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How a New Investor Can Find More Investing Ideas

Credit: Simon Cunningham

A new investor starting out may lack investing ideas. Or in Warren Buffett’s parlance, the new investor might feel that they have a small circle of competence. So, if you’re someone new to investing, a possible question in your mind could be: How can I expand my circle of competence to find more investing ideas? For that, I would like to suggest three approaches.

1. Keep it as simple as possible

What’s your favourite restaurant? Could it be Din Tai Fung, the Chinese restaurant franchise managed by food and beverage outfit BreadTalk Group Limited (SGX: 5DA)? Let’s say you do. From there, go a step further. Figure out what traits of the restaurant you’re attracted to. It is the quality or service? Is it the food? If so, why are they able to deliver it better than their peers? All these questions may lead you to better understand the competitive advantage that the restaurant has.

Going into areas which are easier to understand – like your favourite services, products, or hobbies – could be where you, as a new investor, can get a head-start.

2. Accumulate knowledge over time

Here at the Motley Fool, we are big believers in holding shares of a company for the long term. That’s because the advantage the long-term investor has over the rest of the market does not come from any special sauce or secret ratio – it comes from the accumulated knowledge the investor has after learning about companies over many different economic cycles.

If you commit yourself to holding a company through thick and thin over many years – and learning more about the company over time – the knowledge acquired will likely supersede any new analyst who is looking at the company for the first time. That’s a comparable advantage you can have.

3. Look at adjacent areas

You may also look at areas which are adjacent to where you already have an advantage or have competence in. For instance, if you’re a shareholder of health care provider, Raffles Medical Group Ltd. (SGX: R01), you may consider an adjacent area like healthcare property owners. In this case, Parkway Life REIT (SGX: C2PU) might fit the bill. In this flow, a  new investor may have useful transferable knowledge of the healthcare industry in Singapore which can be applied forward to new, adjacent areas.

Foolish take away

Although working to increase your circle of competence is a noble aim, Foolish investors would do well to balance this with another piece of advice from Buffett: It’s not the size of your circle of competence that matters, but rather, awareness of the perimeter of your own circle of competence. By the name itself, the circle of competence exists when you have a comparative advantage within that circle. So, the goal is to really expand it when you can, and be good at the areas of new expansion at the same time.

 

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.