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Where a Great Investor Finds Investing Ideas

Individual investors have more information at their fingertips than ever before. That can be either an advantage or a curse -- an advantage because it levels the playing field against professionals and a curse because it can be overwhelming.

Last month, I asked value-investing great Mohnish Pabrai where he gets his investment ideas. Here's what he had to say (transcript follows):

Mohnish Pabrai: New ideas can come from all over the place. So I read Value Line every week, and I look at the 52-week lows and stocks that have lost the most value in 13 weeks and the ones that look like they're the most mispriced, the lowest P/Es and all of that, so that's one source.

I scan the 13F filings of all the great investors -- you know, Berkshire Hathaway and Fairfax and Longleaf and Third Avenue and Seth Klarman and so on, so that's another source, and we look at 13Fs every quarter and see if there's anything that looks interesting.

Then the other few publications, Outstanding Investor Digest and some websites that I look at. There are some blogs that I look at ... and then I'm reading three newspapers a day -- you know, the Fortune, Forbes, Businessweek, Economist, and so on. So a combination of all that. I read articles in The Motley Fool all the time, and that's a valid source.

I think that there's plenty of, you can say, "deal flow" coming in from all these sources. And then the question is what rises up to being within your circle of competence and being at a price that you find acceptable.

Morgan Housel: So all the information that you use is also available to anyone else in the public.

Mohnish Pabrai: Yeah, in fact we're in a business where the small investor has a significant advantage over the large investors, so if someone has $10 billion or $100 billion under management, they cannot make investments one million dollars at a time. So they cannot look at ... $100 million market cap company, for example. They would just ignore that universe. And there are plenty of studies that say that the smaller the market cap, the higher the long-term returns.

And so, if you are a small investor, you have an edge because you can invest in a $15 million market cap company after doing your homework. And those companies -- so, first of all, you have less competition, and they have more mispricing, so actually the game is biased toward the small investor.


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