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okay so you've seen that the market is down at the moment you know you should be investing right now but how on Earth do you actually find great stocks to invest in well in this video we're going to talk about a surprisingly simple screening method inspired by value investors such as Warren Buffett and Peter Lynch and Charlie Munger and Monash McBride that reliably finds you winners amongst the thousands of publicly traded businesses out there so no time to waste there's six steps to this process and with that let's dive in with step number one now a lot of people think that the first step to finding a great business is to Simply find what stocks are the cheapest you know what has the lowest PE ratio what does the stock screener spit out at you as the cheapest result that is definitely wrong and let me tell you firstly looking at the price is a very dangerous Habit to start forming if you want to do well in the long run the real first step in this screening process is in fact to Define your circle of competence so how do you do that well make a list of all the things you're really good at all the things you spend time on and all the things you spend money on and then get out the Venn diagram the topics that appear in multiple sections are probably in your circle of competence for example while I'm not great at video games I do spend a fair chunk of my time playing them and I certainly spend way too much money on them so video game companies are probably going to be much closer to my circle of confidence than say pharmaceutical companies so look for those common themes in your Venn diagram and then from there you can literally Google search like video game stocks and there you go there's the list Activision Blizzard take to interactive Electronic Arts Nintendo Microsoft now that's not a shopping list to be clear but that's your starting point because chances are if you spend money on it if you spend your time on it and if you're naturally good at it then you'll already have a good idea of how businesses in that field operate and you haven't even read an annual report yet have a listen to this if you don't know enough to know about the business instantly you won't know enough in a month or two months I mean you have to have sort of the background of of understanding and and knowing what you do understand and don't understand and that that is the key it's defining what I call your circle of competence and everybody's got a different circle of competence the important thing is not how big the circle is the important thing is staying inside the circle and if that Circle has only got 30 companies in it out of thousands on the big board as long as you know which sturdy they are you're okay and you should know those businesses well enough so that you don't need a reed do lots of work so step one Define your circle of confidence don't just try and find a stock that's super cheap and then try and work backwards to understand it trust me I've done that it it just simply doesn't work so that's step number one but what do you do after you've found a selection of companies that you feel as though you could understand well for the next step we're going to look at a recent interview from Warren Buffett disciple monish so let's listen to monish explain this next step and then I'll show you how to do what he says in the clip so usually my most preferred starting point on a company is to see you know as you know I'm the Shameless cloner you know so the first thing I'm trying to ideally try to do is hopefully someone smarter than me already owns the stock and hopefully they have made some comments about it so the first thing I try to look for is uh who are the shareholders and and usually it's I don't need to look at the shareholder because usually it is coming through some guy or some fund that I admire and they have this particular company as a holding so luckily for us there's no anti-plagiarism rules in investing so the next step is to then take your list of companies and have a look if any of the super investors own them the buffets the mongers the layluz of the world and a great website to use for this step is ticket.com who are also the sponsor of today's video so there are two ways to go about this step you can either look at the super investors portfolios and see what's in there or you can look at the company you're interested in and then see if any super investors are on the list of major shareholders personally I would start simply by just browsing super investors portfolios for example on ticker you can click on track investing gurus and immediately we can see a whole bunch of different funds from all the super investors you know if you click on Berkshire pathway bang you can see Warren Buffett's largest holding is Apple they also like Bank of America they like Coca-Cola all right we can check out Pershing Square which is run by Bill Ackman he owns Chipotle maybe that was on your list I know I certainly spent a lot of time and a lot of money in Chipotle when I was over in the states earlier this year but we can also see Bell post group run by Seth clyman we can see Scion Asset Management by Michael Barry the list goes on you can literally just browse all of these super investors portfolios and then if you find that one of the investors holds your stock just research their rationale for buying in you know Warren Buffett has spoken many times in the past on Apple and Coca-Cola a quick Google search will tell you literally everything about his thesis so that's the first method or alternatively you can simply search the company of Interest say apple and then you can just look at the ownership tab now yes there's going to be a flood of ETF providers and investment banks on the list but occasionally you can find super investors as well Berkshire Hathaway is second on the list there if you type in Tesla you'll find Larry Ellison type in Japan hotline you'll find Pershing Square so step number two is to use ticker to your advantage and check whether your companies have been bought by the world's best investors then just Google what they've said about the company in the past to begin to get an understanding of what the value investing thesis actually is I just wanted to take this opportunity as well to thank ticker.com for being fantastic supporters of the channel and by the way a lot of this stuff is free on their platform so I definitely recommend you check it out and if you do decide you'd prefer some of the more premium features like access to over a hundred thousand stocks globally or ten thousand funds Holdings 10 years worth of financial charts three years of Wall Street analyst estimates or three years of earnings called transcripts on stocks globally then you can use my referral link down in the description and get 25 off an annual subscription but anyway that's step number two and then from there Step number three is to go and skim through the most recent annual report now at this stage you don't need to read the whole thing because there's some manual reports can be very long and very intimidating but at the start of every single annual report also known as the 10K the management will perfectly describe what the business is what they do and how they make money you know if you take five minutes and just read that section you'll very quickly get a sense of whether this is something you're interested in or whether this business goes on the too hard pile and again Tikka comes in clutch here simply type in your company's name meta for example then you can go down to filings narrow it down to the 10ks and there you go and if we go to meta's most recent annual report we can very quickly get a sense of what they're all about you know the first section tells us that meta is a family