Investors need to focus first on generating investment ideas at the start of their Investment Process. A reliable and consistent source of ideas can save a lot of time in their search for opportunities. It’s important for investors to build a system that allows them to evaluate investment ideas that meet their specific criteria and needs. There are various ways for investors to discover and generate these investment ideas, which I have compiled in this guide.

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The importance of generating investment ideas.

One of the most common questions I receive is how to generate investment ideas. It’s an excellent question because it’s crucial to the investment process. With over 60,000 publically listed equities, how can investors identify, evaluate, and quantify opportunities for further research?

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

Seth Klarman

Once investors have developed a sound investment strategy based on their investment philosophy, they need to put it into action. In this article, I will primarily focus on how private investors can generate an abundance of quality ideas regardless of their investment style. Each idea can be customized to suit your specific needs and style, such as growth, value, quality, small-caps, or mega-caps.

Once investors have established an idea generation system, they can then expand their hunting grounds to identify even more opportunities for further research. The first step in generating investment ideas is to build a list of potential candidates. During this stage, it’s not about going through a rigorous checklist, developing investment thesis, or conducting due diligence. Instead, it’s about quickly eliminating unsuitable ideas and only adding those that warrant further investigation to your list.

A sound “Idea Generation” system from trusted and vetted sources is equally powerful as an in-person network. Everyone has a different way of generating ideas. I use a combination of the following methods, some more than others, especially when investing in geographies or industries that I’m not as experienced in.

Kill the idea fast.

Say no fast! That is my number one rule, the one that guides all else. Eliminating maybes, sub-par ideas, companies with poor fundamentals, anything that does not meet my criteria. If something does meet my criteria, I still run it through my “Kill the idea” fast pre-check checklist. The most successful investors don’t bite at every opportunity. By staying hyper-focused and not wasting time researching ideas that you were better off not even looking at, you can stay vigilant and disciplined, finding the best candidates to further research.

Invert all ideas, ask “Why wouldn’t this be a great investment?” Don’t think you’re missing out. Eliminate first-order thinking and think beyond. I have found that by saying no to 90% of what I see fast, I am very focused on finding those companies with the best attributes that fulfill my criteria, the multibaggers, the crème of the crop.

Does the idea fit within my Circle of competence? Do I know the industry? Is the company in the market cap segment I want? Does this business have a future? Do I understand how it makes money? Is there excessive dilution? Is there too much debt? Are there signs of shareholder alignment? Lack of consistent earnings? It takes me less than an hour to look at the history on TIKR and eliminate companies that immediately raise too many red flags.

Go through the entire stock exchange A-Z.

This strategy is often looked down upon, as it requires a lot of effort and time. The first step is to download the exchange database of the country you are interested in investing in. Once you have the database, go through each company listed in it.

This may take a while, but it can be an incredibly valuable resource. By filtering out and eliminating a lot of companies, you can narrow down your list to a few hundred for further due diligence. I believe this process is the best place to start because it makes you familiar with all the companies, and you can glance at them, read about them, and make notes.

Doing so saves time in the future when you can come back to these ideas and see why they didn’t make the cut. Additionally, this process gives you an incredible insight into the stock market. You can look at all the industries, learn about the benchmarks, and see which companies are moving and which are not. I have found that the database I have created through this process requires ongoing updates, but it allows me to stay clear of the 90% of companies on the exchange, narrowing down my focus dramatically.

Company Screens and filtering.

Screening and filtering is a great way to generate investment ideas based on specific criteria. Platforms like Bloomberg or Tikr can help by allowing you to screen for fundamentals, qualities, or ratios you are seeking. This approach is also known as a bottoms-up investment approach. By focusing on analysing individual companies and researching their underlying business fundamentals, you can screen by market caps, countries, industries, and financial metrics. For instance, you may want to use a valuation style approach to find companies with low Price-to-earnings ratios or those with certain gross margins.

Screening and filtering can help you immediately filter out companies based on your criteria. For example, if you want to invest in the ASX and are looking for companies with a market cap of under $1 billion in a particular industry with a Return-on-Capital of more than 15%, and positive Free Cash Flow, you can use a filter to generate a list of companies that fulfill these criteria.

Although not always accurate, screening and filtering can present you with a list of candidates to investigate further.

Follow other fund-managers and Guru Investors.

