June 2019 – Don’t Dismiss Overlooked/Unpopular Stocks
If you have explored the investment blogging universe enough, you will quickly realize that there are a lot of people writing articles about the same popular stocks, which generally cover the same perspective, but use different words to explain the same thesis.
How many times do we need to read another bull article about Amazon? A lot of people would agree that Amazon is a good business and that it has a long runway for growth. But what is the probability that it is trading below its intrinsic value when so many people have already researched the stock and are aware of its potential?
Investors generally gravitate to these types of companies because they are familiar with them (along with everyone else) because they have frequently used their product/service and hence it feels much safer for them to invest.
But you shouldn’t necessarily buy stock in a burrito chain just because you eat there two days every week or buy stock in a grocery store because you know a lot of people who shop there. The trick with investing is to let data and reason drive your decision-making process. This methodology applies to any sized company regardless of liquidity, stock price, and geographical location.
So where should you be looking and how should you approach investing?
Look where others are not. This will increase the probability that you will find an investment that is trading well below its intrinsic value. Investment opportunities that are overlooked or unpopular are this way due to investors having:
- a fear of the stock being too difficult to understand
- a biased view of the industry that the company operates in
- hesitation of investing in a stock with too small of a market cap or too little trading volume
As Peter Lynch once said “The person that turns over the most rocks wins the game. And that’s always been my philosophy”.
It is very important for an investor not to be deterred from researching overlooked/unpopular stocks. They should be motivated to test their limits of understanding of various companies to see if the companies fit within their circle of competence. Sometimes an investor may incorrectly assume that an overlooked/unpopular microcap falls outside their circle of competence when it actually falls within it. But they will never know until they attempt to research it.
In summary, try and be adventurous with your research. Don’t hold back by only working within a group of companies that you think are within your circle of competence. Test and expand your knowledge about all businesses because knowledge gained from one can also easily apply to another in the future.
Charlie Munger has said, “If you skillfully follow the multidisciplinary path, you will never wish to come back. It would be like cutting off your hands. Spend each day trying to be a little wiser than you were when you woke up”.
Don’t be afraid of arriving to an inconclusive conclusion on an investment. Even if the research does not result in finding an investable company you will retain the knowledge gained from it and be able to use it for reference in understanding another company in the future.
If you have any suggestions, comments or feedback that you would like to share feel free to email me at alex@StockWriteUps.com.
Enjoy the Journey,