When I first started out investing I was very eager to find new investments. I would try to cover as many new companies as I could each day, crossing off all the ones that didn’t meet my criteria. I’m still eager, but I’ve learnt to have a little more patience as the past few years have taught me some important lessons about investing. In my eagerness to cover as many companies as possible I probably missed some opportunities because of the following.
Relying on information portals
Sites like ADVFN and Morningstar are great resources, but don’t rely on them. Firstly because sometimes they are wrong, especially for smaller less liquid companies. And secondly, everyone else is using them. If there is a bargain that can be found on a site like ADVFN then you can be pretty sure it has already been found.
Instead you should go direct to source, read the annual reports, find out the real information. When I was initially investing I would have a quick look at the profit/losses on Morningstar and then look at the PE ratio. From this I would decide whether or not further investigation was warranted. If a company was making a loss or the PE was too high, given their growth, I would cross it off the list.
This is the wrong way to do it. Those companies that look so unattractive on information portals are the most likely place that a hidden gem is lurking. Maybe there is an unprofitable subsidiary that is dragging the company earnings down and once removed the PE ratio is only mid single digits (keep reading my blog for a post on exactly this kind of company soon!). Or perhaps there are some large assets on the balance sheet that haven’t been marked to market value and are worth considerably more.
You wont find information on this on Morningstar. You’ll need to read the annual report. I’m not saying read it cover to cover, but a quick look at the financial statements and segment breakdowns in the notes should give you a clear indication of whether this company is worth investigation. I learnt this lesson the hard way.
Focussing on large companies
I’m sure most people start off reading the annual reports of the mega cap companies. They have the strongest moats and you wish you could have bought them 10 years ago. But they are followed by so many analysts that the chances of finding a value investment are much slimmer than small caps, with no analyst or press coverage. They also have a lot more room to grow!
Not only that but if you compare the annual reports of mega caps to those of small caps, you’ll notice they are far more complex and it involves a lot of extra work to unpick them. I remember reading Aviva’s annual report, about 368 pages, and I didn’t even buy it (thankfully!).
Nowadays I don’t specifically pick out small caps, but over the years have noticed that a lot of my best (or missed!) investments were in smaller companies. Of course small cap opportunities are harder to find, they aren’t in the press and some aren’t even on screeners. Part of finding them is getting lucky, but some of it is looking in as many places as you can. I give quite a few places in my post on how to find investments. Always dig through the financial statements, actively search for those hidden gems and treat every annual report as having some hidden quirk. You’ll be a lot more productive. Most of the time that quirk is negative, but every so often you’ll find the diamond in the rough and they will be the real money makers of your portfolio.