When people hear that I am a research analyst, they typically ask me two questions:
- What do I do every day?
- How do I find stocks?
When I was in high school and just dipping my toes into the stock market, I had an opportunity to meet a portfolio manager of a large Canadian mutual fund. I asked him the exact same question: what do you do every day in the office if you’re not buying and selling stocks? He replied that he simply works to find better investments. At the time, this did not really click with me, but that in a nutshell is what I do.
The investing universe is nearly infinite in scope and there is always more to learn. In Canada alone, there are 830 companies listed on the TSX. Add in the 2,600 or so publicly-listed companies with market cap of over $1 billion in the United States and that is enough companies and markets to learn about in a lifetime, even before considering the rest of the world. Simply put, there is always something new to learn in the markets.
A large portion of my time is spent reviewing existing companies that we already own for clients. Warren Buffett observed a long time ago that, unlike with baseball, in the investing business there are no strikes called for not swinging the bat and deciding not to invest in a business. However, for companies that we do own, it is critical that we remain up-to-date on the competitive positioning and prospects for those companies. Sometimes we discover we did not understand the business as well as we thought or new threats (think Amazon) come up, and the logical conclusion is to sell.
For new ideas, I spend most of the time reading and doing preliminary research on companies we don’t currently own, including a quick review of the company’s background, financial profile, economics, and management incentives. This typically takes no more than one or two days.
Great businesses (the only type of business we try to buy at Baskin) tend to have common features, and most companies are eliminated from consideration after this initial process. Although we decide not to invest in most companies after doing the research, this does not necessarily mean the time was wasted. The knowledge gained from learning about that company may be worth something down the road. Maybe it helps you understand another company that you look at later on. Or maybe you read something in the news that convinces you there may be something more to the story. Either way, learning something new is never a waste of time.
In order to decide which company to look at next, idea sources include:
- Blog posts and 13Fs (Securities Exchange Commission filings) of other great investors;
- Screening based on a set of criteria that reflect our investment philosophy;
- Looking at a sector or industry based on an investment theme (i.e. if you want to invest in homebuilders, a list of homebuilders is a good place to start);
- Random meetings with company management and attendance at company roadshows.
For companies that look like they may be good investments, we do more detailed work to understand the core economics and competitive positioning of the business. This may include talking with the management team, doing site visits, and trying hard to disprove our thesis that this is a great business.
The very last step in the process is the valuation. This is surprising to many students who talk to me and want to be better investors themselves. Finance classes in universities typically focus heavily on teaching students to construct complex financial models and perform detailed valuation analysis. In my view, if you find a truly superior business that has a long runway of growth, it does not matter in the long-run if you pay a slightly higher price today. It is much more important to understand the competitive advantages and key economic drivers of the business than to quibble about whether the discount rate should be 8% or 9%. Some of my worst investing mistakes have come from not investing in great companies because I out-modelled myself instead of focusing on the right things.
Finally, I prepare a formal written “pitch” for the investment committee including all portfolio managers to debate during monthly meetings. Everyone discusses what they like and don’t like about the potential investment, before making a team decision on whether to invest in the stock.
One thing that I have increasingly appreciated over time is that it is far more important as an investor to build a necessary base of knowledge that can be drawn on later, as opposed to finding immediately actionable ideas. When I was first starting out as a research analyst, I wanted every company I looked at to be a buy today. What I ended up discovering is that by gathering knowledge by learning about different industries, you begin to connect the dots together and gain an appreciation for the interconnectedness of companies. A good example of a company that we own that demonstrates this is Disney. If you looked at Disney’s stock on a standalone basis, you would probably conclude that while they have a decent movie and parks business, the media sports business is under pressure. However, having done work on companies like Cineplex, Google, and Viacom you begin to gain a deeper understanding of the real situation at Disney, in particular the motivations for the acquisition of 21st Century Fox (pending antitrust regulation).
And that’s what I do every day. Read, think, increase my base of knowledge to be a better investor and hopefully find some good investment ideas along the way.
Ernest Wong
