How I Select Stocks to Invest

Hint: I stole every single idea…

Before I go in detail about my own investment philosophy, I would like to clarify that I am in no way an experienced investor (in fact, I only just started investing some time more than a year ago), so take whatever I write here with a pinch of salt. I would just like to share with the community what my investment philosophy is now, and also in the future when I look back, I can see how much I have evolved in my thinking and mindset regarding investing. I mean… it’s always nice to keep memories of your old self, right?

The Art of Shameless Cloning

This is the start of my investment research cycle — shamelessly cloning other investors. While there had been articles talking about how most fund managers underperform the index such as the S&P 500, I think it is important to note that the keyword there was most, not all. There are also a selected few individuals/fund managers who are able beat the market in the long term (some even by a lot). I label such group of people as the super-investors. Considering that I will not be as experienced or knowledgeable as the super-investors, I think it makes sense for me to try and replicate their investments.

Given the technology we have today, I am happy that it is much easier for anyone to access the 13F filings to see what kind of investments (in the U.S.) the super-investors had made every quarter. The website that I use to keep track of the 13F filings is none other than dataroma. If you have checked out the website, you would see that many investors are being tracked in that website. Some might think “how can you possibly clone every single one of them? There are too many people, and too many stocks to follow!”

Now, mind you, first, I do not simply follow just any super-investors. I’ll share more about who I follow and why in a moment. Second, when I said I will shamelessly clone the super-investors, I don’t mean just blindly copying their trades. Instead, I use their trades to curate my own watchlist of potential stocks that I can buy, and then study more about the respective stocks.

Now, let me reveal the selected few super-investors that I have decided to clone (they are arranged in alphabetical orders):

• Christopher Mayer from Woodlock House Family Capital
• Dennis Hong from ShawSpring Partners
• Josh Tarasoff from Greenlea Lane Capital
• Mohnish Pabrai from Pabrai Investments
• Norbert Lou from Punch Card Management
• Robert Vinall from RV Capital GmbH

These are just those that I keep track of currently, so this list is in no way exhaustive. If I come across any new super-investor that I may like some time in the future, this list will grow.

The reason why I follow these people were not really because they have had a good track record throughout their investment career (though most of them do!), but mainly because I agree with their investment philosophies; what qualities they look out for in the businesses that they invest in. I learn about their investment philosophies either through their blogs, or through any interviews or podcasts that they had attended. I also tend to favor super-investors with a very concentrated portfolio. I like to clone businesses that the super-investors themselves have very high convictions in.

Research Process of Individual Stocks

Cloning super-investors is only the start of the equation. It helps me to formulate my own watchlist. The next step would be to dive into research about the individual businesses that I had previously shortlisted. Firstly, I would go into Value Investors Club (VIC) website to check if anyone had written up a thesis on that particular stock before. For those that do not know about VIC, it is a platform where different investors would come together to pitch a stock and share ideas. Theses that are uploaded there have went through checks by the admin (though I’m unsure what the requirements are to be considered “of quality”), so you can be assured that the theses uploaded there are of certain quality. Not all the time will the stock that I am interested in be available on VIC. In such situations, I will consult other notable finance platform such as Seeking Alpha. Sometimes the super-investors would write down their own reasoning behind why they invested in a particular stock in their quarterly letters to investors, and would make public their letters. When they do so, I can better understand both the business and the super-investor’s rationale.

What I have mentioned above is mainly to provide me with the overview of what the business does. It is also necessary to look at the numbers to make sure the company is financially healthy. I use TIKR terminal and Yahoo Finance to access the financial data of companies. I prefer TIKR terminal over Yahoo Finance though because it provides a more comprehensive set of data and presents them in an easy-to-understand manner. It used to be completely free, but recently they introduced a premium model. I still think that the free one is good, so I did not opt for the premium model.

My research process ends when I finally decide on whether I want to invest in that particular company (obviously!). So, what exactly do I look out for?

First, is the company founder-led and/or have high insider ownership? There are several articles that you can find online talking about why founder-led companies tend to outperform others, so I will not explain it here. Instead, I will link one such article here. It may be extremely limiting, in my opinion, if I only look into companies that are founder-led, so I also look at insider ownership. I think that having skin in the game is important, so if there is high insider ownership, it is more likely for the company’s values to align with that of the shareholders, and there is more incentives for the company to maximize shareholders value. In addition to this point, it may be worthwhile to look at the compensation provided to the CEO of the company as well. If CEOs are paid very well, they may be less incentivized to make their own stock perform. But, this is just my own opinion, so take it for what it’s worth.

Second, I look for companies that are compounders. These are high quality businesses that you expect to exist and flourish for very long periods of time. Mohnish Pabrai, one of the super-investors that I follow and admire, did talk about how to identify compounders. I will link it here. I like compounders because most of the work comes from researching and understanding the businesses, but once you are invested it in, you just have to sit back and ride out the volatility. This way, you can save your time by not having to constantly look for new stocks to buy, and you also save on any transaction costs or taxes.

In addition to finding compounders, if you are able to find them during a period when the stock has a low multiple, you will be rewarded greatly. In such situation, you will benefit from the growth of the company, as well as the rising valuation of the stock. This is what Christopher Mayer, another of the super-investor that I admire, term as “twin engines”. But such opportunities are rare, so I would say just focus on looking for compounders, and let the opportunity of finding the “twin engines” come to you when the time is right. I will leave the link to the blog post here where Christopher Mayer talks about the “twin engines”; there are more nuggets of gold in the blog post itself.

Finally, once I have found a company that I would like to invest in, the last thing I would look at is if I am able to purchase the stock at a price that is either equal or lower than what the super-investor had paid for. To do this, I look at the lowest price the stock had reached during the quarter that the super-investor had bought into the stock (Note that this is not necessarily the price the super-investor had paid; he could have bought it at a higher price). There is no fixed rule here that I have to buy it only if the stock is equal or lower than the price the super-investor had paid for, but if there is a huge run-up in the stock price before I even buy in, I will be less-inclined to purchase it. To each their own I guess.

Possible limitation about my investment process

If you have read my research process, some of you might find that I am too reliant on others. I admit, I am. I only shortlist stocks that are bought by super-investors. I look for investment theses presented by others instead of crafting my own from scratch. However, I would defend myself by saying that I shortlist my own group of super-investors, so these investors must have done something right to attract my attention. Second, while I read other people’s investment theses, I may not necessarily agree with them. Ultimately, I still do my own due diligence by ensuring that the research data provided by others is accurate, and I form my own judgement on whether I am convinced by their investment theses.

Closing Remark

After all, I am still relatively new to the investing space. I started investing only in the late 2020. Whether my investment philosophy is effective, only time will tell. Some of you may not agree with my method of investing, that’s fine. Like I said, to each their own, and I respect everyone’s opinion and method of investing. At the end of the day, results triumph over method of investing. In fact, if any of you are willing to share your own methods, I am happy to hear. It is always great to bounce ideas off one another!

Note: I am not affiliated with any of the investment tools that I have mentioned in this article. I shared them because I have used them myself, and thought that they were great tools that more people should know about.

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