How do you generate investment ideas?
I’m always trying to find mis-priced opportunities. Ideally, I’d like to find great, easily understood, businesses that are undergoing some form of indiscriminate selling. That sounds simple but it’s actually quite difficult. As boring as it sounds, I read a lot. I try to look where people are selling indiscriminately—redemptions, spin-offs, removal from an index, post bankruptcies, one-time events like a recall, etc.
I think a lot of investors, professional or otherwise, compromise. If they can’t find a compelling bargain they go for the next best thing. I’m not comfortable with that approach. There are a lot of smart people out there. Investing is basically saying the market it wrong and you’re right. You need to be sure you know more about the situation then the market and those opportunities don’t come around very often and they are usually research intensive. Given that you could be wrong, you need to afford yourself a margin of safety so if things change you can still recover your capital.
There is a lot of pressure on professional money managers to do something. I suspect their first priority is to avoid under-performing their competitors by a wide margin. I’d rather have cash than a sub-par investment even if that means losing investors. I can’t remember who coined the phrase, “I’d rather lose investors than their money” but that’s something that really sticks with me. It’s incredibly important to find the right partners and turn away the easy money. It’s hard to take a long term view without the right partners.
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