Stock Picking is a Game of Self-Confidence
If you’ve been a stock picker for 10+ years a small part of you always wonders if the last big win you had was your last. You must not believe that.
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:
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:
Human nature is to search more often for new ideas when the markets move up but the exact opposite is what should be done. Always search.
— Stock Trader (@MikeDDKing) October 7, 2016
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.
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