CHAPTER 19

Generating Ideas

The value investing model needs to be fed stock ideas. These ideas can come from different sources, some of which are more fruitful than others. I look at seven.

The first source is bad news. Stories about companies often emphasize an extreme element of an event. These extremes get amplified in headlines. Headlines drive human reaction, sometimes too far. This can cause stock price swings deeper than would a more sober take on the facts.

Overreactions don’t just come from individual investors. They come from professional money managers as well. For example, a hedge fund doesn’t want to scare off its limited partners when it reports holdings at the end of a quarter. As such it may dump a perfectly good company going ...

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