Finding Ideas Before Others

When Robert Ballard found the Titanic in 1985, he was officially on a classified military project to find the wrecks of two sunken nuclear submarines, the USS Thresher, and the USS Scorpion. 

Ballard had long been fascinated by the Titanic and its mysterious fate since it sank in the North Atlantic Ocean in 1912. He even led an expedition in 1977 to find the ship but came up empty handed. 

Apart from his interest in the ship, Ballard was also heavily involved in underwater robotics and deep-sea exploration technology. The military agreed to fund one of his projects. Ballard designed the Argo, a 16-foot (5-metre) submersible sled that could be towed by the ship at depths of 20,000 feet. The sled was equipped with a remote-controlled camera that could transmit live images back to the ship. 

Ballard made an agreement with the Navy that if he successfully completed his primary mission early of locating the two submarines, he could use the remaining time and resources to search for the Titanic. After completing the submarine surveys, Ballard had 12-days to find the Titanic. It took 8-days. 

On September 1, 1985, after a week of searching the seafloor, the team’s persistence paid off. The Argo camera captured the first images of the Titanic’s boiler, a key piece of debris from the wreck, lying on the ocean floor about 12,500 feet (3,800 meters) below the surface. At these depths the water is 1–2 °C (34–36 °F) with low light, and low oxygen. The water acts as a time capsule. This initial finding was quickly followed by more discoveries, including large sections of the ship and a vast debris field.

We can picture Ballard and the crew on the ship in celebration watching the live video feed. First the boiler. A few minutes later they see China plates and cutlery. A few minutes later a child’s leather shoe. In that moment the excitement starts to fade. 

Ballard described the emotional impact of the find: "When I first saw the Titanic through the porthole, the impact was overwhelming. It took my breath away. Then, in the next moment, I realized that what I was seeing was also a grave site. It was a very sobering moment."

Just a few years earlier Texas oilman Jack Grimm backstopped the expense of three expeditions to find the Titanic with no success. Later it was found the sonar used in his 1980 expedition passed right over the Titanic but didn’t detect it. He was so close. 

When we are kids, we are amazed by everything, and as we age, we are amazed by nothing. Today we read this story and think, “What took so long?”.  We forget that only 5% of the world's oceans have been explored and how difficult it is to find something 2 miles underwater in the pitch black. 

It took 72 years of studying, searching, talking to past search parties, the invention of new technologies, to find the Titanic. It also took the funding of another exhibition to lead to the discovery of the Titanic. The search for one thing led to finding another.  

I often think about this story and the parallels with stock picking. 

After 23 years in the game, it's still exhilarating stumbling upon a new opportunity that makes you stop everything you are doing - those "clear the calendar" moments that happen a couple times per year. The thrill of discovery. There is no greater high in the world.

A talent is a gift or strength you were born with. A skill is a strength that can be developed. Identifying aka "finding ideas before others" is one of the six core skills of a stock picker.  

The common element in every great stock picker is relentless curiosity and persistence. A stock picker must use all the tools at your disposal to find actionable ideas before others. In the end sometimes it’s serendipity or luck or fate that led you to find something great, but even then it’s the result of a consistently applied search plan. 

How do you find actionable stock ideas? 

60,000 public companies worldwide and about half are microcaps. 

20,000 public companies in North America and half are microcaps. 

Microcaps are small companies with little to no analyst coverage. They aren’t being spoon fed and sold to you by Wall Street (US), Bay Street (Canada), Dalal Street (India) financial machines. You must leave the comfort of the crowd and go find them. 

Where do you start? It can be overwhelming unless you know what you are looking for. 

What flavor of investor are you? Are you a deep value investor, GARP, inflection, special situation, hypergrowth, momentum, short-term, macro, technical analysis, a combination of a bunch of things? 

Depending on what type of investor you are and what exactly you are looking for will determine how you find them.  

For me – I find ideas like a spider builds a web. The spider can’t catch a fly by singling out one fly. It makes a web and waits. It’s the same for finding ideas. You must build out your web through brute force, screening, researching, networking, and relationships. You must be diligent in maintaining your web and keeping it free of debris so you can feel the tremor. It might be once every two years or ten times per year but eventually something will hit your web and you will feel it. Then you go see what you caught.  

I’ve found there are three main ways you find ideas and two-ways ideas find you. 

Here are the ways you find ideas:

Brute Force: the only way you know you aren’t missing something is to look at everything 

Your advantage can be the fact that you are willing to sift through a mountain of sand to find a small diamond. Your willingness to look at hundreds of un-investable ideas to find one. This will put you in the top 5% in finding ideas. Many say they do it, but most don’t. 

Michael Liu and I did this last year on the London AIM exchange, literally going through the list of 1,100 stocks A to Z. You can't just do it once. You need to do it every year. We also try to do this once per year on the OTC markets here in the United States. It takes a lot of work but the more you do it the better you get at deselection. If you know what you are looking for, it only takes a few seconds per company. You might be left with 20 out of 1,100 that are worthy of additional time.  