Following fund managers and other “Guru Investors” is a very common and effective idea-generation strategy. If you have a similar investment philosophy and criteria to certain investors, you can sign up to receive their investment letters and fund updates and watch what they are investing in, talking about and how they find and evaluate ideas. You can learn what they own or are selling by checking their 13F filings.

This is a very good source of information and something that I personally do. I align with several fund managers and how they invest, and I learn a lot from their letters and fund updates. I gain insights into how they see the part of the market I am interested in. The way they value, interpret and analyse companies is very valuable to me and helps me understand things I may have missed.

Find alternative competitors from around the world.

If you are interested in a certain company or industry look beyond home soil. See if the company has any competitors globally, perhaps there are better candidates. Sometimes these companies are in a far greater position to grow with a much bigger addressable market. I have found when comparing a business that it may be the best in the country or state, but it is nowhere near the best in the world. I’m looking to own the best. I understand there is a bias towards investing in companies domiciled on the exchange where you live. However, sometimes investors need to combat this bias to go after the gold. You want the best in class, don’t be afraid to look abroad.

Follow the Value Chain and Supply Chain.

The supply chain and value chain are two useful approaches to identify potential investments. By following them, I have discovered some of my best investment ideas. Sometimes, a company that appears at the top of an industry and makes reasonable returns might not be the most profitable. If you look further down the value chain, you might find a company that supplies these top-end companies but is making all the profit. These companies are often overlooked by investors who only focus on the bigger names. However, such highly profitable, strong MOAT companies listed on foreign exchanges can be far greater compounders.

When you analyse an industry, always try to identify who is making the money. For instance, during the construction boom in South Asia, it wasn’t the multi-billion-dollar development companies or property conglomerates that were the most profitable. Instead, it was the small yet highly profitable paint suppliers, framework or cement companies that made the most profit.

Hence, there are winners and losers within industries, and you need to find where the profit lies.

Life experiences and day to day observation.

I enjoy finding investment ideas by observing products and experiences around us. My wife and I are always on the lookout for new ideas. Whenever we have a great experience with a product or service, we ask if it is publicly listed.

This approach has helped us discover many great investment ideas. We travel extensively around the world and are exposed to a lot of cultures, experiences, and products. This way of life follows the approach of Peter Lynch, which is still underutilized. Although I am not in favour of investing based on liking a product or a brand, with no idea of the underlying business. The company should still meet certain criteria and be investable. Investors cannot determine if a company is overvalued or has a bright future if they invest based on emotions.

Recently, I was travelling to Kuala Lumpur, Malaysia, one of the three trifactor cities where we live. We found a hospitality company that was very popular and had several amazing properties that were efficiently managed. Upon some investigation, we discovered that the company was a small-cap listed company on the Singapore Stock Exchange.

The company had a lot of value on the balance sheet and owned major properties in key cities that were depreciated down to nothing from having owned them for many years. By asking questions, observing, and thinking “Is it public?” we were able to find great investment ideas. You can also follow trending products, and monitor media and social media to see what is gaining popularity. Although trends rarely last, sometimes the ones that do can be discovered early and invested in.

Monitoring insider buying.

Monitoring insider buying is not a commonly used approach unless you already have a specific area or segment of the market you are focusing on. There are platforms available that can help track insider buying. As a part of the investment process, when looking at companies in a screener, I do look at insider activity. While selling is not a major concern, it warrants a flag for further research. I am interested in insiders who are buying large parcels on the open market, not through options or bonuses being executed.

When an insider, director, CEO, or chairman buys stocks at current market prices, it is a good sign. However, it needs to be a reasonable amount. For instance, if an insider buys $5,000 worth of shares on a $1 million+ salary, it could be a sign of keeping shareholders happy as it hardly hurts them. I want to see insiders reaching deep for me to be curious about what they see that we could research further.

Social Media, Forums, chat rooms and trusted blogs.

Social media, chat rooms, investment forums, and trusted blogs are great ways to generate investment ideas. With a caveat…ensure it isn’t noisy or information overload. Ensure you are following and active with groups to generate ideas and practical involvement otherwise, it can be a waste of time and distracting. I’m not on social media; I don’t use it so I cannot vouch for following people on Twitter but there are some great investors in between the millions of noisy ones.

I am a part of some private forums and chat rooms with other like-minded investors and I find this valuable in both generating and sharing investment ideas. Sharing is a great way to instantly gain feedback on areas you may have missed. Following trusted blogs is also helpful if it I trusted and vetted.

