Lesson 1 of 7
Where investment ideas come from
Screens, special situations, prices near a 52-week low and plain observation feed one pipeline. Write down why an idea entered before you know the answer.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Ideas arrive from four common places: screens, special situations, prices near a 52-week low, and your own reading or observation.
- An idea log records the source and the reason before you know the outcome, so hindsight cannot rewrite it later.
- Most ideas end within the hour, and the pipeline only has to produce a few survivors a month, not a shortlist of certainties.
Most ideas come from four places: named screens, special situations, prices near a 52-week low, and what you see as a customer or at work. Log each with its source and reason before researching it. The habit of finding ideas in more than one place matters more than any single source being the best one.
From a source to a held thesis
- 1SourcesScreens, events, new lows, reading
- 2Idea logOne line: source and reason
- 3TriageAn hour, most ideas end here
- 4ResearchThe eight-step order
- 5Memo, then thesis
Four places ideas come from
A named screen returns companies that already pass a stated rule, computed the same way for every company tested. A special situation is priced by an event (a spin-off, a merger, a rights issue) rather than an ordinary view of value, and it resolves by a date. A spin-off's new shares land with holders who never chose them, and many sell whatever the shares are worth, regardless of the business behind them. A price near its 52-week low sits at the bottom of the past year's range. That is not the same as a large fall: a stock with a narrow range qualifies too, so check how far it actually fell, and why. Lynch's own case is the plainest of the four: a shopper, an employee, a supplier or a customer sees a company's product succeed or fail at the mall, at work or at the pump, long before Wall Street notices.
Write the reason down before you know it
An idea log is one line: the source, the date, and the reason it seemed worth an hour. Written before any research, it cannot later be edited by the outcome. "The ticker looked interesting" is honest and useless. "F-Score of 8, trading within 15 percent of its 52-week low" is a claim someone else could check against the same figures.
Triage before research
Most lines in the log end within an hour, at the five questions in Killing an idea in an hour. A pipeline is meant to lose most of what enters it, and that is not a failure of the pipeline. What should not happen is an idea skipping the log because it already feels promising. The feeling is exactly what the log exists to check.
Check yourself
Why keep an idea log before researching anything?
- To prove later that you were right
- So the stated reason cannot be rewritten once you know the outcome
- To rank ideas by expected return before research starts
Show the answer
Answer: B.
The log is written before the outcome exists, which is the only way it stays honest about why an idea was worth an hour.What decides the price in a special situation?
- The company's own trailing P/E
- An event, and the sellers or deal terms it creates
- A screener's ranking of the sector
Show the answer
Answer: B.
A spin-off's new holders selling regardless of value, or a merger's deal terms and completion odds, set the price rather than an ordinary judgment of the business.In Lynch's account, where do many ideas first appear?
- In a broker's morning research note
- Wherever the observer already shops, works or does business
- Only in a company's own shareholder letter
Show the answer
Answer: B.
Lynch's argument is that ordinary exposure to a business, as a customer, employee or supplier, produces the tip long before Wall Street has one.Sources
- Lynch with Rothchild, One Up on Wall Street, 1989 (millennium edition 2000), chapter 6: stalking the tenbagger.
What this leaves out
- The pipeline, its counts and its idea log are illustrative, not any filed company's figures.
- A screen or an event is a source of ideas, not a verdict on them. Triage and the full research order still have to run.
- House screens set their own cutoffs. Lynch did not specify the numbers this product's screener uses.
- Nothing here is advice about any security.