Investors need to manually go beyond screening for ideas and the idea generation funnel. After this first step, they then need to form their “investment hunting grounds,” which are the pool of companies within their “Investable Universe“.

TABLE OF CONTENTS:

What are Investment Hunting Grounds?

Not all publicly listed companies will be suitable for an investor’s strategy and criteria, regardless of the investment style adopted. While plenty of opportunities are available, only those that match the philosophy, strategy, competence, and the areas an investor can accurately and honestly analyse are worth considering.

The hunting grounds may make up about 5% of the investment universe, but further shrinking is necessary. I have found that 5% is a good guide and ballpark to narrow down the hunting grounds to find investable options. This part of the process can be incredibly valuable long-term to investors.

Be focused on process not outcome.

Seth Klarman

Within this group of candidates maybe 1-2% are investable. However, it’s important to keep an eye on the remaining 5% to see how companies are evolving and whether certain criteria are met before becoming investable. The investment hunting grounds are forever evolving as companies enter and exit the pool.

Active investors need to put in a lot of effort into developing their hunting grounds. However, for part-timers or passive investors, this may seem like a daunting task.

Once investors have their hunting grounds, they can use it to turn their initial ideas into a database or watchlist and start conducting further due diligence. They should run these ideas through a checklist of criteria they find most important. The same theory applies here: kill the idea fast if it doesn’t meet the criteria.

Why building your Hunting Grounds is important?

What you DON’T buy is just as important as what you do. Saying no, turning down ideas, and killing ideas fast can help you not to get distracted by sub-par investments. Investing in average companies, tinkering too often, and high portfolio turnover is often the cause of below-average performance (including the many behavioural factors).

Investment hunting grounds transformed the way I invest because it gave the process direction but more importantly myself. It allowed me to narrow down a huge pool of ideas into a much smaller bite-sized group where every day I can sift through. As a full-time private investor, this is crucial. To be able to know where I am looking every day creates a far more efficient process.

The task of the investor is to look under the hood of these companies, and continually “turn over rocks”. I’m always looking at companies that require further analysis and then eventually an Investment Thesis before taking a position. Or it may be these ideas don’t quite pass the checklist, but the story could change so I watchlist them. My hunting grounds allow me to have an ongoing supply of “Inventory” to look at, so I am not twiddling my thumbs waiting.

By focusing on the 5% rather than everyday sifting from 65,000 available ideas I can spend more time doing deeper investigative work. Annually I update the database, add new companies, and remove ones that no longer fit the criteria or were delisted.

Most companies do not turn into anything. Avoiding placing your capital in these mediocre companies is exercising Munger’s “Don’t do anything stupid” rule. The Hunting Grounds will not eliminate bad investments altogether as there is always risk involved, it can however help you remain vigilant on potentially finding the best multi-baggers.  

How to build your Investment Hunting Grounds?

To build one you must first choose your hunting grounds. This will be governed by your Investment Strategy which will define What you invest in. Even if you are a passive investor who only index invests, a hunting ground can still be formed out of the ETFs or managed funds that suit your needs. Out of the thousands available narrowing it down is crucial.

Some highly simplified examples of defining your hunting grounds based on investment styles.

If you are a value investor, then your hunting grounds will be searching for undervalued opportunities. A growth-focused investor means your hunting grounds will be focused on companies in “growth stages”. If you’re an income-focused investor dividend-paying companies form the hunting grounds. If you are focused on mega-cap quality companies, then practically everything else below a certain market cap is gone and the top end of the market forms your hunting ground.

On the opposite side if you are a micro-cap or small-cap investor everything below let’s say $2bil USD forms an aspect of your hunting grounds eliminating everything above it. It is not about one shoe that fits all. To form a hunting ground, you need to know what you’re looking for, which is why we spent a lot of time explaining Investment Philosophy.

Your hunting grounds are formed by first eliminating everything that does not fit your criteria. Then further narrowing down that list, all the way down to what you consider investable.

Once you have generated ideas from however you find them, the real work begins. Manually screening and developing the hunting grounds is just the first stage. The in-depth work begins after this. You narrow down that 5% to say 1%. Then your valuation comes in, investment thesis, position sizing, portfolio management…and hopefully outsized returns.

An example of my own Hunting Grounds process.

Let’s run an example of building an investment hunting ground by including some examples from mine. This is an example and not a full breakdown just to show how they can be formed.

We’re going to focus on the London Stock Exchange (LSE), the Australian Stock Exchange (ASX) and the Singapore Exchange (SGX).

