How many businesses have you looked at (question to buy-side PMs/analysts)

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I have always wondered how Warren Buffett could beat Wall-Street in compounding wealth despite lacking the Street's resources. Wall Street banks and investment funds have access to troves of databases, computing power, intelligent/hard-working analysts and yet few can match the returns that a 25 year old kid produced working out of his bedroom.

One thing that struck me about Buffett was how much he read. As Warren Buffett said in his 2001 annual meeting:

"When I started, I went through the manuals page by page. I went through 20,000 pages in the Moody’s industrial, transportation, banks and finance manuals -- twice. I actually looked at every business -- although I didn’t look very hard at some."

I have always wondered how he could understand a business by looking at the one-page tear-sheets that rating agencies produce. I have tried doing this myself - going through Moody's China manuals, going through value-line one-pagers but I find it impossible to feel confident that the 15-20 minutes i spent on that page gave me any useful knowledge.

The question I want to ask WSO industry veterans (especially buy-side PMs/analysts) is how many businesses do you look at, on average, in a year. To some extent, I want to understand whether making excel model is really worth the time it takes. Many buy-side analysts I know spend months evaluating a single investment opportunity but I want to understand if you feel that you are missing out on the breadth of your research (number of companies you have looked at).

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Comments (9)

 
Oct 2, 2015 - 5:51pm

You will get a wide variety of responses to how many a year. Investing the time in an excel model has its pros and cons, but you really need to at least be doing basic models when you are first starting out in my opinion. "Basic" might even be better. It's very easy to get drawn into trying to segment every aspect of a company and over modeling it. At the same time, you need to know what the key drivers are so it is a balancing act.

One more thing: I wouldn't think of it as "how many companies per year" as that creates a checklist like mentality that is not conducive to being successful IMO. You want to be continually reviewing the opportunities out there to see which stories are looking better and which are played out. On the flip side, it's not the best use of your time to be watching intraday movements for 50+ stocks so this is a balancing act too. It really is art as much as it is science in my experience (which is on the sell side FWIW).

 
Oct 3, 2015 - 2:16am

bigblue3908:

On the flip side, it's not the best use of your time to be watching intraday movements for 50+ stocks so this is a balancing act too. .

Thanks a lot for your response. I follow a similar method as yours but I sometimes feel this is a bit inadequate. Buffett once said that you should know something about every publicly listed company in the US. Maybe he is not the right benchmark but I feel many investors fall far far short of that mark. I do not think he meant following the stock price of every company. I suppose it was more in the vein of reading something about as many companies as you can - lets say 2500 companies - of which you pick, lets say 500 which are good quality businesses, of which lets say 50 are ones you think outstanding. And then you just wait for a time when the general level of the stock market is weak or a sector has been beaten up - then you look up those the stock of those 50 companies and pick a few to invest.

There are no bad securities, only bad prices.
 
Oct 2, 2015 - 8:49pm

Probably look at, defined as at a minimum reading some research reports, investor presentation, annual/quarter filings, earnings transcripts, etc., 100 to 150 companies per year. Maybe put 1/2 those into excel at a high level, with 1/2 of those actually modeled out, and 1/2 of those actually modeled out in depth. Kinda shooting from the hip but I'm pretty sure these numbers are roughly correct.

 
Oct 4, 2015 - 1:30pm

Side Pocket:

Probably look at, defined as at a minimum reading some research reports, investor presentation, annual/quarter filings, earnings transcripts, etc., 100 to 150 companies per year. Maybe put 1/2 those into excel at a high level, with 1/2 of those actually modeled out, and 1/2 of those actually modeled out in depth. Kinda shooting from the hip but I'm pretty sure these numbers are roughly correct.

This sounds about right. Depends on what you define as "look at" but based on this definition, I would say this is generally in-line.

 
Oct 3, 2015 - 10:59am

I formally cover (e.g. Have ratings on) ~50 names. Of those I know probably 15-20 extremely well as we either own them or they are candidates for 'buys' in my mind. I probably have another 20ish names that probably fall into my sphere of competency, maybe I've met with the mgmt teams at some conference sometime, but I don't have models built out on them and rarely listen to their earnings calls etc.

It is tough to turn over new ideas once you've ramped your coverage, since there is a lot of maintenance/updating work that goes into monitoring existing positions. For me personally it usually takes a month or six weeks to get an idea from "hey this might be interesting" into a portfolio.

Good questions though, I'm looking forward to reading other responses.

 
Oct 5, 2015 - 3:12am

jankynoname:

I formally cover (e.g. Have ratings on) ~50 names. Of those I know probably 15-20 extremely well as we either own them or they are candidates for 'buys' in my mind. I probably have another 20ish names that probably fall into my sphere of competency, maybe I've met with the mgmt teams at some conference sometime, but I don't have models built out on them and rarely listen to their earnings calls etc.

It is tough to turn over new ideas once you've ramped your coverage, since there is a lot of maintenance/updating work that goes into monitoring existing positions. For me personally it usually takes a month or six weeks to get an idea from "hey this might be interesting" into a portfolio.

Good questions though, I'm looking forward to reading other responses.

My condition resembles yours, more or less. Since I'm only early on my 2nd year (whereas you're 3rd+), it's more like ~25 companies, but yes ~15 of which I know extremely well. Another ~5 fall into my "sphere of competency" which I also don't have models built out on them.

And just like you, I'm looking forward to reading other responses. /toast

Fortes fortuna adiuvat.
 
Oct 5, 2015 - 4:59am

It really depends upon how you define "look at." I probably briefly look at 200-300 companies, of which I'll meet with or talk to 75-100, which translates to about 10-15 holdings. It's really a distilling process. The time you spend looking at the companies early in the funnel can be quite small. If a company has a flawed business model, terrible management, or huge risks then it generally becomes apparent quickly and I won't spend much time with it. The longer you spend looking at a given sector or region the more quickly this process moves since you become familiar with the names.

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