The Little Book of Investing Like the Pros

Chapter OneStep I: Idea Generation How do you find investment ideas?

There are tens of thousands of publicly-traded companies on various stock exchanges around the world. So, where do you begin? The search for investment ideas takes many forms. At a basic level, it starts with reading … a lot. Stay on top of industry standards, such as Barron's, Bloomberg, Grant's, The Financial Times, and The Wall Street Journal, and broaden from there. Successful investors pay attention to what is going on in the world.

Your search also extends to everyday life and the products and services around you. There are countless stories of people who found great stock ideas inspired by observations from their daily lives. What are people buying? Where are they shopping? What are they talking about? What websites are they visiting?

Many investors take a bottom-up approach, which focuses on the fundamentals of individual companies. Within bottom-up, several common sources of investment ideas are prevalent. These include undervalued companies, “earnings compounders,” operational improvement and turnaround stories, M&A, spin-offs, restructurings, and capital return. Evaluating these opportunities requires a basic understanding of business drivers, financial analysis, and valuation. You didn't go to business school? Don't worry—bottom-up investing is the primary focus of our book and we've got you covered in the chapters ahead.

Others employ a top-down approach, whereby they search for opportunities based ...