Welcome to issue #11. As always, I’m keen to share what I’ve been reading, learning, and compressing. A shorter issue this week as I’ve been away for a wedding. But first, a quick quote from Draymond Green [Source]:
In order to learn, you have to understand what you don't know, and most people don't understand that they don't know shit, so they're just fucked.
Here’s the format of today’s email:
Part 1: Finding Investments
Part 2: Under the Spotlight: Tony Fernandes
Part 3: Bonus Quirky Content - Something to Read, Watch, and Listen.
How the Best Investors Find Investment Ideas
You ever asked yourself “Where do the best investors find their investment ideas?”. Enter me. The spud with too much time on his hands. A lot of people talk about what a good investment might be. But not many people talk about where a good investment might be.
In short, here’s where the best investors find ideas:
Computer Screens for discounted stocks
Mergers, tender offers, and other risk-arbitrage transactions
Ideas from other respected investors’ portfolios
10K’s, 10Q’s, earnings announcements, press releases, and transcripts of conference calls etc
Find struggling companies and industries with poor sentiment
Notice the businesses that you use as a consumer. At the mall, grocer, etc
And lastly, reading a shit tonne about anything and everything
But don’t just take my word for it! Here are their methods:
Seth Klarman
Computer screening is helpful for discounted stocks. But because the data can be out of date or inaccurate, investors have to verify that the output is correct.
Mergers, tender offers, and other risk-arbitrage transactions are widely reported in the financial press, as well as in specialized newsletters and periodicals.
Distressed and bankrupt businesses are often identified in the financial press; specialized publications and research services also provide information on such companies and their securities. Fundamental information on troubled companies can be gleaned from published financial statements and in the case of bankruptcies, from court documents.
Many undervalued securities are best identified through old-fashioned hard work, yet there are widely available means of improving the likelihood of finding mispriced securities. Looking at stocks on the Wall Street Journal’s leading percentage-decline and new-low lists, for example, occasionally turns up an out of-favor investment idea.
Similarly, when a company eliminates its dividend, its shares often fall to unduly depressed levels. Of course, all companies of requisite size produce annual and quarterly reports, which they will send upon request. Filings of a company’s annual and quarterly financial statements on Forms 10K and 10Q, respectively, are available from the SEC and often from the reporting company as well.
Bill Ackman
In the early days of Pershing Square, he would find with investment ideas and then his team would help analyze them.
As the business has matured, and I really think it’s a credit to the team and the maturity of the business, many ideas are sourced from members of the team.
I’m usually the 20% person on every idea. So 80% of the work is work led by a two-person subset of the investment team, and 20% of the work — reading public filings, conference call transcripts–work that I do, the 80% work, a lot of that will involve conversations with experts to understand natures of businesses, and that’s work that’s largely done by other members of the team. And then the team overall discusses whether something merits inclusion in the portfolio.
Source: The Knowledge Project Podcast
Warren Buffett
Buffett generally responds by saying there’s not a set way that he goes about finding investment ideas, it just sort of happens. But then he also talks about how back in his investment partnership days in the 1950s he would open the Moody’s Manual and simply “start with the A’s” and flip page by page examining all the companies listed.
Source: After Dinner Investor
John Neff
Unfavourable news flags my attention. About the time experts declare that low p/e has no future and that stocks du jour will rule forever, inflection points are drawing near.
Ever conscious of the frailties of prevailing wisdom, I read the news with an eye to finding particular companies or industries on hard times. When I find one, I’ve got to decide whether the underlying business is actually sound and fears have been overblown. Windsor collected handsome profits by taking issue time and time again with prevailing opinion. Few such disagreements were more dramatically visible than when mammoth environmental liabilities threatened to swamp the insurance industry. Reflecting this gloom in the late 1980s, numerous property and casualty insurance companies slipped into Windsor’s range. We particularly liked Cigna Corp.
Source: John Neff on Investing
Philip A. Fisher
I might not agree at all with the conclusions of any of these men as to a stock they particularly liked… however, because in each case I knew their financial minds were keen and their records impressive, I would be disposed to listen eagerly to details they might furnish concerning any company within my range of interests that they considered unusually attractive for major appreciation. Furthermore, since they were trained investment men, I could usually get rather quickly their opinion upon the key matters most important to me in my decision as to whether it might be a good gamble to investigate the company in question.
