“Investing is like being able to take a test in school where you can answer any 10 questions of your choice on a 100-question test. You answer only those you know well and ignore those that are very difficult to answer.” – Murray Stahl
Investors often ask us where we get our investment ideas. Do we have a Bloomberg terminal? Do we get good ideas from brokers even though we are a small investment firm? Do we feel out of the loop not having an office on Bay Street? Our answer is that we don’t rely on a Bloomberg terminal, brokers or the rumour mill to generate ideas.
In Ted Williams’ book, The Science of Hitting, he describes the idea of the “Fat Pitch.” Williams divides his strike zone into sectors, determines his success rate in each sector and attempts to only swing at pitches where his odds of success are high. We apply the same approach to investments, focusing our efforts on businesses we understand well and making relatively large investments when we find attractive investment opportunities. Accordingly, our investment ideas are generated within the framework of our Investment Playbook:
1. Cheap Assets
We review the 52-week lows list for major North American exchanges on a daily basis. While these businesses are not necessarily cheap, they are, by definition, cheaper than they used to be and represent a good place to look. Businesses that own fixed assets that can be valued independent of current earnings (i.e. real estate, timber, drilling rigs, etc.) are another place we search for “Cheap Assets.”
2. Great Businesses
Knowledge of great businesses is acquired cumulatively, but opportunities to buy these businesses at reasonable prices are rare. We maintain a Wish List of “Great Businesses” that we would love to own if the price was right. We monitor these regularly and have alerts to notify us if these businesses reach attractive levels.
3. Great Capital Allocators
Great investors of capital are difficult to identify directly. But if we discover an outstanding record of capital allocation while researching a “Cheap Asset” or “Great Business” candidate, we will reconsider the business as a candidate for a “Great Capital Allocator” investment. Businesses that are run by their founders and have large insider ownership are also a good place to look.
4. Broken Businesses
The most important contribution an analyst can make is to creatively answer the question, “What can go wrong?” When studying a “Great Business” we spend most of our time researching this question. If the answer is “almost nothing” the business becomes a candidate for a “Great Business” investment. However, if there are many potential answers, it becomes a “Broken Business” candidate.