How to Use the Time You Devote to Investments

In his partnership letter dated February 11, 1959, Buffett wrote, “I make no attempt to forecast the general market – my efforts are devoted to finding undervalued securities.” This is very different from the approach we read about in the financial press and see on the cable business networks. It seems as if everyone has an opinion on where the market will be in the next six months. Of course, this would be nice (and profitable) to know. Getting rich in the market would be simple: get the latest six-month market forecast and place your bet, perhaps adding some leverage. The problem with this approach is that nobody can consistently do it.

Having said that, it is important to draw a distinction between market forecasting and market valuation. Market forecasting, as we’ve seen, is trying to predict the short term direction of the market. Market valuation is about gauging the level of overvaluation or undervaluation in the market. A value investor wants to commit capital when the market is undervalued and act with caution when the market is overvalued.

The takeaway should be clear. Instead of spending time reading and thinking about predicting the direction of the stock market, you want to spend the time you devote to investing finding undervalued securities. When Buffett had just finished Ben Graham’s course at Columbia, he took the Moody’s Manual and the Standard & Poor’s Manual and went through them twice. Evidently, this was more than 1,000 pages. When asked how he became so successful in investing, Buffett answered, “We read hundreds and hundreds of annual reports every year.”

In sales, they talk a lot about the Sales Funnel as a metaphor for the selling process. At the top of the funnel are all the unqualified prospects, in our case, the entire stock market. The salesperson’s job is to qualify all these prospects and take them through the sales process, i.e. contacting them, qualifying them, making a proposal, closing the deal. Likewise, the value investor must qualify prospective investments by researching and valuing them. For purposes of our discussion, the key insight is that, just like in sales, you need to keep your “idea” funnel full in order to find stocks that are worthy of investment.

To that end, the following is a list of sources that value investor Monish Pabrai uses to find new ideas. The list is from a February 2007 interview with Pabrai at The Motley Fool.

1. 52-Week Lows on the NYSE (published daily in The Wall Street Journal and weekly in Barron’s)
2. Value Line (look at their various “bottoms lists” weekly)
3. Outstanding Investor Digest (http://www.oid.com/)
4. Value Investor Insight (http://www.valueinvestorinsight.com/)
5. Portfolio Reports (from the folks who put out OID)
6. The Wall Street Journal
7. Financial Times
8. Barron’s
9. Forbes
10. Fortune
11. BusinessWeek
12. The Sunday New York Times
13. The Value Investors’ Club (http://www.valueinvestorsclub.com/)
14. Magic Formula (http://www.magicformulainvesting.com/)
15. Guru Focus (http://www.gurufocus.com/)

Pabrai said that, “Between all of the above, I have historically found at least three to four good ideas every year.” Note that some of these are paid services.

Happy hunting!

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One thought on “How to Use the Time You Devote to Investments

  1. Jim Allen

    My wife sometimes says, “You have to kiss a lot of frogs before you find a prince.” Of course, hopefully she was only in the market for one.

    It isn’t so much a matter of valuing the market. Even when “the market” is relatively high, there may be a few bargains out there. When the market is relatively low, there should be lots of them. My sense from reading just about everything that Graham and Buffett have written, and lots of articles on what they said, is that they pay little to no attention to “the market” and concentrate on looking for individual stocks which are bargains. In fact, that may be how one judges whether “the market” is high or low, by the number of bargains out there, if it matters. I think it shouldn’t much matter from the standpoint of influencing your actions.

    When you deal with Mr. Market, you ignore him unless he offers to sell you a bargain or buy from you at or above intrinsic value, for each stock you may be interested in. Otherwise you ignore him. The trick is valuing each of the stocks so that you know when Mr. Market can be taken advantage of.

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