How to Create Idea Management Systems for New Investors

The goal with idea management is to optimize your time spent on researching ideas and moving them along the spectrum from new fresh idea to a final decision. Most ideas will fall into one of the following categories:

1. Bad Idea or too hard

2. Buy at the right price

Along the way, your ideas will go through a series of processes as you study and research them. Some ideas will fall into the "bad idea" category early in the process and some may ultimately end up in your portfolio management process. A  reasonable series of steps that you may follow could include:

1. Initial gates to determine whether to continue researching an idea

2. Quick look at 5 or more years of financials statements on something like

3. Review of recent company Annual Reports and 10(K)s

4. Review of competitors and customers

5. Review of industry-wide information

6. Fill out your checklist

7. Complete a few valuations of different types

8. Look at the price the idea is selling for in the stock market and that is where your portfolio management process starts.

If you prefer to listen to a podcast about this topic, episode 72 is part one of a two part series about idea management systems.

So you can see that there are a number of steps you are probably following and these steps need to be tracked for each idea. As an idea moves along the track of these steps, it has a chance to be fall out so all work stops. To show how this works, I will illustrate for you how my idea generation process generally works and some tools that I use.

My first step is to capture any idea that I come across. In the past, this was by adding them to a notebook for future research. Eventually, I created a Microsoft Excel spreadsheet to capture the ideas. I created a series of tabs, one for each type of idea, including:


· Generals

· Bonds

· Preferred Stock

· Insiders

· Options

· Liquidations

· Spinoffs

· Odd Lots

· Warrants

· Net Nets

· And more

The idea here is to initially segregate the ideas and organize them so I know whatever is on a certain tab should be similar.

This was a big step in decluttering my office, by the way. I will tear out articles in newspapers, Barron’s, Wall Street Journal, BusinessWeek and so on and stack them as ideas for initial review, and they would just stack up. I moved these on to the notebook, and then eventually onto the Excel spreadsheet and that eliminated most of the clutter in my office!

The next stage in my idea management process is to begin the initial review of the ideas to determine whether they require more research or follow up.

To keep things efficient and to best utilize my time, I start by analyzing the ideas with the shortest fuse. This usually means starting with tender offer arbitrages which have a finite timeline of about 30 days. I then move to other arbitrages that have a longer fuse but less than a year. There are certain arbitrage spreadsheet calculations that I have automated to the point where I just punch a little bit of info in and hit a calculate button and it pulls all the most recent prices in for all the arbitrages I am tracking (and there are a lot).

Moving other types of ideas along is a slightly different process. To decide which ones to look at next, if there is not a short timeline like an arbitrage, then I will look at the ones with the least liquidity or competition for the stock. These will be somewhat backwater ideas, the rare and way off the beaten track type of ideas that you can do well in over time without worrying about hedge funds or other institutional investors coming in and driving up the price and eliminating the profit spread.

The key to moving ideas through your idea management system is to focus on the most promising ideas with the shortest fuse to take advantage of opportunity cost. Yes, I just strung together three concepts in one sentence, but ultimately, if you want to be efficient, focusing on the ideas with the shortest fuse is the best way to take advantage of opportunity cost.

So my process starts with the initial triage of the ideas into catagories, and then I move the ideas in each category along its own path to either fall out as a bad idea, or continue as an approved idea into my portfolio management process.

Each type of an idea follows a different path, with some ending up in a calculation sheet, and some ending up in a database of ideas  and/or on a watchlist.

First off, the ideas with short fuses like arbitrages, spin-offs, odd lots and such end up in their own special, customized Excel spreadsheets that are designed to calculate the arbitrage spread whenever I look at it with the must current price. If an arbitrage has the qualitative aspects I am looking for, such as a reasonable spread and a double digit annualized return, then the next step with these is to do a full document review and categorize it as a “participate” or no. These then become portfolio management items.

Ideas like “generals”, which are companies selling in public markets that are likely undervalued go through a process where I attempt to prove that they are bad ideas. I did a podcast episode which is episode 37 about the null hypothesis from the scientific method and how I use it in my investment process. If I fail to prove they are bad idea then I continue researching them until I am generally out of material and then I do a valuation using a few different methods, including the multiple of EBITDA method, which was episode 57, a discounted cash flow, and a few other valuations.

The next step with these “generals,” is to record the results of the valuations, pricing, and key statistics in a custom database that I built from scratch to help keep track of ideas. Part of that process is assigning it to one of a few types of watchlists I use for various kinds of ideas. These watchlists will alert me when a price falls below the price I would buy it at with the kind of margin of safety I am looking for.

The key with idea management is to have both a start point, waypoints along the way, and an endpoint. Otherwise, the idea just stays in limbo. Episode 73 of my podcast is the second of the two part series and is about what path particular types of ideas follow through my idea management system

Instead of just chasing random ideas, think about how you can build an efficient, modern idea management system using the tools available to all of us now. My tools are on Dropbox and I can access them from anywhere in the world. I can be sitting poolside in the Caribbean and moving ideas through my idea management system, no problem.

Idea management systems are organic creations that each investor creates themselves. Ask hedge fund managers and you will find that these systems are very bespoke, unique creations. Mine is based on value, efficiency, and effectiveness. It is a work in progress and definitely a passion project.

If you have any thoughts on the idea management process, any good ideas, something you do that you think is pretty awesome and that helped you stay organized and efficient let me know!

About the Author

Jeremy Scott Bailey is an investor, author, entrepreneur and host of the "What Works In Investing?" podcast now available on iTunes. He is founder and Chief Investment Officer of Burgeón Group, Inc. an investment advisory firm that provides portfolio management services to families and individuals.

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