Buffett method: Start with the As. Russell 2000

[Saluki]

When asked for a method for finding good companies to invest in as a small investor, he mentioned thumbing through all the companies in the Moody's manuals when he was starting out. When the reporter said that there were thousands of companies there, he said "start with the As." 

 

I keep coming across interesting companies haphazardly and most of them don't make the cut.  But in an effort to systematize the search, I'm going to focus for a while on the Russell 2000. I don't want to do a deep dive, but if I spend just 5 minutes on each one learning the basics of who they are and what they do, I will get through all of them in less than a year even if I only do 6 a day.

 

If I'm looking for 1 in a hundred companies, this method should produce at least 20 companies that might be great for further research.

 

I'm going to start at the smallest companies and work my way up, starting today. A few each day. 

 

Just looking for the obvious: low PE, low P/B, lots of cash, a holding of a respectable value investor, buybacks, insider ownership etc, should not take more than a few minutes each.

 

Anyone else want to join me? 

[LC]

I admire your gusto

 

Will you account for growth? I imagine one benefit of using a small cap index is finding companies which may grow into mid/large caps. Low earnings, low book, high buybacks...these metrics may ignore these. 

[Vish_ram]

don't pay any attention to "a holding of a respectable value investor,"

 

focus on cfo, fcf, fcf/sh

[Eng12345]

Personally - I'm coming to terms recently with the folly of low PE. It sounds like a good endeavor though. I won't have time to partake for sometime. Starting 12s and masters classes tomorrow. 

Edited July 8 by Eng12345

[coffeecaninvestor]

I think what you will probably find is a bunch of mediocre or cyclical businesses that are tough to evaluate without knowledge of the business cycle. I like to use quickfs.net it has the company description and a nice chart of historical ROIC. 

 

Some thoughts to look for when looking a snap shot of a company

 

1) incorporation date. On average I like companies that have stood the test of time, and see how they have evolved. I typically will dismiss anything without 10 year financials, but may follow them to see how it develops. 

2) Asset growth - especially if it is a more capital intensive industry you don't want a ton of growth

3) Consistency in margins especially gross margins

4) Profitability over the past 10+ years

 

Edited July 9 by coffeecaninvestor
additional thoughts

[Spooky]

Great idea. I was thinking of doing the same with the S&P 600.

[UNF2007]

I like this idea and was thinking about doing it myself, it's probably a great way to learn about businesses you would otherwise never look into. 

[Morgan]

Buffett did not have computers to run screeners, so there may not have been a better way to review a lot of companies quickly other than “starting with the As”. Some of the old books of companies had lists in the back sorting the lowest P/E, P/B, various metrics etc. That was kind of a short cut, but everyone looks at that. 
 

This is not as effective in the long run perhaps, but it is easier. I have probably 20 screens set up on TIKR.com. It has financials on 64,000 companies and can sort by most of the normal metrics, plus it has a good bit of other info on each company. Koyfin also does this similarly, but has more metrics I think. Depending on the screen you can get 50 or maybe a few hundred companies to review. I usually spend 30 seconds to determine if it is a pass or not. I pass on almost everything very quickly. If it is interesting I research it further there or add it to a list. Right now I’m focusing on small caps, but found 3-7 interesting companies in the last few months. Of course over time you’ll need to review each company again. Screeners can lead you to companies that are very stable, but sometimes you find a company that is in transition to something better while hopefully having a strong balance sheet. 
 

Does anyone know how many publicly traded companies there were in the 1960s during Buffetts partnership days? I don’t think it is reasonable to go through company by company when there are 64,000 companies. 2,000-8,000 companies is manageable I suppose. 

No matter how you do it, you need to look at tons and tons of companies to hopefully find a few good ones. 

 

[HubbadaPow]

I spent a few years doing something like this, but with valueline (small/mid/and large).  Flipping through the pages looking at the statistics and estimating what I thought the company was worth, then comparing to the market price.  If there was a big difference, then I would dig in and see if I had missed something important.  

 

The universe I was following was a few thousand companies, with very few outside the USA.  It took a lot of time.  But it was useful for a few reasons:

 

Looking at lots of companies in each industry helped me get an idea of what margins/cyclicality/capital requirements should be

There are very few special companies that can generate high ROIC through the cycle while growing the business

It raised my cost of capital by identifying plenty of good, but not great, stocks

The print copies allow you to quickly flip past pages that are obviously bad at a glance.  Not even software is that fast

I replaced most of my time reading news and social media with this, and I found myself better informed about the economy

VL was a useful first cut to remove bad businesses from my search.  Surprising to many is that tons of small cap companies have never earned any money.

 

I hope it's a useful experience for you.  Best of luck.