I remember years ago when I was first starting, I joined a telegram group for small-cap global investors. 100% of the group out of the 1,000 + messages were absolute rubbish. They were day traders, pump and dumpers, and all sorts of junk. This can be harmful. Block it out and ensure it is a “TRUSTED AND VETTED” source of information. Don’t jump in, always conduct your Due Diligence. No one has your financial future at the forefront of their to-do list. “Trust but Verify”.

Financial Media, news, investment platforms.

If you tailor, the types of news down to important and well-known financial media companies this can be helpful. Stick to the good quality news even if you must pay. Subscribe to the ones you align with, not everything. You don’t need daily market updates about forex concerns in countries you’re not even vested in. Stay focused on what the information is, and what ideas you can gather and always ask if it is helpful.

I tend to give things a trial and if I gain no ideas or helpful information in a month I unsubscribe. Currently, I do not gain much from this and am not subscribed to anything such as Bloomberg or WSJ. What I am hunting for is not going to be discussed in the news or media. I have found blogs much like what I am trying to build here in the future around equity research to be the best source of independent, non-biased information.

In the countries I invest in, I am always a part of at least 1 or 2 local investors’ blogs who write about ideas on their country exchange. This is valuable to me.

Word of mouth from your trusted Investor Network.

The trusted Investor Network that we have discussed is an important source of generating ideas. Discussing ideas with your network can help you find out what people are looking at, valuing, selling, and buying, which can lead to the discovery of great ideas. Although I follow and discuss ideas with investors who are far more experienced than me, I still verify everything and run it through my pre-checklist to weed out the bad ones. There is no substitute for independent thinking when it comes to investing.

Word-of-mouth investing isn’t just about someone at a BBQ saying they’re buying shares in a nano pharmaceutical firm when they’re a real estate agent. If you’re engaging in investor meetups or discussing ideas with friends, family, or anyone in your network, ask them what they’re looking at and why. If I am talking to management, “scuttlebutt”, or talking to suppliers and competitors I always ask for ideas also.

Top Down approach to finding investment ideas.

The top-down approach is a common method for finding investment ideas based on industry-specific factors such as emerging trends, thematic themes, and future innovation. For instance, if you believe that electric vehicles will become popular, you can conduct research and find companies that are going to cater to this demand.

Alternatively, you may identify a thematic theme that you believe in, such as an aging population needing more aged care. You can search for companies that fill this gap in the market.

However, following trends can be risky, and it is essential to filter out bubbles such as cannabis and focus on those with long-term potential, like AI, EVs, cybersecurity, and e-commerce. To generate investment ideas, you can outline these themes, trends, and hot topics and then filter the best public companies in that area. To go further, follow the supply and value chain down the line.

In the case of electric vehicles, not only the manufacturers will benefit from this emerging industry. Other players such as semiconductors, battery manufacturers, and raw material suppliers like lithium will also benefit. This approach is an excellent way for growth investors to identify where the world is going, which industries will serve that need, and then try to find potential dominant companies.

In Summary…

The process of generating investment ideas is like having a team of your own that is dedicated to hunting for ideas. It’s best to have multiple fishing lines in the water to increase your chances of catching a fish. I have several lines out there and I receive fresh ideas every week, even some that I’ve previously passed up but are now worth investing in.

When you come across an idea that you want to research further, use sound fundamentals and logic to either quickly reject the idea or verify that it meets your criteria. Don’t let your judgement be swayed by biases towards ideas due to their source. Many investors blindly follow others, but if an investment idea doesn’t align with your process and criteria, eliminate it. Look into it, but ensure it aligns with your strategy.

It’s not about having hundreds of sources all bringing ideas weekly. That would be overwhelming to distil it all. What’s important is the quality of the ideas that meet your initial criteria and align with your philosophy. What I mean by this is I rarely invest in mining, especially exploration companies. Therefore, I have no sources that form a part of my system where these ideas come to me. Rather than sift through ideas I just eliminate it. Most of my sources are around global micro-cap and small-cap companies. That immediately brings to me the qualities and companies that I am looking for.

The most important part of the Investment process is knowing where to look for these opportunities. By developing an Investment System that can bring these ideas to you, you will be able to continue developing a pipeline of potential candidates that sit on your watchlist.