Where to look for investment ideas?

Where to look for investment ideas?

"I'm no genius. I'm smart in spots—but I stay around those spots." — Tom Watson Sr., Founder of IBM

I have thought about this for many years, the question really is "how do I decide where to become good at", in investing people call it a "circle of competence".

Why is it important?
1) you need to minimize risk when investing or you are not going to be around for long, and risk is not knowing what you are investing in, and by "knowing" I really mean "predicting the outcome".
To predict the outcome of something like an investment not only do you need to understand all the moving part of that investment, but the moving part of the competitors, and other industries that could eventually affect you. It's a lot of work! So that's why you stick to what you are familiar to (by the way this doesn't mean you can not learn about other interesting industries, companies, etc just don't invest in them until you can predict outcomes)

2) More important than having a big circle of competence is to know where the limits of your understanding really is. 

How do I know if I understand something? It will become "obvious" to you. Somethings are really obvious, but the great majority wont. And that ok. 

For example I invested in the Phoenix, Arizona in 2011, when prices dropped around 75% from the high, a house that was being sold. I first started studying and visiting Phoenix 3 years before... but prices where crazy so I didn't invest... for years! Then it crashed, and Phoenix laws, taxes, demographics, economy, etc where within my circle of competence.

I bought property (green line) in 2011 sold in 2018, but I didn't double my money like the chart suggests I triplicated it and then-some (I'll write a post about this soon)

People I presented the idea to friends, family, most of them though I was crazy by buying properties that nobody wanted them, in a falling market, etc etc. They were scared. They were waiting for something... I just never figure what.
For me it was obvious, it was within my circle of competence, and I made a lot of money.

How to define your circle of competence?

Most of the time people will write 3 circles "Tales" + "Passions" + "Money", where this 3 circles convine, that's where you should focus. I can't recommend this enough, Do IT Now! it will take 5 minutes and will give you clarity.



However, the other day I saw someone posting "Ikigai" in an investment group facebook page.
If you pay attention is the same thing, but with an extra circle "What the world needs". Let me tell you simply why this is important: Every dollar you invest in a business or stock, and anything for that matter, is a vote.
You vote with your money!
You think tobacco companies are evil, don't invest in them. You think google is evil? don't invest in the stock! right? If a lot of people invest in your stock it becomes more expensive, the more expensive it is, the more sources of capital they have to grow, their cost of capital is lower, and the collaterals they can use are bigger.

Where to look for investment ideas?

Let me show you "Ikigai", Im adopting this to write down stock ideas https://neyinvesting.blogspot.com/2019/05/how-do-you-pitch-stock-idea-like-hedge.html

So! Write inside this circles and there you go! be as precise as possible. Don't be afraid if you only have 1 or 2 things. That's only your start point. As you research and read about a company you will start learning about other companies and industries, and that circle will become a little bigger. I started with Real Estate (housing), that eventually allowed me to understand building materials, banks (not all of them though, but the basic ones), insurance companies (I understand them very little, but I'm understanding them a little more as time passes, I don't feel confident to invest in one, except for berkshire hathaway ) etc etc.

"I'm no genius. I'm smart in spots—but I stay around those spots." — Tom Watson Sr., Founder of IBM