Peter Lynch
The average person comes across a likely prospect two or three times a year — sometimes more.
And the best place to look is close to home, malls or at work.
There’s an edge that being in a business gives the average stockpicker. On top of that, there’s the consumer’s edge that’s helpful in picking out the winners from the newer and smaller fastgrowing companies, especially in the retail trades. Whichever edge applies, the exciting part is that you can develop your own stock detection system outside the normal channels of Wall Street, where you’ll always get the news late.
Source: One Up on Wall Street
Mohnish Pabrai
I have no original ideas. Almost everything in our portfolio is cloned from some other investor that I admire. The wonderful part of the business is that I still get paid.
If you can identify great investors in India and look at their portfolios and the ideas in which they have the greatest conviction, then those stocks and portfolios will tend to do well
Source: I Have No Original Ideas. I Am A 100% Cloner: Mohnish Pabrai
Guy Spier
My routine is to start with the least biased and most objective sources.
These are typically the company’s public filings, including the annual report, 10K, 10Q, and proxy statement. These aren’t perfect, but they are prepared with a good deal of care and attention, especially in the United States.
After working my way through the corporate filings, I typically turn to less objective corporate documents—things like earnings announcements, press releases, and transcripts of conference calls. There might also be helpful information to glean from a book about the company or its founder.”
These are fairly useful if they’re not just vanity pieces since many hours of work have gone into them; in some cases, they have such depth that I’d read them before the corporate filings.
I also try (and sometimes fail) to minimize my exposure to the Internet, which can lead me in a thousand different directions
As for the equity research published by brokerage firms, I read little of it, and I never rely on it. Once I’m finished with all of my other research, I sometimes pull up these reports so that I know what Wall Street is saying about a company or industry. But I’m careful to make this research the last thing I read, so that I’ve already formed my own impression.
Source: Education of a Value Investor
Li Lu
There are many kinds of sources.
If you have a curious mind, you tend to have many interesting ideas.
Li believes you can find a lot of great ideas just by reading public information. It’s judging what is a good opportunity that is the difficult part.Source: Li Lu’s Value Investing Insights
Under the Spotlight: Tony Fernandes
Each week I provide a little spotlight on an investor or operator I admire.
Tony Fernandes is this weeks focus, in a nutshell:
Born in Kuala Lumpur, Malaysia, to an accountant father and a mother who sold Tupperware. (She was also good enough to sell ice to an Eskimo apparently)
Studied Accounting at LSE, worked as an auditor, a financial controller with Virgin Music Group, and CEO of Warner Music before he took the plunge on AirAsia.
Purchased AirAsia in 2001, three days before 9/11 for one ringgit.
By 2019, AirAsia was the fourth-largest airline in Asia by passengers carried. Only being beaten by IndiGo, Air China, and China Southern Airlines. All who benefit from much larger home base populations.
Tony Fernandes on how he built AirAsia [6 mins]
A good quick introduction to Tony, and how and why he started AirAsia. Also, rate his thoughts on aiming to be a humble CEO.
I always say it. I always say, in everything I say… your team is the most important.
CEOs who believe they're the most important part of their organization that's when they begin to lose it.
When you start believing your own press and you believe that you're the sole reason for the success, that's the beginning of the end.
Tony Fernandes on the Foundr Podcast [Link] [Apple Link]
I’ll never get tired of hearing how Tony started AirAsia. Because it shows how committed he was. Seeing 9/11 happen only three days after you took on this massive responsibility would cause most people to pack it in and bounce.
I was in a pub in Hampstead up to Luton Airport and was blown away. People were flying to Barcelona for £8 to Paris for £6. Everything was orange, and I had never heard of a low-cost airline route. What an amazing concept!
It was a very fine line between brilliance and stupidity. It’s very narrow. I thought, “I’m going to do this. You only live once. If I fail, I fail. It’s okay. I’ll go get a job doing something else,” but I didn’t want to sit there at 55 and say, “I wish I did it.”
