The Little Book of Investing Like the Pros: Five Steps for Picking Stocks (Little Books. Big Profits) by Joshua Pearl

Chapter One
 Step I: Idea Generation 
How do you find investment ideas?
 There are tens of thousands of publicly-traded companies on various
 stock exchanges around the world. So, where do you begin? The search
 for investment ideas takes many forms. At a basic level, it starts with
 reading … a lot. Stay on top of industry standards, such as Barron's,
 Bloomberg, Grant's, The Financial Times, and The Wall Street Journal,
 and broaden from there. Successful investors pay attention to what is
 going on in the world.
 Your search also extends to everyday life and the products and services
 around you. There are countless stories of people who found great stock
 ideas inspired by observations from their daily lives. What are people
 buying? Where are they shopping? What are they talking about? What
 websites are they visiting?
 Many investors take a bottom-up approach, which focuses on the
 fundamentals of individual companies. Within bottom-up, several
 common sources of investment ideas are prevalent. These include
 undervalued companies, “earnings compounders,” operational
 improvement and turnaround stories, M&A, spin-offs, restructurings,
 and capital return. Evaluating these opportunities requires a basic
 understanding of business drivers, financial analysis, and valuation. You
 didn't go to business school? Don't worry—bottom-up investing is the
 primary focus of our book and we've got you covered in the chapters
 ahead.
 Others employ a top-down approach, whereby they search for
 opportunities based on macro or secular themes. These themes are
 expected to drive accelerated earnings growth and ideally the revaluation
 of a particular sector. Key macro top-down strategies center on global
 market trends and business cycles, as well as movements in interest
 rates, currencies, and commodities. Secular themes include changing
 consumption patterns, product penetration rates, and demographics, as
 well as emerging technologies, structural competitive shifts, and
 regulatory developments.

Experienced investors tend to incorporate elements of both bottom-up
 and top-down in their approach. Even the most ardent fundamentals
based investors are highly attuned to the macro environment. It is
 imperative to understand the impact that certain scenarios can have on
 individual stocks. As the saying goes: “If you don't do macro, macro will
 do you.”
 The process of generating ideas requires great patience and discipline.
 You may need to review hundreds of companies before a high-quality
 opportunity stands out. Therefore, it is critical to know where to look and
 what to look for.
 While certain techniques are prevalent, each investor develops a distinct
 style with its own nuances and variations. The experience-based nature
 of investing means that professional investors tend to fine-tune their idea
 generation techniques over time. Even the most seasoned pros must
 evolve and adapt to dynamic market conditions, adding various bells and
 whistles along the way.
 Screens
 Screening tools are helpful for efficiently sourcing investment ideas.
 Screens allow you to use customized criteria to sift through large
 databases of companies to identify stock opportunities. Pros run screens
 on a regular basis in their continuous search for ideas.
 A bottom-up screen might target stocks trading below a specified
 valuation level or growing above a certain rate. Another might focus on
 recent M&A transactions, upcoming IPOs, or companies with new share
 repurchase authorizations (see 
Exhibit 1.1).
 A top-down investor with a thesis on increasing oil prices would screen
 for energy sector opportunities in combination with financial criteria.
 Alternatively, a thesis might center on the secular trends of increasing
 broadband usage or mobile device proliferation. Here, the screen would
 focus on sub-sectors within Tech, Media & Telecom (TMT) with
 additional filters for selected financial metrics.
 A multitude of stock screening tools are widely available online for free
 or at relatively low cost (e.g., Yahoo! Finance). At a minimum, you
 should set up alerts from financial news sources (e.g., Google Alerts,
 WSJ) that automatically pick up newly announced corporate events.

The Little Book of Investing Like the Pros: Five Steps for Picking Stocks (Little Books. Big Profits) by Joshua Pearl