Turning Over the Most Rocks

Mike Schellinger Blog, Educational 6 Comments

I’m a big fan of Peter Lynch. One of my favorite Peter Lynch quotes is:

“The person that turns over the most rocks wins the game.”

– Peter Lynch

When I first started investing full-time I set a quota for myself for looking at new companies. I did this because I wanted to ensure that I found some new ideas rather than just watch stocks trade all day. My quota was five new companies per week. Most weeks early on I hit that quota. I would take electronic notes on each company in a template that I created. I don’t have that quota any more because I have a personal database of research on over 700 companies which makes it difficult to look at that many new companies per week. However, I still look at large number of new companies as well as frequently look at the companies that I already know.

Investigating many new ideas has a number of benefits including the following:

  1. Peter Lynch indicated that the more companies you look at, the more good ideas you find. The full quote by Peter Lynch which indicated this was: “So I think it was just looking at different companies and I always thought if you looked at ten companies, you’d find one that’s interesting, if you’d look at 20, you’d find two, or if you look at hundred you’ll find ten. The person that turns over the most rocks wins the game.” I’ve also found this to be true in my personal investing.
  2. The more you look at companies, the better you become at analyzing companies. To become a good investor requires practice. It is a topic that Chip Maloney discusses in the article Investing Mastery Through Deliberate Practice. I think that researching new companies is one of the best forms of practice for investors.
  3. Looking at more companies helps you find trends that may be helpful in finding ideas. Perhaps you are looking at several companies in the same industry and are seeing a positive trend that is happening in a few but there are some that haven’t reported it yet. It might provide you with an opportunity to buy the stock of the companies that haven’t reported the trend knowing full well that it is benefiting them too.

While looking at more companies will generate more good ideas, results likely will not be immediate. I often find that an idea that I investigate is typically not purchased for months if not years after initially investigating the company. Sometimes it takes a while to see that a thesis makes sense or for the company’s plans to obtain traction. I find that many times I need to see a couple of quarters of consistent results before I know a trend is in place. Sometimes it is just a matter of knowing a company so that when good news strikes I am poised to purchase it.

The latest stock that I purchased is for a company that I have been following for over seven years. I’ve owned the stock a few times during that time period but now own it in a bigger way than I ever did. They recently reported some good news and I knew the company well enough to react quickly.

I have also found that if I stop looking at new ideas, eventually the performance of my portfolio suffers. It may take six months or a year for that to happen but it does eventually happen. If you want to outperform the general markets, usually you will need new ideas as it is extremely difficult to have a static portfolio of stocks that significantly outperform the general market over the long term. I believe this is especially true in microcaps as small companies often outperform for only a short period of time before they run into some challenges.

You may be thinking that this is a lot of work that I can’t do myself. It is true that investing requires a certain amount of dedication to obtain good results. One thing that I have found is that having a network of other investors to tap greatly increases the number of rocks that I can turn over. Someone in my network can explain their thesis on a company they like and I can look it over quickly by piggybacking on the research they have already done.

You might find other investors through your network of friends but often the best place to find other investors is through online resources like MicroCapClub. I have greatly benefited from harnessing the brains of 150+ investors on MicroCapClub. It allows me to turn over many more rocks by just looking at the ideas they post.

I believe that you should always be looking for new ideas. However, some times are better for searching for ideas than others. In general, the best times to be looking are when nobody else is looking. It is counter intuitive like many things in the stock market. A tweet of mine on the topic is:

One of my best finds was found in May of 2009 shortly after the bottom of the financial crisis. I found a company that had just reported awesome earnings. The earnings that they had reported for Q1’09, when annualized, gave them a PE of just one and they were guiding for improved earnings the following quarter! I purchased every share I could get at or near those low prices. The stock ended out being as much as a 15 bagger in under five months. Another time I purchased stock in a rapidly growing company during the debt-ceiling crisis of 2011. Again it was a situation when great earnings came out and nobody else was looking. A little over three years later I sold a portion of that purchase for a 100 bagger!

While I believe that looking over a lot of ideas is a way to obtain better results as an investor, that doesn’t mean that you should purchase more companies as a result. My philosophy is: You should always be hunting for new ideas but that doesn’t mean you should always be pulling the trigger. Think sharpshooter.

Essentially you should Wait For Your Pitch while you go to bat as many times as possible (look at many ideas).

Turning over a lot of rocks is important but that should never come at the expense of doing homework on your existing positions. It is very important to keep up-to-date on what you own. If you start to look at more ideas don’t neglect the ideas you own.

After Peter Lynch said, “The person that turns over the most rocks wins the game”, he said, “And that’s always been my philosophy.” I’ve made turning over many rocks my philosophy too and hope that I’ve motivated you to try and make it your philosophy.

MicroCapClub is an exclusive forum for experienced microcap investors focused on microcap companies (sub $300m market cap) trading on United States, Canadian, UK, and Australian markets. MicroCapClub was created to be a platform for experienced microcap investors to share and discuss stock ideas. Investors can join our community by applying to become a member or subscribing to gain instant view only access. MicroCapClub’s mission is to foster the highest quality microcap investor Community, produce Educational content for investors, and promote better Leadership in the microcap arena. If you enjoy the search for the next great company, Join Us.



About the MicroCap Expert Author

Mike Schellinger

Mike (aka MikeDDKing) has almost two decades of investing experience primarily in micro caps. He became a full-time private investor and trader in 2006 after his investing hobby became more profitable than his corporate job managing the development of software for cellular telephones. His specialty is in finding rapidly growing, profitable micro caps that are extremely undervalued and unknown. He spends most of his day turning over every rock he can find to locate those hidden gems.

