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Generating Investment Ideas

Generating Investment Ideas. Presented by Ryan Rechkemmer September 12, 2012. Sage Advice. “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

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Generating Investment Ideas

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  1. Generating Investment Ideas Presented by Ryan Rechkemmer September 12, 2012

  2. Sage Advice • “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” • “I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.” • “Never invest in a business you can’t understand.” • -Warren Buffett

  3. Thesis Points • Key arguments justifying the pitch • Specific to company’s unique situation and investment time horizon • Builds on Value-Added Research (VAR) to reveal informational edge and explain variant perception • Complements valuation analysis • Considers relevant risks

  4. Example: Apple, Inc. New Entrants: Low -Established brand name -Intellectual property Suppliers: Low -Economies of scale -Retains pricing power Buyers: Moderate -Significant switching costs -Carrier subsidies Substitutes: Moderate -Indispensible gadgets -Incremental tech change Rivalry: High -Oligopolistic competition -Mimicry and knock-offs • Porter’s Five Forces Analysis Threat of New Entrants Rivalry Among Existing Competitors Bargaining Power of Suppliers Bargaining Power of Buyers Threat of Substitute Products or Services

  5. Long vs. Short Long Short • Superb management • Competitive moat • Limited downside risk • Underappreciated growth potential • Under-reaction to positive news • Hidden assets / overstated liabilities • Actionable catalysts for outperformance • Poor management • Few barriers to entry • Bond downgrade • Overly optimistic projections • Under-reaction to negative news • Acquisition hungry • Accounting irregularities • Actionable catalysts for underperformance

  6. What to Look for • Small-cap stocks (market capitalization < $1 B) • Overlooked by most analysts • Untouched by large investors • Likely to be inefficiently valued • Foreign companies • Same as above, plus offers international diversification (but check with me to make sure that MII can trade it) • Special situations • Includes IPOs, spin-offs, distressed / post-bankruptcy companies, takeover / buyout targets, etc. • Potentially wide disparity between price and value • Inherent catalysts to resolve temporary inefficiency

  7. News • (including online portals like CNBC, Forbes, Bloomberg, etc.) Pros Cons • Easily accessible • Expert opinions • Current events • Widely read • Potential biases • Too broad

  8. Investing Websites Pros Cons • Timely commentary • Individual perspective • Very specific focus • Detailed analysis • Highly opinionated • Questionable veracity • Possible hidden conflicts of interest

  9. Stock Screeners • (also applies to • industry browsers) Pros Cons • Instantly compares stocks by relative valuation, past performance, etc. • Purely quantitative • Anchoring bias • Myopic snapshot

  10. Personal Experience Pros Cons • Informational asymmetry • Discover emerging trends before professional investors • Foundational to VAR • Potential biases • Limited scope

  11. Other Resources • Professional stock reports (Standard & Poor’s, Thomson Reuters, etc.) • Yahoo! Finance stock screeners (http://screener.finance.yahoo.com/newscreener.html) • Yahoo! Finance industry browser (http://biz.yahoo.com/p/) • Individual company’s annual and quarterly SEC filings (http://www.sec.gov/edgar.shtml) • Mutual fund and hedge fund holdings (Blue Ridge Capital, Fidelity Contrafund, etc.)

  12. How to Learn More • These slides will be made available on MII’s website under the “Research – Presentations” tab, and more information can be found in the “Fundamentals” section.

  13. Questions? Thank you!

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