In one sentence: Once you know your neighborhood (the three circles from 076), five ways to find the actual company are scanning tools, gurus' filings, broker tips, friends' tips and newsletters or research sites, and every one of them only produces a name that you then run through Munger's filters yourself.
Key ideas
- Diversify in proportion to ignorance. The more you know, the less you need to spread. A single rental house in a neighborhood you know well is an analogy. Phil jokes that one famous investor concentrated heavily in banks because he thought he understood them. [00:00–03:00]
- Recap of the series. This is part two of a "back to basics" run on Munger's four filters. Finding a business comes before filter one. [03:00–05:00]
- 1. Scanning (screening) tools. A scan applies criteria across thousands of stocks in an instant. Phil's own screener scores moat from consistent 10%+ growth in sales, earnings, cash and book value, and scores management from steady ROE and ROIC and low debt. His live demo narrowed about 6,000 stocks to a few hundred and then to 88 by also requiring a maximum payback time of eight years. [05:00–12:00]
- Other screeners. GuruFocus offers Graham net-nets, Buffett–Munger, Greenblatt's magic formula, Peter Lynch, 52-week lows and Piotroski F-score lists. Phil's quick tests (ROE above 15%, 20%, then higher) show how many companies pass at each cut. Morningstar has a paid screener. Yahoo's is hard to use. [12:00–21:00]
- 2. Gurus. Large managers file 13Fs with the SEC roughly every 90 days. Aggregators (Phil's site, GuruFocus, Dataroma) make them readable. Phil follows about 45 managers he admires, and a "merge" of three circles, screen and guru buys narrows candidates further. The data is public and free on EDGAR, just hard to navigate. [21:00–28:00]
- 3. Brokers. Their job is to recommend, many aren't trained in valuing a business, and the research behind a recommendation usually gives a target price rather than a value. Take the tip, then check it yourself. Ask whether an advisor got rich investing or advising. A good advisor will discuss moat and understanding with you. [28:00–35:00]
- 4. Friends. Fine as tips, but be careful of anything that could be inside information, which the SEC pursues even for small trades. A friend noticing a store with long lines (Urban Outfitters, in Phil's story) is a legitimate prompt, and the later empty stores are a reminder to keep watching. [35:00–38:00]
- 5. Newsletters and research sites. Motley Fool's Stock Advisor (aimed at growth names, not strictly Rule #1) and Seeking Alpha (many independent analysts). Danielle found an expedition-cruise company there that spoke to her. [38:00–44:00]
- Finding is easy; understanding is the filter. Thousands of companies are on sale every day, so the question is which ones speak to you. Danielle prefers reading to screening, and that is fine, as the practice should be enjoyable. Think of it as shopping for about 20 businesses you want to own over a lifetime. [44:00–46:00]
How it maps to RuleOne
- /stocks/ is the scan and the home page event watch is the guru and event layer (insider buys, 13Ds, drawdowns). The stock page links to EDGAR for the primary documents.
- The screen scores the same things Phil screens on (growth consistency, ROIC, debt, payback), so the exercise below can be done on the site.
- Radar in the agent stack plays the role of "friends, newsletters and gurus", with the same caveat: output is a candidate list, not a recommendation.
Buffett, Munger and Graham links
- Graham's net-net and defensive screens (The Intelligent Investor, chs. 14–15) are classic screening ideas and appear as GuruFocus presets.
- Buffett's 1993 Berkshire letter on diversification calls it protection against ignorance, which echoes Phil's point that diversification should scale with your lack of knowledge.
- Greenblatt's The Little Book That Beats the Market is the "magic formula" referred to here.
Words to know
- Screener / scanner: a tool that filters thousands of stocks by criteria such as ROE.
- 13F: quarterly holdings filing from large managers (see 001).
- Payback time: years of earnings needed to repay the price you pay, here eight years or less.
- Piotroski F-score: a nine-point score for financial improvement in cheap, small companies.
Try this
On /stocks/ apply filters for consistent growth, high ROIC and low debt. Pick one industry from your three circles in 076 and write down which names remain. Then find one tip from outside (a friend, a newsletter) and note which of Munger's four filters it already answers.
Check yourself
- What are the five ways to find companies?
Answer
Scanning tools, gurus (13F filings), brokers, friends and newsletters or research sites. - Why treat a broker's recommendation as only a lead?
Answer
Brokers usually give a price target, not a business valuation, and often aren't trained in valuing a business. You still need to test the four filters. - Why be careful with a friend's tip?
Answer
It might be inside information. The SEC investigates unusual trading, even small, and legal costs can erase the gains.
Short quotes
"Diversification is appropriate to the degree that you don't know what you're doing." (Phil, ~01:30, auto-transcribed, paraphrased)