We have previously discussed various ways to generate investment ideas, including filtering and screening for stocks and developing hunting grounds. To sum up these areas, the phrase that best captures the core ideology behind the relentless search for investable ideas is “Turning over Rocks”. This phrase, coined by legendary investor Peter Lynch, is something I have implemented not just in investing but also in my entrepreneurial life.

Whether I was scaling companies, building my network, or clientele, the same philosophy applied. I never heard the “Turning over rocks” phrase when I first started, but I lived by the expression “put more lines in the water”. More lines meant more chances to catch fish. The more companies you look at, the more chances you have of finding investable ideas.

The person that turns over the most rocks wins the game. And that’s always been my philosophy.

Peter Lynch

When I was making cold calls and hunting for opportunities to pitch to clients, I used to work on how many people told me NO. If I had only one person tell me NO that week, it wasn’t enough. The more NOs I got, the more I was making connections and trying to find opportunities. Eventually, in between all those NOs, there was a Yes, and I was off.

I grew my first company in my early 20s into a million-dollar business. When people asked me how I did it, apart from affordability and service, I simply knew I made more calls, visits, and introductions than my competition.

The investment process is the same. Looking between the rocks to kill ideas and say no fast so you can find the one to say yes to.

Why is Turning Over Rocks great practice?

Leave no stone unturned. It is about the exhaustive search for the best ideas. Always exploring, being aware of what is going around you, and being curious about brands and companies. Being sceptical about bubbles, but still exploring them. Reading statements, countering your own biases, and remaining open to the countless opportunities that exist.

The more you practice the better you get. Looking at a company’s day in and day out, checking under the hood, looking for trends, and anomalies, increases your chances of finding excellent companies. You become better over time; investing is a skill that needs practice to fine-tune how you analyse companies. Like any skill, it is the ongoing practice of your art that makes you better over time.

You have to turn over a lot of rocks to find those anomalies. You have to find the companies that are way off the map – way off the map.

Warren Buffett

Turning over rocks is the best way to do that. You get an idea of how industries work, and how different size companies work. Allowing you to connect dots and start to thread together patterns. You become faster at saying no to ideas based on logic and sound fundamental decision-making. This allows you to say YES more confidently to companies that fit within your criteria and meet your strategy.

Turning over rocks is not easy. It requires hard work, discipline, patience, systems, and commitment. Reading financial statements and annual reports, conducting in-depth analysis, valuation, and thesis on ideas. The systematic process improves over time.

Why is a system important to turn over rocks?

You must turn over a lot of rocks, and you also need to have a system to consolidate all this information during the process. Turning over rocks is extensive work; you may look at hundreds of companies over the years.

Some are not investable, some are on the verge of investable, and others need certain milestones to become investable. The point is when you’re turning over rocks it needs to be systematic and archived. You can look back at all ideas and companies and be able to draw on what you found under each rock.

Turn over a lot of rocks to find the “easy” investments.

Joel Greenblatt

Ideas may come full circle. The more rocks you turn the more opportunities you scan. The idea generation and watchlist are forever evolving as we have discussed. When you identify companies that meet some but not all your criteria you want to ensure that you can check back in on this business.

Companies may be overvalued; perhaps further growth and metrics need to be met. Sometimes good companies especially in the smaller end of the market need years of consistent earnings and “hitting goals” to become investable. Turning over rocks and keeping it all in your head means missed opportunities. Sure, if you are looking at a handful of companies a year, but to find and construct a portfolio of the best requires a lot of rocks to be turned.

It is not how well-designed the system is and does not need to be flashy and pretty. It needs to in the simplest way reflect what you are looking at, why you’re saying no to these companies, what would make you change your mind and then consolidate this into a watchlist.

In Summary…

When investors say they cannot find ideas or anything investment-worthy, it is often because they have only looked at a couple of ideas. If you look at 10 ideas a year the chances to find something investable isn’t great. If you look at 100 or 200 ideas a year you will find maybe 10 or 20. The more you scan the investable universe the more chances you have.

No matter what investment style you adopt, most strategies require continuous searching. This is where the investment system comes into effect.

Turning over rocks should be adopted by all investors no matter what you are looking for. It is a way of “Investing Life” to always be on the lookout. Don’t discard any idea no matter who or where it comes from. Always be open, and verify, but be open to ideas. You do not want to approach the investing universe with a narrow lens. The purpose of having a process and a way to filter and run checklists is to consolidate the wide lens into a narrow list of investable ideas.

The person who turns over the most rocks generally finds the best gems. It is a reminder that to become a great investor and find those multi-baggers requires hard work and the relentless continuity of the investment process.

Turning over rocks is a great expression for investors. Keep evolving and adopt the lifelong learning discipline. Keep looking under the hood of companies, checking what is going on, and monitoring for improvements. By implementing this exercise you may increase your chances of finding companies that can generate Alpha.