Some initial inputs to form our Hunting Grounds. We are looking for smaller companies under $1b Market-Cap, in growing industries (not outdated or dying sectors) that have zero-low debt levels. We want to have companies that have Gross Margins >40%, Free-Cash-Flow positive, and ROIC >20% in industries we understand.

My simplified process is based on companies that are, Hell No (laughingstocks), No (Not investable), Maybe (Could be), Watching Brief (Investable if criteria are met), and Interested (Investable Universe).

The Hunting Grounds Process:

CRITERIA:	COMPANIES:
Total Companies Listed on the LSE, ASX, SGX:	4,632 Approximately
Remove all Mining Exploration, drill for thrills, all biopharma, FDA, clinical trials and companies with NO earnings. Just CASH BURNERS. Including Capital Intensive sectors.	2,589 (Half of the exchanges) including companies that are consistently raising capital with no real income potential.
Remove all that are above the $1bil USD Market:	1,059 companies remain below the market-cap criteria.
Further remove Zombie shell companies, terrible businesses, poor fundamentals, and terrible financials. Companies that are not within the Circle of Competence.	568 companies remain. This looked at companies that have gone nowhere since listing, penny stocks, bad PR and negative news.
After this stage, it was about fine-tuning based on the fundamentals such as management, and skin in the game. Poor ESG, excessive dilution of shares, industries that don’t have a future.	407 companies fit this bill. This is where the process starts to be very thorough. Roughly at our 5% mark.
INVESTABLE UNIVERSE:	407 Companies
Now I narrow down based on Criteria such as Gross Margins, ROIC, and Free Cash Flow Positive.	252 companies remain. There are some other fundamentals we screen for.
Once we have this narrowed down to between 3-5% we add to our Watching Brief which is a watchlist of companies that have potential but are not quite there.	122 companies left after we removed more, added to watchlists, and killed a few more ideas after checking under the hood a little deeper.
Then the work begins, valuation, checklist, investment research, analysis, and “scuttlebutt”.	87 companies are short-listed.
Companies that may warrant a position if the Thesis / Valuation / Checklist align.	1.85%

Whilst this is a simplified example showing the layers to form the investment hunting grounds, you can see the idea behind how I and many other investors work.

What happens after you form the Hunting Grounds?

I keep all of this in a database offline in Excel and cloud software, connected to my brokerage and screening software. Every day I log in and go to “work”, reading annual reports, and updates, conducting investigative research, and looking at catalysts in ideas that could change the thesis.

Sure, I may miss huge spikes in mining, pharma, and other industries, but I am ok with this. I stick to what I know, and what I am looking for according to my strategy. My hunting grounds usually sit at a couple of hundred companies.

It is not static; companies enter your stratosphere and leave it all the time. Companies may have a change in fundamentals that become attractive, or not. A business may “cross the chasm” become profitable and scale aggressively. Growth companies I am watching may dip and become undervalued presenting great buying opportunities.

All though there may be a couple hundred companies left, that can still be daunting. However, I am only adding a couple of positions of the best ideas to the portfolio every year. A lot of the time I am watching, reading, studying, and watching for the metrics and factors to change in companies I am interested in.

I still get ideas from a variety of resources; however, any long-term investor will tell you, that investing is a game of patience and there are long bouts of inactivity. Finding companies that can compound your capital and create enormous wealth doesn’t surface often. While you wait refining your hunting grounds is good practice.

The Hunting Grounds is an ecosystem of significant importance to help me stay the course long-term and to find long-term compounders.

In Summary…

Choosing your hunting grounds will evolve and change as you do. Perhaps you shift from growth to more quality conservative investing. The fundamentals of building a hunting ground stay the same, what changes are the inputs, the qualities you are after, the criteria that define what you want.

Now, this also does not mean you have your head in the sand like an Ostrich. Just because you have well-defined hunting grounds does not mean you are not open to opportunities from all areas. The hunting grounds give you focus day to day but sometimes a company may pique your interest and warrant further research. Just because it is “outside” of your hunting grounds means nothing.

All investors have different strategies. If you are trading, you need a hunting ground of momentum and tradable companies. If you are a buy-and-hold investor, then you have a hunting ground for the best companies to hold. The hunting ground process can suit all styles of investing.

It could be classified by countries, by market cap, by quantitative or qualitative characteristics, or by industries you know well. Whatever it is you are looking for define it and build your hunting grounds around it.

Once an investor has formed their hunting grounds based on their strategy and criteria then they become a lot more focused on the best opportunities to help them fulfil their investment goals. The concept behind creating this database of your investable universe is to help you block out the 99% of the noise around markets as well as the 95% of the companies that may not warrant your capital.