The Motley Fool

3 Ways to Find Your Next Great Investment

Everyone loves a good investment idea, but many often get these ideas from dubious sources, such as a hot tip or hearsay. If someone has a good investment idea, there is very little chance that he will share it for free. Hence, it is essential for the investor to be able to generate good investment ideas of his own. So, let’s look at some methods of generating such ideas.

Stock screening

One of the most common methods used for investment ideas would be termed the “quantitative method”. This involves using a screening tool available on SGX, Bloomberg or Factset to screen out companies using pre-defined sets of criteria such as price-earnings ratio, dividend yield or return on equity. The investor can set the parameters for these attributes and then apply the filters. Results will then be generated which pertain to these characteristics. Though this method looks simple to do, the problem is that good companies may slip through the cracks if they have a bad year or two, while companies which are captured by the screens may not have good prospects if you delve into the details.

Reading extensively

The next method would be from extensive reading of news articles, trade journals, publications, and annual reports. This is admittedly more tedious and would take time and effort, but the quality of the decisions would also improve as the investor would be able to glean valuable information on companies and industries which he would not get just from using screening tools. Being aware of such trends is vital in determining which companies would benefit, and hence contributes to overall better decision-making for the investor.

Seeking other investors

The last method which I recommend is to consult people who have had a good and consistent investment track record, and who are sharp, knowledgeable and have good insights. It takes many years to observe friends and peers to discern who has this unique ability, but it is well worth the wait.

I have several friends whom I bounce off investment ideas with as they are both knowledgeable and prudent, and it can also be beneficial to hear alternative arguments to your investment thesis. A word of caution, though. You should always undertake your research and due diligence even if you obtain an investment idea from a trusted source. Ideas are supposed to act as a filter for the investor to narrow down his investible universe, and should not act a substitute for sensible, logical thinking.

With the above suggestions, investors should be well-equipped with the necessary sources to find good investment ideas.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.