Idea Generation: Reading vs. Screens

I thought I’d write down some quick notes regarding my investment process today… This is a topic I write and think about a lot. Having a defined investment process is essential to staying focused and being able to methodically generate long-term investment results.

Buffett Reads, He Doesn’t Screen

I read a lot about the Berkshire meeting last weekend, and I have a few friends that attended (I’m anxiously awaiting their firsthand accounts). At the meeting, Buffett discussed how he never uses screens to find ideas. I find that interesting. This exchange sheds a little light on how they think about screens:

Charlie Munger: “We don’t know how to buy stocks just looking at financial figures. We need to know more about how the company actually functions. Anything a computer could be functioned to do in terms of screening – do you use a computer to screen anything?”

Warren Buffett: “No I don’t know how to. Bill’s still trying to explain it to me. We don’t use screens. We don’t look for things that have low P/B or P/E. We’re looking at businesses exactly if someone offered use the whole company and think, how will this look in five years?”

I think about screens differently than Buffett and Munger do. One thing you have to consider is how adept they are as business analysts (in addition to security analysts). This is a skill that is developed over the course of a career. It’s very difficult (impossible) to compete with Buffett and Munger on a qualitative basis. But, the thing I took away from reading through the Q&A at the meeting was how much they valued reading.

This is a key takeaway: Reading allows you to compound knowledge over time, and it will improve your qualitative skills. Knowledge is like compound interest. But until that interest builds up, it is much safer to place greater weighting on the quantitative side of the equation.

I use screens often to filter my list of investment ideas. However, I have noticed that lately, I’ve found that simply reading fund letters and even certain blogs are great ways to find ideas because you get to piggyback on the research and work of others. It’s like having an in-house analyst that has already done a ton of work for you. That’s the beauty of the Internet and people that are willing to spend their time sharing ideas and research.

So reading blogs is a great way to find ideas. So is reading fund letters and letters to shareholders. Reading these sources for ideas gives you the idea itself, but also often gives you the thesis and the logic behind the investment idea. From there, you can do your own work and determine if you agree or not, but leveraging the work of others is a great way to find and learn about stock ideas.

Screens Are a Starting, Not Ending Point

As for screens, I use them often and I think it’s a great way to filter for interesting ideas. I think Buffett would have certainly used them if he started his career in today’s world. I’m sure Graham would have. Screens are a great way to start looking. But it’s just a start. Reading Value Line is one step better than a screen because you can learn a lot about the businesses as you flip the pages. Reading ideas from other investors is the best of the three, because it gives you the idea, allows you to learn something about the business, and it gives you (in most cases) the reasoning behind why the investor thinks it’s a good idea. So it’s a case study on a current stock idea.

I’ve discussed my investment process in many different posts. I’m currently trying to simplify, and always looking for ways to streamline my process. My basic investment process is divided into three main categories:

• Idea Generation
• Research
• Portfolio Management (Decision making: buy, not buy, hold, sell, etc.)

Currently, the “idea generation” part of my routine has just three sub-categories:

• Reading through Value Line each week
• Checking a few screens once per month
• Reading other investors (professional and non-professional) that share ideas on blogs and in fund letters

For blogs I follow, check the blogroll. For fund letters I read, check out this post.

Of course, idea generation is the first part of my investment process. Research is the second part, and that involves reading annual reports, proxies and background articles on the stock. Then, a decision has to be made to either buy the stock, put it on a watchlist, or discard it completely. More on that later.

As for screens, I like them, I use them, and I find them helpful in generating ideas. I think they help make my search process more efficient. I think Schloss and Graham would have used them, but certainly not exclusively. They are simply tools. I do believe that reading is a way that allows you to improve skills much more quickly than going through screens.

Investing is an art, but it’s an art form that can be methodically practiced. That’s a big part of what this blog is about. Practice, practice, practice. And finding ways to improve not only results, but the approach to practicing itself.