"Where do you get your ideas?"
If you write about stocks or manage money, you get that question a lot. At cocktail parties it's the question that is nearly as fraught with danger as "So, whaddaya like now?" There's just no profit in answering the question.
But the truth is, I generate most of my ideas by reading. Constantly. I love 52-week-low lists. I love screening. I love going to the mall and observing where people are shopping -- New York & Co. (NYSE: NWY ) , for example, is always mobbed, while the Wet Seal (Nasdaq: WTSLA ) store in our whereabouts is so quiet you can hear crickets chirping. I talk to people, I read trade journals, I watch what industries are out of favor.
Oh, yeah: I also steal ideas.
This is not nearly as bad as it sounds. In fact, given a few caveats that I'll get to in a moment, I think you'd be insane not to steal investing ideas from smart people.
"Stealing" ideas is a long-observed investing trend. A somewhat famous study once showed that money managers in a geographic area had a much higher coincidence of investments than the national average, even if those investments were not based in the same region. The reason is simple: One investor finds the idea, buys it, goes to play golf with the boys, and lets drop that he's found a Mexican chicken company that he's excited about. Next thing you know, several of his friends own the same obscure company, thousands of miles away.
There's a story, certainly not apocryphal, about a guy who came into the Graham-Newman offices in the 1950s wanting to thank Benjamin Graham for all the money he'd made him. Turn out this guy wasn't a client -- he simply obtained copies of the Graham-Newman SEC filings and bought what Ben Graham had been buying. Today, many investors, most famously Warren Buffett at Berkshire Hathaway, try to shield certain companies from disclosure because they are still in the process of buying them.
This makes sense. After all, look at this chart for PetroChina (NYSE: PTR ) . Want to guess the exact moment Buffett disclosed that he'd been buying the fire out of it? The reason it rose so fast is because a large number of people said, "Well, if it's good enough for Buffett, it's good enough for me."
Now, when we're talking about "stealing" ideas, I have to be clear: you must do your own work. Taking a look at other people's ideas is a good thing because it's efficient. You don't have the time to follow every company by yourself. You have a job. Heck, my job is to cover stocks and I still don't have time to cover the entire universe of stocks by myself. I don't even have time to cover stocks in areas that interested me.
So if the venerable Tweedy, Browne value shop owned by Affiliated Managers Group (NYSE: AMG ) shows in its quarterly letter that it's been buying a company, why would I not be interested in learning more about this company?
Places of maximum thievery
Believe it or not, several of my favorite ideas have come from The Motley Fool's stock discussion boards. Several years ago a poster noted that he'd been looking at Cemex (NYSE: CX ) following a long drop in price, and found that it was generating gobs of free cash flow. Lo and behold, he was right. Furthermore, though Cemex had a pile of financial leverage, new management was aggressively paying it down straight out of the cash it generated from operations. After a long study, I bought the company and made it my selection for our annual publication, Stocks 2003.
It's increased 120% in the interim, and paid dividends at a clip of nearly 3% on top of that. We're talking about Mexican cement here. This is just the kind of company I'd naturally be attracted to, and I had the wisdom to recognize "wow, that's an interesting idea." I also did an extensive amount of work on the company. But the little bug that told me to look at Cemex came from outside.
Of course, there are a great many more bad ideas on message boards than there are good ones. About 99% of the stuff isn't worth the paper it's written on. And you may of course deduct that since Internet discussion boards require zero paper, that means. ... Yeah, most of the good counsel you receive on stock discussion boards will more than likely end up costing you money. As always, overlay others' ideas with your own research, but ideas that come from the anonymous message board "expert" require a much greater level of care than ones that come from elsewhere. I'm saying this as a total board aficionado: I think the boards are the best part of our Motley Fool Hidden Gems service. One idea that has become a formal recommendation, Cryptologic (Nasdaq: CRYP ) , had its origin with superstar Hidden Gems subscriber Jim Gillies.
Mutual fund managers are also prime hunting grounds. Each quarter, these managers disclose what companies compose their portfolio. Though it takes some legwork, you can find plenty of ideas this way. The trouble is, these reports don't necessarily list which companies are new purchases, but with a little digging you can find the previous report and make a comparison of the buys and sells.
And finally, there are newsletters and periodicals. I'm not very interested in the "HOT STOCKS NOW" gobbledygook that graces the covers of all of the big finance magazines at one time or another. I am interested in the interviews with good money managers whose thought processes and skills I respect. That's why I still consider Outstanding Investor Digest (OID) to be invaluable.
The danger of "stealing" is, of course, putting too much faith in the source. There was a sad story last year in The Wall Street Journal about people who had lost massive amounts of money by tracking Peter Lynch's SEC filings and mimicking his trades. Lynch hadn't lost his touch, but as is his usual habit, Lynch buys a large number of companies knowing full well that some of them will not work out. Those who copied the wrong set without stopping to do their own work got their heads handed to them.
That's the trick to "stealing." If the work is not your own, then you're still flying mostly blind. But paying attention to smart people (obviously smart people, preferably with track records) and then using these kernels to launch your own study can lead you to some worthy investments. This particular form of thievery can be lucrative indeed.
Bill Mannthinks that the backup vocals in Gladys Knight & The Pips "Midnight Train to Georgia" are the best ever. I mean, "Superstar, but he didn't get far"? C'mon! Bill and Tom Gardner put their best stock picks in the small-cap world up against each other head-to-head in theMotley Fool Hidden Gemsnewsletter. We offer a risk-freeone-month trial so you can see all they have to offer. Bill owns shares of Berkshire Hathaway, but no other companies mentioned in this article. The Motley Fool has a disclosure policy.