of four apps that they generate all of their revenue from selling ads they have their reality Labs business which is a collection of virtual and augmented reality projects but that's still very small part of their business it really is that simple that's all you need to do in this screening stage just get a sense of how the business works and whether you want to learn more about it so that's my step number three skim the first part of the annual report but now let's go back to monish to talk about what comes next usually if the company is giving us letters to shareholders and it appears that those letters to shareholders are not written by a PR firm then I'll have my assistant just make a PDF of all the 20 years of letters 20 30 years of letters starting with the oldest one and then I just read the letters you know because then I can say okay what do they what are they saying in 95 and then what happened by 2000 what was the thing in 2000 what happened by 2005 I can just see kind of what they were saying versus how the trajectory of the business has gone subsequently so step four is to read the annual shareholder letters over time why well because it shows you a lot about the Management's execution and it tells you how they treat their shareholders you can tell a lot about a CEO from the contents of the shareholder letter so go back a few years read what they were promising and then cross-check that with how well they actually did you know do they under promise and over deliver are they honest do they talk about the challenges as well as the successes or are they always trying to to sell you this company are they just trying to convince you how good the company is the other interesting thing about reading these letters is especially reading them in the past for example we know that in 0809 a tsunami is coming we know that so when I'm reading the 2005 letter or 2006 letter or 2007 letter they don't know that right but I know that so it's like you're about to go off the off the cliff down the waterfall but you don't know that then they're in the waterfall and then they're finally at the bottom so you know you can see that whole thing play out in the letter so that kind of gives you a view how the company deals with you know how resilient the business model is and the adversity same thing with the pandemic right you know and again this step is as easy as a Google search Netflix letter to shareholders Amazon shareholder letters or Berkshire Hathaway now it's worth noting that not all companies will do this which is a bit of a bummer but you know a lot of the good companies still do however if they don't well don't fear because there is actually a backup plan which is our fifth step have a listen if I am still interested in the business after reading the letters then I go to the transcripts it's actually definitely not written by a PR firm right because this is actually investors and analysts asking questions and so on so forth so I'm not that interested in the prepared remarks in the in the transcript because that will be similar to what's in the in the reports and the annual reports because they're they're controlling that messaging but especially the companies that don't write their own letters Etc I'm really interested in the Q a and of course I have to sift through stuff because the analysts will ask some stupid questions about next quarter you know do you expect to beat by one penny or two pennies and you know that sort of thing which is not really relevant but what I'm looking for is you know when different questions are being asked about the business and they're making different comments I had the full future in front of me and just how did it unfold did they under promise and over deliver or did they over promise and under delivered are they conservative are they aggressive so in the same vein as reading the shareholder letters the earnings calls also give us a really good sense of what the management is like usually the format for these calls is that the CEO maybe the CFO get up and give some prepared remarks which as Manish says you know is basically what they put in their quarterly report but then after that it's all q a and as minus says that's where we learn a lot about the management team again what did they promise a few years back how did they perform you know did it sound as though they were just trying to sell the company now listening to the earnings calls is an important Habit to form because it helps you judge the two main characteristics of company management which is skill and integrity if they have skill and integrity then in the earnings calls they won't over promise but they definitely will deliver and again big shout out to ticker for actually keeping a record of the earnings called transcripts so if you are looking at say Google well easy as you know just click on earnings call transcripts and just like that you're reading exactly what went down during the latest earnings call or you can do what monish says and just scroll back as far as you want and read a transcript from 10 years ago super useful tool so definitely read the call transcripts and with that said let's listen into monishe's final step in this screening process we can then look at the proxies because that gives me a good feel for the you know stock dilution and comp plans and all of that how that is playing out and then after all of that if I'm still interested then we start plowing into the financials and and you know different parts of the annual report risk factors and so on so that's usually the journey so the final step is to check out the proxies aka the death 14a form this is the document that actually explains how the management team are compensated what do they have to do to earn their bonuses how much stock do they own or get given Etc and this is another crucial step because you want the Management's incentives to align with the long-term shareholders AKA you want modest salaries and bonuses related to long-term success of the business and long-term success of their shareholders and furthermore we want the CEO to have a decent stake in the business so that their wealth is directly tied to how well they can grow that company ultimately if the CEO gets a big fat salary and has no stake in the company and their compensation does not really change based on how well the business or the shareholders do that's when you need to run so that's the last step in the process and finally if we pass all of those check boxes we can then start to you know dig into the financials the valuation Etc overall guys that's the easy process that you can use to kind of find high quality businesses relatively quickly you know in the space of a couple of hours you've got a good idea of three out of the four pillars of the Warren Buffett approach you'll understand the business because you know it's in your circle of competence and you've done the reading you'll understand the moat from reading what other investors like Warren Buffett Etc think about the business you'll have checked the management team through the shareholder letters and the earnings calls and the proxies and then the last thing to do is to properly go deep into the business analyze you know the expected future growth check out the financial statements and then come up with your own valuation but with that said guys thanks very much to tikka.com first of all for sponsoring this video as you can probably tell this website is actually pretty damn useful for Value investors and most of the functionality is free so I definitely recommend you just check it out but apart from that guys thank you very much for watching this video leave a like on it if you did enjoy subscribe if you'd like to see more and I'll see you guys in the next video
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