WWII 072: Idea Management Systems Part 1, Buying Falling Stocks, Is Warren Buffett A Venture Capitalist?

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Main Topic: Idea Management Systems

Do you feel overwhelmed by the amount of investing ideas that you find every day?

If I were to advise someone on the progression that you should follow when learning to invest, it would be:

1. Learn the different methods on how to value a business on a whole company basis

2. Learn how to value bonds, preferred stock, options and other security types.

3. Idea Generation – where to find ideas

4. Idea Management

5. Portfolio Management.

This episode is about Number 4 from that list, Idea Management. 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 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. Steps that you may follow could include:

1. Initial gates to determine whether to continue

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

3. Review of recent 10ks

4. Review of competitors and customers

5. Industry-wide information

6. Fill out your checklist

7. Complete valuations

8. Look at the price it’s selling for and that is where your portfolio management process starts.

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 an excel spreadsheet to capture the ideas. I created a series of tabs for each type of idea, including

· Arbitrages

· Special situations

· Generals

· Bonds

· Insiders

· Bonds

· Preferred Stock

· Options

· Liquidations

· Spinoffs

· Odd Lots

· Warrants

· 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 which I will talk about next.

Ask JB: Should I invest in companies with falling prices?

So I recently started investing, and truthfully I sort of jumped in feet first with no real idea what I was doing. My question pertains to the facts that I see two major trends in stocks: Either a steady increase in value, or a fairly quick decrease. My question is whether or not I should bother with companies that lean downwards. Conversely, should I invest in them in the short term, and sell at, say, 15%?

JB Says: Hello Gaarstyn, welcome to a brand new world full of terror and intrigue. Just starting out in investing can be intimidating given the enormous amount of information that has been produced on this topic. I would never recommend someone just “jump in” and would prefer years of intense study on the topic before investing in anything. Even for professionals it is a difficult pursuit. Check out some of the earlier episodes of this podcast, including episode 2 which suggests you make a choice about whether to be the investor, or buy index funds, or give your money to someone to manage.

Good luck and god speed.

Ask JB: Could you call Warren Buffet a venture capitalist? (self.investing_discussion)

submitted 2 days ago by tech245

Are all investors known as VCs?

JB Says: Definitely not. Although Buffett has invested in joint ventures such as (Bercadia – car loan), and start-ups like HomeServices of America – real estate brokerage firm founded in 1998, Buffett is generally not considered a venture capitalist.

Do you have a burning question on investing you would like answered? Click the button below to send it to me and I will answer it on the podcast!

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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