Comments 6

  1. Mike, I’ve thought a lot about this question — whether to devote my time to knowing a lot about a few companies or a little about a lot of companies — and come to different conclusions at different times. Turning over rocks is one way of looking at it. Another: when trying to find water, one thirty foot hole is likely to get better results than 30 one foot holes.

    I recently changed my time allocation from screening all US companies –about 10,000 over $5 million market cap — every two weeks to screening every quarter to identify the 200 that look at least somewhat interesting, and then study the 60 most attractive on the surface — the most I can know in any kind of depth. I then spend the next quarter reading analyst reports, SEC filings, management conference call transcripts, study charts on those 60 for three months, until the next 10Qs or 10ks come out.

    Knowing a little about a lot of companies, an investor can get a pretty could handle on relative value — what, for instance thirty different companies with annual growth of 10%, no debt and an average return on capital of say 20% trade at in relation to TTM earnings and free cash flow. Knowing a lot about a few companies, you can know why for instance return on capital has gone up 25% over the last two years — expansion into new markets maybe, or pruning mediocre products or new management.

    Or think you know. From there the subject quickly gets into whether or not the impact of personal bias and judgment rather than strictly facts — a personal relationship with management versus a thorough understanding of the margins, capital turnover and relative value for instance — is positive or negative in investing. I’ve encountered investors who think because they are friendly with management the numbers don’t matter. I’ve become buddy buddy with CEOs a couple of times myself and gotten my head handed to me. I don’t put any time into that now.

    Anyway, in everything in business, time allocation is central to success or failure. I know you said you have 700 in your database, but how many do you follow closely? Or have you developed your system so that you can actually follow 700 each quarter with enough depth to know why each is doing better or worse than say a year or two ago? Do you follow time allocation principles — half your time knowing a little about a lot and half knowing a lot about a little, or 75/25?

  2. Post
    Author

    Thanks Rod for the question.

    Let me take the last part of your comment first. On my 700+ companies I look at the press releases and filings for these companies but only maintain my research on a small portion of them that I think averages less than 10% of them. Which ones I maintain is different every quarter. I look at them beyond the press releases/SEC filings when I find a reason to evaluate them. Some may get updated every quarter and others it may be years between updates. However, I find the notes that I take to be very beneficial because it significantly reduces the research time when I look at a company again. While it is tricky to quantify, I would guess I spend on average 30-60 minutes per day to maintain my watch over the 700+ companies.

    The question you ask about depth vs. breadth of research is kind of like the age old question of sharpening the saw vs. sawing and balance is the key to it all. I hit on the topic in my article:

    https://microcapclub.com/2017/03/trusting-management-limitations-research/

    One of the major points of the above article is that there are limits to how much research is helpful.

    I look at research priorities as follows (highest priority first):

    1. Research current position
    2. Investigate news/filings on companies I don’t own but have researched previously. These are companies I found interesting before for one reason or another.
    3. Research totally new companies.

    My thinking is that one should do enough research on existing positions until you have hit the point of diminishing returns. Of course, defining that point is easier said than done. After I have fulfilled the requirements on the companies I own, I work my way through priority #2 and #3.

    It sounds to me like what you wrote is similar to my strategy.

  3. Thanks Mike.

    One of the things you do that I haven’t at least to any major extent, but will start now, is taking extensive notes on my thoughts and conclusions on each individual company I research. It is like compound interest, but research rather than financial. That must be a major advantage over time.

    I always find your articles interesting. From time to time I refer back to your article on maintaining a substantial cash reserve in all but very weak markets. I notice Buffett does something similar, although he combines it with leverage (debt, unearned insurance company premiums) which is also interesting.

    The opposite approach — feeling that you must be always 100% invested to maximize returns — an approach I have fallen victim to in the past — can lead to investments in mediocre companies and ultimately to mediocre (or worse) returns. The psychological posture that a situation has to be truly exceptional to be better than cash is much more effective, in my experience.

  4. Hi Mike,
    Couple of questions…when you come up with the list of new companies how much time do you spend on each? Do you use quick checklist to decide whether to dig deeper in a particular company or not? And when you decide to dig deeper then on an average how many hours do you typically spend analyzing that shortlisted company?

  5. Good one Mike. I have also noticed the same in my experience “it is extremely difficult to have a static portfolio of stocks that significantly outperform the general market over the long term”. Thanks for the underlined warning as well 🙂 “You should always be hunting for new ideas but that doesn’t mean you should always be pulling the trigger. “.

    Rod also has an imp warning about meeting/knowing the management in person, I’m personally going through it right now i.e. “gotten my head handed to me”. So no more of that going forward 🙂

    Yep, it is much easier to connect and meet other value investors these days. I like Pro Bakshi’s role where he keeps teaching new students every year and expanding the network 🙂

    A Gem of a Post..thank you!!

  6. Post
    Author

    Giri,

    A new company that I add to my list of 700+ companies is usually analyzed for at least an hour and maybe several hours. Before I buy a stock I generally am going to have at least 3 hours invested in it and most times much more. It depends upon the circumstances and also how much I’m going to invest.

    As to what I want in a company, I suggest you read the four-part article series entitled “My Secret Recipe” starting with the first article.

    https://microcapclub.com/2012/10/my-secret-recipe-the-index-card/

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