When I began investing, I had only one certainty, namely that I would not be able to identify a wonderful company from a terrible one. But the first thing I learned was that I knew much more about companies than I had previously thought.
Drawing three circles - passion, talent and money
Let's do a little exercise first, the three circle exercise by Phil Town (side note about Phil Town on the end of the article): Draw three circles that overlap in the middle. Label the first with passion, the second with talent and the third with money. (As shown in the example).
In the first circle, write everything you are really passionate about; such as things you love or would like to do if you had more time or money.
In the second circle, write down everything you have a talent for - i.e. in plain language, everything you are really good at, whether for work or for pleasure.
And in the third circle, write down everything that brings you money and everything that costs you money.
Let's continue with my data!
Analysis of the 3 circles - finding common ground!
First circle was pretty simple - what I am passionate about: investing, reading, my family, travelling, playing basketball, studying history, going to the gym and MS Excel.
Second circle - where are my talents, what am I good at: investor, speaker, founder, traveler, bookworm, good eater, number cruncher, sports fan and historian (my childhood idol is Indiana Jones - I still want to find treasure and explore human history).
For the third circle, I had to think for a while about where my money went or what I spend it on.
- Food from Coca-Cola and Mondelez
- Software from Microsoft and Apple
- Books from publishers like John Wiley & Sons and McGraw-Hill Education
- My car - a Ford Focus
- Clothing shops like H&M
- Air travel with RyanAir and WizzAir
- Restaurants like KFC (YUM! Brands Inc.) and Starbucks
I looked at my Amazon account to see what I had spent money on recently and I did the same with my bank account. I noticed that I had not only ordered books through Amazon, but also printer cartridges and razor blades. The printer cartridges were from Canon and the razor blades from Gillette. Canon is even listed on the stock exchange, but Gillette is no longer listed. But Gillette was bought by Proctor & Gamble in September 2005. On my bank account, I noticed that I often filled up at the same Shell petrol station.
So I include Amazon, Canon, Proctor & Gamble and Shell in my list.
The second part of the third circle was the easiest - what do I do for a living: job - startup consultant, investor, coach and speaker.
The intersection of my circles included: startups, investing, travel, eating out, books, sports and software. It was really quite helpful to see it in black and white so I could refer back to it when looking for companies.
The three circles exercise narrows down the industries you should start with. So we start with the companies and industries that we already deal with in some way.
Then we narrow them down again to form our true circle of competence for our investments.
Find the industry
I focus on just one industry at first. In this case, you have to ask yourself the following question: Which companies belong to it that you already know about? In a high-priced market, you usually only put wonderful companies on a wish list to buy them later when the market experiences its inevitable downturn. But for now, you don't have to worry about that. We will put together a shopping list first.
I need to figure out now which sectors include startups, investing, travel, eating out, books, sports and software.
For starters, and to practice, focus on your circle of competence. Find out what other businesses there are in the sector and find out how they relate to each other. What are the business cycles in the sector? Does the company you are interested in go with the general trend of the industry or against it? Does the company go up and down regularly, or does the company's profit usually go up with the economy and go down in a recession - or is it counter-cyclical? (read: Value Investors invest in businesses, not just stocks)
I went through my results. Startups can go public, but that is a speculative investment, so that leaves investing, travelling, eating out, books, sports and software.
However, the financial industry was perhaps very interesting - The point "Investing" fits well here. Then I thought of Microsoft. Now that was really a company I felt something for. I actually liked this company a lot because it changed the world in so many ways, from the development of computer programs (I am a total Excel nerd) and cloud computing, to a normal standard program for every PC called Windows, to the deliberately capitalistic attitude towards business.
From certain companies like Microsoft, I could infer the industry: software industry/IT. Or from the books to the publishing industry. With sport, it was more difficult. There is no industry called sport. There are many listed companies involved in the subcategories of sport, i.e. corresponding accessories such as clothing and fan merchandise, but I was thinking of sports clubs or media companies that cover sporting events.
I can promise you that when they go to a basketball game, half of them wear Nike clothes and the other half wear Adidas clothes. Both are expensive but durable, and I wear these clothes more often than most of my others, so the cost per use is low.
Finding industries that are not obvious
So the question is, how can you find industries that you like if the industry is not obvious?
Yahoo Finance and WallStreetZen are free websites where you can find out the individual industries (also called sectors on Yahoo Finance) and sectors to which the companies are assigned.
In the sports category, for example, there is another company called Under Armour. We know that Nike and Adidas have their main focus on and produce sports shoes. How could you find out what Under Armour makes.
Take a look at the annual report! (Preface: they make special underwear for athletes. But started with the US military as a partner).
For Asian and European companies, you can download the annual reports from the respective company websites under Investor Relations.
In the USA, you can download the annual report in a different form from the SEC, namely as a 10-K form.
During my career as an investor, I have read many annual reports, but have never had to write one myself. These are notoriously boring. Yet they are like tabloids. Once you have read a few, you learn where to find the really interesting information and then you can just skim the rest.
Listed companies also have quarterly reports, called 10-Qs, which are discussed with analysts on a quarterly basis. These conversations are recorded and transcribed. As with the European and Asian companies, these can all be found on the website of the respective companies under the heading Investor Relations, or if the company does not have a website, on the website of the SEC.
Your homework from Phil Town
Homework: Starting your research is very difficult. It takes a few tries and quite a while to find good companies. Do the exercise with the three circles so you know where to focus your investment research and then just start. Pick a newspaper like Wall Street Journal and read it regularly.
Note - Phil Town
Phil Town is not a typical investor. He used to be part of the elite Green Berets unit and earned his living as a river guide after leaving the army. His life changed abruptly - in the middle of the Grand Canyon's worst rapids. There, his skills saved the life of a group he was guiding. One of his clients subsequently took on the ex-elite soldier. He introduced him to the basics of value investing and explained to him how to invest successfully according to simple principles.