Inspiration for great investment ideas

Identifying and shortlisting great investment candidates is sometimes a struggle. It’s hard to know where to start. Truth of the matter is that great investment ideas are all around you. 

 

One of the best bits of investing advice that I ever came across came was something that Peter Lynch used to advocate. Lynch suggested looking for investment ideas and companies that were involved in the provision of routine, regular tasks that were non discretionary in nature, things such as medications, razor blades. Once he had that basic filter, he would overlay that with a view as to companies with limited competition and with a sustainable competitive advantages.

Much like Warren Buffett, Lynch suggests that an individual investor is more likely to be successful if they invest in things that they can understand and explain. How does a business make money? What are its profit drivers etc. Your more likely to understand a business if it is in some way connected with you and what you do.

Things you own, Services you use

My first forays into candidates for dividend investment were based on products I owned and services that i consumed. It was no surprise that I added a few of the large Australian Banks into consideration very early on. Banking is the one service that none of us can escape. Short of plonking your funds under the mattress, most of us need to intersect with the banking system in some way.

The Australian Banking System was also particularly compelling to me given it’s oligopoly structure and very rational pricing power, which has delivered sustained returns over the years.

I also worked out that the telecommunications sector was an attractive source of opportunity. Who doesn’t have a cell phone these days? Again, overlaying some of the competitive dynamics of the sector on the investment opportunity things looked positive from my perspective. A growing sector in a regulated environment with reasonably strong barriers to entry (after all, it’s not everyday that someone has the capital to start their own telecommunications network!).

When you think about products that people use and consume everyday, food is another natural one that comes to mind. But why make bets on specific products or items that people may buy when you can hedge everything and just buy the store?

Grocery chains also very quickly made my list of investment ideas to consider, and given Australia’s relatively small market, there’s frankly not much room for multiple grocery chains to operate. Hence the pricing power and competitive dynamics for the grocery leaders looks pretty good. Australia’s largest grocery chain soon made it’s way into my portfolio.

When I first looked to buy in the US market almost 10 years ago, my knowledge of the breadth and diversity of the market was fairly limited. My initial inspiration, at least for initial investigation were the products that I was familiar with and that I used. And my love affair with Coca-Cola and McDonalds was born from a very young age, with many years to develop . Both businesses have extremely wide moats, strong affinity with consumers and very good economics and pricing power. Both are also in my portfolio today,

Things you see

A trip to the local store normally brings a bunch of new investment ideas for me. Walking through the grocery aisles, I look for products that have great shelf space, things that have the consumers lingering just a little longer than others. It also helps if the product is a consumer staple that has regular consumption

That was how I first stumbled upon McKormick & Co. The maker of spices and condiments is normally able to secure great shelf space and has a steady consumer appeal. Most folks don’t think twice about shelling out a few dollars on spices and seasonings.

Similarly, walking the store aisles have led me to investigate companies like Colgate and Clorox.

When you think toothpaste and mouthwashes, it’s tough to go past Colgate as a company that dominates the category. Colgate has premium billing and shelf space in many grocery aisles. In fact, at our local store, it’s not uncommon to see a separate bucket filled with Colgate toothpaste that exists in prime space, outside the clutter of the aisles.

The beautiful thing about any products that are put inside people is that safety and reliability of the brand is super important. This plays into the fact that Colgate’s strong brand perception with customers is a source of significant brand advantage for the company. This is further borne out in Colgate’s stellar economics, returns on equity and long term growth.

It’s hard to escape Clorox’s stranglehold over the cleaning products category. A walk through of the cleaning products section in a store sees Clorox products feature very strongly in all things from wipes to bleach. Again, a nice reliable staple for consumers who need to tidy up around the house.

In fact, we occasionally have professional cleaners who come in and do a thorough cleaning of our house. They always instruct my wife to specifically purchase 3-4 bottles of various Clorox products, which they promptly proceed to go through in a single 3 hr period! I have owned Clorox in the past. It’s a great business.

What’s always made me a little uncomfortable with the company as a long term holding is the significant amount of debt that the company carries, which is the principal reason I don’t hold it any more.

Experiences you have

My journey as an immigrant to the US provided me with a bunch of very interesting experiences, some of which became investment ideas for me. As anyone who has investments or assets abroad understands, there’s always that problem of being able to transfer money from one country to another. The big banks typically fleece you, what with their very poor exchange rates and high fees.

