may also want to invest in good quality companies that have a long growth runway ahead. These companies should be profitable, generate free cash flow, and belong to industries that you understand within your circle of competence.

By applying these criteria, you can significantly narrow down the number of companies to sift through, although there will still be quite a few. You can further refine your list based on what you are looking for and what you want to own.

Knowing your investment style can help narrow down your search even further. Whether you prefer Passive or Active Investing, Growth, Value or Quality, Small-Caps, Mid-Caps, Large-caps, or specific industries, or even what exchange to start on, having a clear Philosophy and strategy is crucial to give your process direction.

While searching the world for investment ideas can be beneficial, I recommend starting on the exchanges in your country of residence. This is not about home bias investing but rather about making a massive haystack more manageable while you learn. Once you become more comfortable, you can expand your search further.

A simple phrase can help to drive the process. Think back to your Mission Statement.

The concept of knowing what you’re searching for applies to both active and passive investing. Globally, there are around 8,754 Exchange Traded Funds (ETFs). To achieve your investment philosophy, your strategy should be quite specific.

To keep myself focused on what I’m looking for, I prefer to put it into a phrase. For instance, if you are an active investor, here is a general idea of what I am talking about:

“I am seeking businesses that possess specific characteristics such as Growth, Undervaluation, Quality, or Income, and that belong to particular industries (X, Y, Z) and a market cap within these ranges. These companies should reflect the qualities I appreciate in a business, which are (list them out), with these types of fundamentals (list them out). I am searching for companies that I can retain for (Time horizon) and I want to own X amount of them.”

Whilst this is a simplified example it provides the investor direction of where to begin. If you simply have no idea of what you want to own or what you’re looking for…you need to go back to developing a Philosophy and form a clearer strategy.