Overview – Never Underestimate the Power of Making Good Observations
Investors have access to almost any sort of investment information they desire. Other than some very sensitive documents, an investor can gather all the information they want with just a few clicks.
With so much investment information that is readily available, it’s easy to forget that investment information goes beyond what is available on the internet or public record.
You don’t need to rely exclusively on “traditional” sources of investment information to come up with investment ideas or to find bits of information other investors aren’t aware of.
Sometimes, maintaining a sharp eye and making careful observations can elucidate investment insights others may miss.
Looking Beyond “Traditional” Sources of Information
In a previous article, I went over the different sources of investment information that are readily available for investors to access.
Because we live in the age of the internet, gathering the information we want is practically effortless. A quick google search and a bit of digging around can easily lead you to the information you are seeking.
It’s safe to say that most investors want to establish some sort of competitive advantage for themselves. That is, they want to know some things that other investors aren’t privy to.
An investor can’t hope to set themselves apart from the crowd and find promising investments if everyone is aware of the same facts they are.
There is a fine line between making an investment decision based on information that isn’t widely known, and insider trading. Insider trading is a crime in Canada, the U.S., and most countries, so obviously that’s not what I’m advocating here.
What I am saying is that an investor can glean hidden gems of investment information and inspiration without breaking the law or by doing anything overly time-consuming.
This starts by looking beyond conventional investment information sources, such as annual/quarterly reports and other documents you can find on the internet.
These documents are viewed by hundreds, if not thousands, of other investors, so the chances of finding something in these that other investors aren’t already aware of is slim.
One of the ways I’ve found that can help investors to pick up facts they previously weren’t aware of is to go out and make their own observations. What an investor reads in a report and what’s really going on out in the field may differ greatly.
This first-hand experience could mean the difference between a good and a bad investment decision.
Gaining First-Hand Investment Information Through Observations
Imagine you are an investor in 2004. During this time, the first iPhone is 3 years away, Myspace was the dominant social network, Yahoo! was still a tech giant, and the current Windows OS is Windows XP.
Around this time, you tell yourself that you want to invest in the tech industry, believing that it has lots of potential. Problem is, where do you start to look for inspiration and information?
There is some investment information on the internet, but other than annual/quarterly reports, high-quality information is hard to come by, meaning you need to find other ways to get the information you want.
Let’s say that, over the past couple of years, whenever you go to the mall you notice that the Apple Store is always busy.
Not only that, but you’re probably familiar with the popular iPod which came out in 2001, and how almost everyone you know either has one or is thinking of getting one. There are also rumours of an Apple phone coming out sometime in the future.
Given the success of the iPod and the growing popularity of the Apple brand, you decide to investigate Apple further by reading through their annual reports and financial data. Ultimately, you decide to purchase shares in Apple.
On Dec. 31, 2004, Apple’s share price was $1.16. At the time of this article’s publication, Apple’s share price is $124.69.
This approach of “invest in things after making an initial observation” might seem overly simple, but it is much more powerful than some investors realize.
Peter Lynch, the famed manager of Fidelity’s Magellan Fund, explains in his book One Up on Wall Street how he ended up investing in Dunkin’ Donuts.
Lynch decided to invest in Dunkin’ Donuts not because he read about it or because it was a popular stock, but rather because he was impressed with their coffee as a customer.
After noticing that Dunkin’s Boston locations were always busy, he decided to perform a more in-depth analysis before making the decision to buy shares. Lynch notes how Dunkin’ was one of the best investments he ever made.
Investors can learn a lot from reading, yes, but there is a major difference between reading about something and experiencing it firsthand.
Lynch could’ve simply been told by other investors to stay away from Dunkin’, but his personal experience with their coffee and busy stores suggested that Dunkin’ was an enterprise worth investigating further.
This is why observations are so powerful in investing. A company can say in their annual reports that their customers love them, but if you’ve observed customers flocking to competitors in search of better alternatives, then you know it’s only a matter of time before this reflects in the company’s financial statements.
Personal Example: Enbridge
Right now, Enbridge is my second-largest holding by market value. The oil and gas industry may be falling out of favour for many investors, but I firmly believe that the industry still has a role to play in the future.
Alberta is Canada’s center for oil and gas activity, yet most of the crude oil Alberta produces isn’t refined or consumed in the province. In fact, the largest customer of Canada’s oil is the U.S – 98% of Canada’s oil exports head south of the border, usually to refineries in Texas.
Out of all the methods used to transport oil, by far the safest and most efficient way to do so is by using pipelines. There are several pipeline operators in Canada, but the largest, by far, is Enbridge.
In addition to their already vast pipeline network, Enbridge owns and operates the largest hydrocarbon pipeline network in North America: the Mainline System.
From a business standpoint, Enbridge has a very wide competitive advantage with the Mainline: it would take billions of dollars and several decades for competitors to rival the Mainline system in terms of size (13,800 km) and capacity (2.85 million barrels per day transported).
Some of the biggest Canadian oil producers, such as Canadian Natural Resources Limited and Suncor, use the Mainline System to transport their crude oil to customers.
If a competitor tried to rival the Mainline System, along with Enbridge’s other pipelines, it would take them decades to catch up. You don’t need to have lots of technical knowledge to understand this – a quick observation of Enbridge’s operations makes this very clear.
Despite the rhetoric against the oil and gas industry, there’s no denying that the industry will continue to play a major role in Canada’s economy. The oil and gas industry accounts for more than 10% of Canada’s GDP and 23% of Canada’s exports in 2019.
With these observations in mind, my continued optimism in the oil and gas industry, and my ability to understand Enbridge’s business because of my chemical engineering background, investing in Enbridge was only a matter of time for me, which I eventually did in August 2019.
Observation is a Preliminary Form of Investment Research
Now, just because you make certain observations doesn’t mean you should base your entire decision on that.
If you’ve ever gone grocery shopping on the weekend, chances are the store is packed with people. Does this mean you should pour your life savings into the stock of your local grocery store because it’s busy every weekend?
In the story of Peter Lynch and Dunkin’ Donuts, he didn’t invest in Dunkin’ simply because he liked their coffee and saw busy stores.
These observations served strictly as preliminary signs to him that Dunkin’ might be worthwhile to investigate further, which he did when he eventually studied their financials.
With regards to my experience with Enbridge, I followed the same logic as Lynch: my observations suggested that Enbridge is a strong enterprise, so I wanted to determine if that was indeed true by going over their annual reports and financial statements.
Observations serve as a good starting point for investment ideas and as an alternative source of investment insights, but careful observations should always precede thorough analysis, not replace it.
Wrapping Up
Investment information and ideas aren’t confined to reports, news releases, and other traditional sources of information.
Insights can be gained by going out and making your own observations. What you read and what you actually experience may end up being entirely different, which could make all the difference in your investment decisions.
Although making observations is simple yet very powerful, it should only ever serve as something that precedes and/or supplements thorough analysis.
Observations serve as an excellent starting point for generating investment ideas or picking up new information, but what an investor observes should always be investigated further.
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