Western Union provides a very convenient and slightly more competitive alternative. It’s an interesting business model where the strength of the agent network on the ground helps drive overall success. While the money transfer business has been going through the doldrums of late, Western Union is an investment that I made, which I continue to hold.

When I first came to the US, I also had no concept of how my non existent credit score would frustrate my life for the first few years. I simply couldn’t get any access to credit!. That made things challenging in terms of needing to pay for almost everything in cash. No credit cards to buy groceries, no store credit for furniture. Life was tough.

And the gatekeepers with the keys to the kingdom were the credit agencies, which include Experian, Equifax and Transunion. While these companies made my life tough for the first couple of years till I built up my credit history, I was determined to see if there was an investment opportunity here too take advantage of. While I investigated TransUnion and Experian further, I ultimately passed on both.

Trends that you observe

Finally, looking for investments based on trends that you observe, which are either in the early stages or more advanced, can position you well for growth opportunities that you can capitalize on.

The trend that I’ve been keenly following is the digitization of tasks. Using the internet or mobile to perform things that were previously done manually or in person, such as buying goods and services whether it be merchandise (such as Amazon) , houses (Zillow, Trulia) or even cars!

In my view, these are trends that are here to stay, for the forseeable future. When you combine them with increasing internet and mobile internet penetration internationally, businesses that can position services to ride these trends could be in for sustained growth over the long haul.

That’s where some of the ideas for my current venture portfolio have come from. ICar Asia, IProperty Group and Freelancer are all business that are well positioned to ride this wave of opportunity.

Conclusion

Investment opportunities are abundant, and sources of inspiration for investments are everywhere. The more challenging process of investing is applying the right diligence to determine which of your filtered candidates can deliver solid long term returns.

Comments

  1. Hi Integrator. I come up with investing prospects by doing what you mentioned above or, by figuring out which sectors have performed the worst in the stock market during the previous couple years…..from there I analyse the industry leaders. Those two methods have served me well. Like you, I love a strong brand name too
    -Bryan

    • Integrator says:

      Hi Bryan, I like idea of looking at the underperformers (whether it’s sector or company) as a basis upon which to start from. That’s the basis of the Dogs of the Dow approach!

  2. I really like your suggestions here. I think it can be both useful, and sort of fun to wander the grocery store contemplating what might be the best investments. One thing that might make it even more insightful is to examine shopper behavior at higher end specialty stores and then at more common stores. You might get some insight as to what is appealing across the income spectrum. Thanks for sharing!

  3. Great post however I think that for the next few years investors really need to focus on companies that can grow to support these premium valuations we are seeing. As you know one of the reasons Coca-Cola has been left out of the rally is that consumers are trending away from its products in the US. Are you still confident that their moat is as deep as it once was?

    • Integrator says:

      Zach, good question. Companies moats are subject to erosion all the time. In Coca Cola’s case, I still believe they have a wide moat, but they’ve been caught up in changing consumer tastes. Fortunately, they are actively pursuing bringing to market non carbonated beverages which they can push through the impressive Coca Cola distribution channel.

  4. FI,
    Peter Lynch’s book One Up on Wall Street was the first investing book I ever read and remains my favorite. It was very accessible for me at a young age. His local to national investment concept is still very relevant and a useful strategy.
    -RBD

    • Integrator says:

      RBD, I agree. While I haven’t invested in a tonne of retail players, evidence of those that can make the local to national transition are potentially good companies to back.

  5. Some of the first companies I bought shares of were services & products I used and was familiar with. I think it’s the easiest way to get into stocks if you start with companies you know the business model of simply from using their product/service.

    • Integrator says:

      FM. The advantage of tracking this you know and understand is that it makes it easier to understand the drivers of what makes a companies P&L tick. If you can do that well, your in a good place as far as understanding whether market movements in a companies stock price is anything to really be concerned with.

  6. Marvin says:

    This is such great and timeless advice. All of my friends and coworkers constantly come to me when they hear of a new start up (Bitcoin) or want to double their money in the next year or so. I tell them time and time again that true investing should be boring because you reinvest your dividends into strong stable companies that people will always need or want.

    Facebook is great I love it, but I truly think there will be a day when something else comes along and offers more value.

    • integrator says:

      Its incredibly difficult to reasonably expect to double portfolio value yearly. You either just set up for disappointment or huge risk in the portfolio with that aim.

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