How many times have you looked at a stock that went up 100-500-1000% and went back to see when the first clues were visible that it was something special? The clues are usually found in a press release (headline or commentary), transcript, hidden in a filing, or insider transaction. 

An additional brute force approach is to look at every press release, transcript, filing and/or insider transaction of every company under a certain market cap. Every great opportunity leaves these clues or crumb pieces. Perhaps it’s a PR headline “record results” or “accretive acquisition” or “record backlog” or any number of things that alert us to a transformation.  

Screens: Narrowing down the investment universe based on what you value

Screening is a tradeoff between being specific and being comprehensive. Specific screens are screening for 4-5-6 fundamental criteria. For example, I want to screen all stocks on US/Canadian exchanges, sub $100 million market cap, TTM revenues >$10 million, Growing >20%, Insider ownership >20%, and ROE > 20%. 

Initial Universe 23,698 stocks, output after this screen = 3 stocks

Is this useful? Not really. Every other microcap investor is doing this exact same screen. I also don’t find screening for qualitative attributes like ROE to be helpful. Often times with specific screens you’re screening for the perfect company but remember, often times an opportunity is an opportunity because the business isn’t perfect yet.

I’m more interested in comprehensive screens and event driven screens. 

Comprehensive screens would be screening by market cap (sub $100 million) and TTM Net Income > 0. 

Initial Universe 23,698 stocks, output after this screen = 1,294 stocks

Is this useful? Yes, you aren’t screening for perfection. It’s going to give you a lot more companies to sift through, but you will potentially find some interesting situations that others would have screened out. 

Examples of event driven screens would be screening for rights offerings, management changes, or insider buys over $100,000. In this screen you are looking for substantial skin in the game and transformations.  

Researching: company and industry research leads to finding ideas

Robert Ballard discovered the Titanic because he was searching for something else. When you consistently “do the work” great things happen in life, business, and stocks. The seeds you plant today analyzing companies and industries is what bears fruit today, tomorrow, and in the years and decades ahead. Your ongoing initial diligence and maintenance due diligence in one company can compound into discovering other things that are even better. Don’t stop.

Here are the ways ideas find you:

Networking: proactively engaging with others

Microcap investors, at least the good ones, are very independent thinkers. I’ve found this independent mindset skews a stock picker’s views on networking one of two ways. The first way is to isolate themselves. Perhaps in their parents basement (I’m joking..well ..not really). They don’t communicate with others. They believe they can't find new ideas if they get ideas from others. This is a huge tactical error. 

Most of the best stock pickers I know share ideas frequently and reciprocate with investors they trust. We all invest differently. Someone might mention a stock, and they don’t even realize what they have. Someone might mention a stock, but they are too distracted to dig into it. Someone might mention a stock, but it isn’t in their circle of competence, but it might be in yours. The benefits of networking far outweigh the cons. 

When I was getting started in the early 2000’s, most microcap discussion and networking occurred on public forums/message boards like RagingBull, SiliconInvestor, Yahoo Finance, and Investorshub. Since most microcap companies are largely owned by retail investors this is where these investors congregated. This is where investors built their reputation for finding and analyzing ideas. This is where I built my reputation. Over time many of these public forums died off and the conversations shifted to private forums like MicroCapClub or blogs, reddit, X, Substacks and other places.    

You supercharge the power of serendipity by sharing your ideas. Start a blog, get on a podcast, post your ideas to MicroCapClub. Do them all. Put yourself in situations to show off your potential. Reciprocate and show value to other people. Build your network. As you build out your network you start to form relationships and those relationships will become your biggest asset as a stock picker. 

Relationships: the greatest asset of a stock picker 

Build relationships with other stock pickers you trust. I mentioned this in a previous article. As you mature as a stock picker/business picker, relationships become your greatest assets – those relationships with investors, CEO’s, industry experts you’ve built over years and decades through reciprocity. It’s the gold plating on your reputation. 

Opportunities find you. Investors and operators bring you opportunities. They want you involved because they see the value in your involvement. The absolute pinnacle of this is “You’re the first call”.

Over time you realize finding ideas before others often means finding ideas with others. Stock picking isn’t a zero-sum game. 

Your flavor of investing will determine how you find ideas, but I do think the core ways in which we find ideas are quite similar. 

As you develop into a stock picker, you will fine tune your idea generation and identification process. The key is applying it consistently. If you take care of today, tomorrow will take care of itself. 

_{MicroCapClub is an exclusive forum for experienced microcap investors focused on microcap companies (sub $500m market cap) trading on United States, Canadian, European, and Australian markets. MicroCapClub was created to be a platform for experienced microcap investors to share and discuss stock ideas. Since 2011, our members have profiled 1000+ microcap companies. 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. For more information, visit https://microcapclub.com/ and https://microcapclub.com/summit/}