Generating Investment Ideas

Presented by Ryan RechkemmerSeptember 12, 2012

Sage Advice “It's far better to buy a wonderful company at a fair

price than a fair company at a wonderful price.”

“I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”

“Never invest in a business you can’t understand.”

-Warren Buffett

Thesis Points Key arguments justifying the pitch

Specific to company’s unique situation and investment time horizon

Builds on Value-Added Research (VAR) to reveal informational edge and explain variant perception

Complements valuation analysis

Considers relevant risks

Example: Apple, Inc.

New Entrants: Low -Established brand name -Intellectual property

Suppliers: Low -Economies of scale -Retains pricing power

Buyers: Moderate -Significant switching costs -Carrier subsidies

Substitutes: Moderate -Indispensible gadgets -Incremental tech change

Rivalry: High -Oligopolistic competition -Mimicry and knock-offs

Threat of New

Entrants

Rivalry Among Existing

Competitors

Bargaining Power

of Suppliers

Threat ofSubstitut

e Products

or Services

Porter’s Five Forces Analysis

Bargaining Power

of Buyers

Superb management Competitive moat Limited downside risk Underappreciated

growth potential Under-reaction to

positive news Hidden assets /

overstated liabilities Actionable catalysts

for outperformance

Poor management Few barriers to entry Bond downgrade Overly optimistic

projections Under-reaction to

negative news Acquisition hungry Accounting

irregularities Actionable catalysts

for underperformance

Long Short

Long vs. Short

What to Look for Small-cap stocks (market capitalization < $1 B)

Overlooked by most analysts Untouched by large investors Likely to be inefficiently valued

Foreign companies Same as above, plus offers international

diversification (but check with me to make sure that MII can trade it)

Special situations Includes IPOs, spin-offs, distressed / post-bankruptcy

companies, takeover / buyout targets, etc. Potentially wide disparity between price and value Inherent catalysts to resolve temporary inefficiency

Easily accessible Expert opinions Current events

Pros

News(including online portals like CNBC, Forbes, Bloomberg, etc.)

Widely read Potential biases Too broad

Cons

Timely commentary Individual

perspective Very specific focus Detailed analysis

Pros

Investing Websites

Highly opinionated Questionable veracity Possible hidden

conflicts of interest

Cons

Stock Screeners(also applies to industry browsers)

Instantly compares stocks by relative valuation, past performance, etc.

Pros

Purely quantitative

Anchoring bias Myopic snapshot

Cons

Informational asymmetry Discover emerging trends

before professional investors Foundational to VAR

Pros

Personal Experience

Potential biases Limited scope

Cons

Other Resources Professional stock reports

(Standard & Poor’s, Thomson Reuters, etc.)

Yahoo! Finance stock screeners(http://screener.finance.yahoo.com/newscreener.html)

Yahoo! Finance industry browser(http://biz.yahoo.com/p/)

Individual company’s annual and quarterly SEC filings(http://www.sec.gov/edgar.shtml)

Mutual fund and hedge fund holdings (Blue Ridge Capital, Fidelity Contrafund, etc.)

How to Learn More These slides will be made available on MII’s website

under the “Research – Presentations” tab, and more information can be found in the “Fundamentals” section.

Questions?

Thank you!