The serendipity engine: Of investments and an endless stream of ideas

One of the very common questions investors get asked is “Where do your investment ideas come from?” The answer is usually typical: running quantitative stock screens, studying different sectors, bottom-up research of some company, and so on. However, in reality, the answer to that question can be endless. Literally everything that an investor does in their day job, even just showing up, is preparing them to bump into investment ideas.

One of the most exciting parts of idea generation is the joy of the hunt. Hunting good quality but beaten down businesses, or finding a sector which is ignored by the rest of the market, or something that was the flavour of the month, has now become the dud of the month. This process keeps investors on their toes, pencils sharpened and eyes darting through the company financials the moment they find an idea.However, the most critical part of this hunt is not the hunt itself, but the preparation towards the hunt. This is where I feel that the investor is preparing for their entire career or even their entire lived experience to identify if something is worth looking at.

The job of an investor is to be forever curious to learn how the world works. This curiosity cannot be taught, it cannot be transferred through observation but it can only be something the investor feels like doing from within.

One could ask what an investor should really be curious about. Learning how the world works sounds vague and can quickly get boring as well as intimidating, there is so much to learn. As a business analyst, the very first thing one can notice is that, since we are living in a capitalist society, every single object we touch or a service we use has a business behind it. There’s someone who founded it and grew that business. The chair you are sitting on, the device you’re reading this on, the clothes you’re wearing, the coffee you are perhaps sipping while reading this, all exist at a reasonable price because some business decided to make and sell them.

If you choose to extend this realization a bit then every business we are interacting with depends on a few but very important ingredients, money to keep the business running, people to do various jobs within that business, utilities like office space, electricity, water, or any other raw materials it might need to make the physical product and of course, most important—the paying customers.

This realization of everything is a business should feel like the red pill-blue pill moment from the first Matrix film. In the film, Neo is given a choice to take the red pill which will show him how the world really works outside the simulated reality of fhe matrix or take the blue pill which will keep him in the matrix, allowing him to enjoy the simulated reality and forget about the real world. It should ideally feel like a curtain being lifted from our eyes and we finally see the world clearly.

After the red pill, the world slowly starts to look like a mix of trade-offs, opportunity costs, required rates of return, interest cost for loans, profitability, sales growth, and so on.

Didn’t we start with the question where our investment ideas come from? Yes, and at the risk of sounding vague, we get our ideas from everything around us. Let me explain. By accepting this business-like nature of the world, we can let our curiosity run wild and try and understand how each of these businesses works. In that pursuit, every book we read, every article, blogpost, podcast, annual report, earnings call and personal interactions with people we know can act as a source for interesting investing ideas. Sometimes, observing a business transaction or seeing the friction or pain point in getting some product or service should trigger the thought process to see what goes behind such a process.

This is one of the processes even entrepreneurs use to get their business ideas. It may not be fully formed but it definitely can lead to a business idea, which leads to a business model and then a business.

When one is working as a professional investor, there are some ways to formalize this process. We can have sector experts on our team; we can have a wider tracking universe of global and domestic businesses. This accelerates the process of curiosity and understanding.

An exposure to this thought process, and the willingness to follow through with the research creates a positive feedback loop. In English language, the word for such happy coincidence is called serendipity. Just this approach towards learning about the world can turn a person into a serendipity engine which will act like an endless stream of ideas. Whether to act on all these ideas or not is debatable.

Raunak Onkar is co-fund manager at PPFAS Mutual Fund. The views expressed in this article are personal.

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Updated: 06 Sep 2023, 11:09 PM IST



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