Investing is arguably one of the most interesting fields of work. That is because investing is a field in which one literally can choose from hundreds of thousands of options . Yet at the end of day, a successful career can be made by investing in a couple hundred ideas. That is less than .01% of those available over the course of a lifetime.
For many people one or two investments are all it takes for financial freedom. Imagine the few hundred folks in Omaha who chose and stuck with Berkshire Hathaway (BRK.A) nearly 50 years ago. Or, the families who invested in names like Johnson and Johnson (JNJ) or Coca-Cola (K) decades ago. I have heard stories about those lucky few who somehow owned Apple (AAPL) 10 years ago when shares were trading below $1 (split adjusted), turning a $10,000 investment in well over $1 million.
What causes investors to choose the investments they make? How does one find those "great ideas" everyone reads about a year later on the front page. The answer will disappoint you: It's simply a non-stop search process. Warren Buffett told me once he would take a Moody's manual of stocks, numbering some 2,000 plus pages, start with the letter A and go through page by page.
Investors are fortunate now to have a little more help in the search process: stock screens, 13f filings by investment funds and the various Internet and journalism sources that are a never ending source of ideas. Regardless of the resources, the search process to find good ideas is on-going and never ends!
A good search process is a realistic one. Finding one or two exceptional investment ideas a year is an incredibly good hit rate. Some great investors can spend months, if not years, without finding a truly great idea. But during the process, they are sifting through hundreds of names each year. The constant search exercise has the added benefit of building a mental database that will prove invaluable -- a mediocre name today can be a great opportunity tomorrow.
The greatest pitfall occurs when investors become frustrated and impatient because they haven't found anything great. They then resolve to invest in second tier ideas for fear of missing out. Such behavior almost always leads to a disastrous outcome.
Perhaps an sports analogy will bring it all home: in baseball, an average hitter is batting .250 or so while a Hall of Fame hitter is .300, or above. The difference between average and immortality is simply 50 more hits in 1,000 at bats. The great hitters likely choose which pitches to hit very carefully. Investors need to be just as choosy if they expect above-average investment results.
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