Question From Readers: Systematizing Idea Generation

Last week I received an email from a reader, David. Here’s the text:

I’ve found what you have been doing to be interesting. I’m wondering if you follow any funds to get ideas from. Quite honestly, I haven’t been able to think of any good ideas on stocks in awhile, and it has lead me to aimlessly reading 10-k’s of random companies. Obviously, it’s not a waste of time but I’d like to be more systematic in my approach.

I love when readers reach out to me with questions/comments. It lets me know that readers are engaging with my work, which is incredibly humbling. Please keep them coming.

There are three questions/comments I pulled from this email:

    1. If I follow any funds to get ideas from
    2. Aimlessly reading 10-k’s of random companies
    3. Would like to be more systematic in my [research] approach

I’m going to dive into each one of these and do my best to answer.

The Funds I Follow

I follow a long list of value-oriented investment funds. Most of the funds I follow are small/micro-cap centered with smaller AUM. If my investment philosophy aligns with theirs, I add them to my list.

I don’t blindly follow these managers into their latest ideas. Rather, I use their holdings as guideposts along our off-the-beaten-path. Sometimes there’s stocks I see that I’m already a part-owner in. Other times I find entire sub-sectors worth digging into. Don’t get me wrong. There’s nothing wrong with cloning. But the key is to clone ideas and not philosophies. In other words, it’s fine to clone an individual stock idea. But make sure it goes through your unique investment process (ie, you do your own diligence and the stock checks all your boxes).

Here’s a list of the funds I follow:

I know. It’s a lot. How can I possibly read all those letters? It takes a while, but I do. Some letters I skim until I reach the new ideas section. Other letters I read word-for-word. It all depends on what catches my eye at the time.

Here’s how I categorize all the ideas from one:

    • Create a “Hedge Fund Letter” notebook in Evernote.
    • I save each PDF into the notebook and highlight the sections I want to look into further.
    • Then, in the notes section of the individual Evernote, I list new positions from the letter. This makes it easy for me to skim through each PDF and find which ideas I want to look at.

I encourage you to try a similar approach. It doesn’t have to look exactly like mine. Tailor it to your own preferences and style.

A 10-K Read Is Never Wasted

I’m of the opinion that reading a 10-K is never a waste of time. Even if you don’t invest in the company. Even if you hate their business model. You learned something that you didn’t otherwise know. Sometimes learning what not to invest in, makes it worth the read.

That said, you don’t want to aimlessly read 10-Ks. There needs to be purpose and structure to how you spend your time.

Here’s some thoughts on how to improve 10-K reading time.

1. Create a list of companies you want to study

These can come from screens (we’ll touch on this later) or hedge fund letters you follow, etc. Assign one 10-K to each day of the week (M-F). Read each 10-K on its assigned day.  At the end of the week, whichever 10-K (or company) appeared most interesting, save it for further research.

Lather, rinse and repeat next week.

2. Take notes when you read a 10-K.

You don’t have to physically write them down. They can live in an Evernote note or a Google Doc. Where you store them isn’t important. It’s that you store them. If you’re wondering where to start, Aswath Damodaran has a fantastic YouTube video on how to read a 10-K.

This brings us to our final question … systematizing the research process.

Creating a Research System That Doesn’t Waste Time

I’m not claiming that my research system is the best system. I guarantee it’s not. But I’ve found that it works for me. And in return, it might help others that are looking for a place to start.

The research system combines elements of what we’ve discussed above. Now it’s about putting it on schedule.

The system is also event-dependent. In other words, when quarterly letters roll around, I devote most of my time to reading each letter. In these situations, screening for companies and reading 10-Ks take a back seat.

I’m also assuming the average investor works a standard 9-5 office job and researches in their free time. This won’t be the case for every reader. But generalizing it this way adds greater value.

Screening, Filtering and Fast-Tracking

Every two weeks I run a stock screener. I try to do it on a Saturday morning. It’s not the same stock screen each time, though. But one thing does stay the same. All screens are high-level filters. This means I’m screening on factors like:

    • Market cap/EV
    • debt/equity ratio

The screen spits out a lot of names, which is the goal.

On Monday (screen on Saturday), I go through the screen and pick out my favorite/most interesting ideas. At this point, I download the 10-Ks and put them on my calendar to read. Tuesday – Friday. You can read one 10-K a day during your lunch break, or before bed.

On Saturday, after reading each 10-K, I pick my favorites out of the filtered screen to do deeper work. I don’t put a time limit on the deep work. It’s different for each stock. Some ideas take me a few days to flesh out. Others take months.

The TL;DR Summary:

    • Screen on Saturday
    • Filter on Monday
    • Read 10-Ks Tuesday – Friday
    • Filter the 10-K companies down to my favorites on Saturday
    • Spend the rest of the next two weeks (give or take) diving deeper into my favorite ideas

There are a few benefits to this system.

First, it self-allocates the bulk of your time to your best ideas. In other words, you’re not going to spend a lot of time on ideas you don’t like. You pass on bad ideas and channel your time into your favorites.

Second, you’re always looking at new ideas. Remember, this is a game of turning over the most rocks. The more rocks you turn over, the greater your odds of finding a hidden gem.

Concluding Thoughts

This is one process out of a thousand that can work for you. The beauty of investing is you get to find what fits your style. What matches your personality. Tinker with this system and make it your own.

Want to screen once a month? Have at it! Don’t like the idea of using high-level screens? Refine it as much as you want. Make it work for you.

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.