In my experience some if not many of my best and most profitable stock pick ideas have been sourced from my bathroom, kitchen, garage and retail store shelves, doctors offices, car, restaurants, casinos, construction sites, roadways, offices, movie theaters, grocery stores and gas stations, etc. In short, based on my own experience and with my own mouth, ears, nose and eyes. By doing this I have at times identified trends and patterns long before Wall Street and the so called experts have. I have also found that it is easy to be lazy and lapse into the passive state of looking to others for guidance. However far more often than not I have found that it can be very profitable to implement my own ideas based on my personal experience within my circle of competence. I am specifically talking about both short-term and long-term trends. The key here is to do some homework to relate what you are seeing firsthand at ground level to the set of expectations embedded in the stock price connected in some way to what you are observing. Yes while it does pay to read quarterly and annual reports it also pays to take a shot about figuring out what is yet to be written in future reports by the company and so called experts who write about them.
In “One Up Wall Street,” Peter Lynch provides personal examples of this approach of sourcing ideas based on his and/or his wife’s firsthand knowledge. Lynch tells the story of identifying growth stocks that became multi-year, multi baggers. Before I do the same I must point out that there have been plenty of opportunities I have identified on Main Street that I have missed or not capitalized on in the stock market due to attention lapses and/or outright error.In 2003 my wife obtained our first Costco membership and dragged me into the local store that had just opened. Over the next several months/years I witnessed a slow but steady increase in store traffic. At the time I was working in an investment fund focused on reading Wall Street research so I was too busy to recognize the investment opportunity in Costco. After about one year of being a member, I read my first Costco annual report. In typical Costco fashion the report contained a chart that showed the long term trend of business increases for vintage year stores. The historical pattern laid out in the annual report was consistent. As year two rolled around in my local Costco store I observed a pattern of traffic increases that were consistent with trends discussed in the annual report. The year two pattern was followed by the same in years three and four. By then I had personally owned the stock for a couple of years but did not own it professionally as it was unfortunately “outside of our charter.” During the Fall of 2008, I observed a collapse in traffic in approximately 35 local restaurants, retail stores, casinos and other locations (that I had patronized for years) before I was reading about this trend. At the same time, I was also continuing to see strong traffic in my neighborhood Costco store so I held onto the stock. As of May 2013 the rest is history as Costco has been about a 5 bagger and is now somewhat of a darling on Wall Street as I now read sell side buy recommendations after the stock has made a 50% - 100% upward move. The key to understanding Costco was spending time in their stores and observing what went on. Without time spent here I would have not likely ever bought the stock and may not have held onto it.
The pattern that was observable in my local Costco store was the long steady multi-year increase in traffic and member renewals (over time we consistently bumped into more of our neighbors on Saturday’s). Reading the report data confirmed the trend I had observed firsthand in my local store. This served multiple purposes which included aiding my level of conviction especially during times of overall market volatility.The observations also provided a feel for judging future duration and persistency of cash flow as basis for judging increases in future intrinsic value.In Costco’s case the rest is history and I was fortunate to have observed it firsthand for several years before the folks in New York had figured it out and were writing about it with the level of enthusiasm they do today.There are more multi bagger-multiyear Costco’s out there on main street so I encourage you to push back from your computer screen and go out and find them.