I came back to Malaysia, got a meeting to see the prime minister along with a couple of my other partners. He gave his blessing, but he said, “No new licence. You got to go buy an airline,” which is the best thing ever because we had no money to start an airline anyway. We ended up buying AirAsia three days before 9/11 for one ringgit which is about 30 Australian cents and about 10 million or [so in] debt.
Also on starting AirAsia, Tony highlights how important growth is, but also finding your niche. They straight away targeted ASEAN. And not just them, but people who wouldn’t usually fly.
The first thing is growth is critical in a startup because ideas are never exclusive. You can’t patent everything. Right? Anyway, this is not my idea. It came from Southwest and Ryanair and easyJet.
It was very clear to me, once we started moving, that this wasn’t something I was going to pussyfoot around. I had to put the foot in the accelerator because there were some big mamas around me in SIA and Malaysia who could replicate this model and put us out of business. […] when you have something, scaling up is important. The way that I see the growth, there was one figure that hit me when I started this airline. Only 6% of Malaysians flew. I’m trying to market the 94% apart from the 6% who may have flown once a year or once every two year. Right?
The second was I saw a fantastic market which no one else saw, which was Southeast Asia, ASEAN, everyone was fixated by China and India, and I was like, “Well, we got 700 million people here.” That’s where I predicated my story around, and from very early days, I talked about, “ASEAN, ASEAN, ASEAN,” and a lot of our growth has come from destinations that no one did before.
Does Tony think that startups should look more to self-fund and just sacrifice profit for growth?
I’m old-fashioned in that aspect. This new business model is subsidised growth. Right? You give away things to build up customers. We’re going into that model with some of our digital ventures, but we have customers from AirAsia. I’m an old-fashioned guy. I believe in cash. I believe in makings and profits. […] I don’t understand some of these tech models. Obviously, a lot of them have gone onto great things like Amazon, et cetera, but I sit there and look at some of these food delivery services and look at their valuations. I think, “Wow,” it’s scary because where is the profitability coming from, and yet people are throwing money at it, crazy. If you have a model that you can make money, make money. Of course, reinvest some of that money, which we did.
Bonus Quirky Content
Something to read: How to Run a Scam: My trip through China [Link]
A tourist on a bus tour in China gives a rundown of the scam business there. Entertaining yet informative.
Authority & Social Proof
There is almost always an actor that the staff pretends to respect and honor. In turn, the customers respect and honor the actor as well. In several places there are cards that talk about the master crafters who have been there for 70+ years or went to college for "tea" who just so happen to be in that day ("you guys are so lucky!") so they can impart their wisdom to you. I would like to know if they are so wise and respected why they have to work in the middle of the tour route, you'd think they could at least have their own office right?
One location the staff even acted afraid of the master who was standoffish initially but "noticed" us on his way out and took an interest. Everyone laughed at his jokes and was quiet when he spoke. I was told by the tourists that I should respect him when I started talking over his presentation and was later shunned by other busgoers for it.
Later some girls my age told me they felt "pressured" by him and I think a large part of it was because they believed they should respect/fear him like the staff did. They bought matching $500 jades. I later told the same girls that we could use the same technique to help me pick up girls (if they pretended to have the time of their lives with me at the club) and they told me "that wouldn't work on us"
Something to watch: Why Europe Doesn't Build Skyscrapers [7 Mins]
I’ve travelled a fair bit throughout Asia. One of the biggest things that stick out (literally) is how tall buildings are compared to back home. And I’m like a little kid towards skyscrapers (photo related below). Even though I’ve never been to Europe, when I did always wonder why the last of Europe representation in the tallest buildings across the world.
*Spoiler alert* The reasons are:
Laws and regulations caused by Brusselization
Preference for historical and cultural buildings
Also a general dislike for modern buildings seeing them as bland and soulless
Something to listen to: Suits: Articles of Interest on 99% Invisible [Link] [Apple Link]
I’m not big on fashion. A bit of a bogan if anything. But this gave me a little bit more appreciation and background knowledge of men's fashion.
If you’re still reading this, thank you. It truly means a lot and I’m so grateful I get to share interesting stuff with such interesting people. You rock :)
Until next week, have a good one!
- Carrott
You can find previous issues of Curated by Kalani here. I’m on the web at kscarrott.com and on Twitter @scarrottkalani.
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