I’ve put out three videos and posts on how to find stocks for beginners. There’s the Peter Lynch style of buy what you know, using your everyday insights. There’s screeners, which allow you to filter through the world of stocks to get to the criteria you like. And there’s coattail riding, or following other people’s ideas, as long as you do your own work.

There are lots of ways to find ideas. Some are more advanced, and I’ll cover some of those at a later point. In this video, I want to share two last beginner ideas: how to find stocks using random and top-down methods.

Let’s start with the first idea: throwing darts.

Random method to finding stocks

Throwing darts? Why not?

Hold on, let me re-state what we’re trying to do. We’re looking for stocks that we might research and that have a chance to be buyable. We’re not literally throwing a dart and then entering a buy order on the companies’ shares. Beyond anything else, throwing darts only works if you have a newspaper to work from or, I don’t know, a magnetic monitor with stick-on darts.

Our first three methods start from a conception of the world. A viewpoint. This method flips that – instead of anchoring to our preconceptions, the random selection allows us to stumble on companies. When you’re starting your investing career and just looking to understand companies, this can be a good way to start.

A random stock picking example

One of the first stocks I ever bought was Fidelity National Financial. Did I fully understand that Fidelity National Financial was a title insurance company, in the financial sector but not a bank? Not completely. Did I understand it was not Fidelity Investments? I think so.

Anyway, I was looking for a financial stock in my portfolio, I saw FNF on a list, I looked at its numbers, and I thought ok. Later swapped it out for Flushing Financial, an actual bank with a higher dividend that happened to be right next to FNF on my list.

This was not exactly random – I was working off a list of 5-star stocks from S&P that my brokerage had sent me – but it may as well have been. I didn’t do enough work, so I didn’t hold onto FNF. Had I held on, I would have outperformed the S&P 500* over the dozen years since. And FNF is a very interesting company that does a bunch of weird things. It’s a good one to learn from even though I’m not crazy about their core business. In fact, I own one of their spin-offs, FG. FFIC, meanwhile, has not had a great dozen years.

*Performance is a little tricky to measure because of spin-offs and corporate actions, but I believe that’s right.

Opening yourself up to what’s out there as a way to explore can work in the stock market. You just have to make sure you turn the random unknown idea into a rational known holding.

Top-down method to finding stocks

If finding stocks using random methods is powered by chance, finding stocks using top-down approach is the opposite. In top down, you have an idea. You think AI is going to be the next great industry. You want to find the company selling picks and shovels to the crypto industry. Or you think that air conditioners are going to be in more and more demand due to global warming. Now you just need to find a way to play that theme. That’s top-down stock picking.

Top-down stock picking examples

Again, a couple examples, now from my recent investing. My friend had the air conditioning idea. I manage a small portfolio for her, and so we set off to look for companies that sell air conditioning devices. Daikin is the biggest air conditioning company in the world, and they sell into Europe and globally. The shares are more expensive than I’d like, so we only opened a small position, but we went ahead and did it.

Another example of a top-down approach, with some Peter Lynch. In 2023, I’ve been looking for stocks that have decent prospects and haven’t fully recovered from the pandemic. This is hard, because most cheap stocks are reaping pandemic and inflation boosted earnings that are likely to fade. And most stocks that have struggled from the pandemic are tech companies that are still very expensive.

My wife is from west Michigan, and I’ve learned over the years that the Midwest and especially Grand Rapids and west Michigan are centers for furniture making. I owned Indiana-based Kimball International shares for nearly a decade. I have to admit, it wasn’t a big winner – mostly due to the pandemic – and I got bailed out when another company bought it in a deal announced this March.

Combining this desire to find a stock that hasn’t been priced for a full post-COVID recovery with my furniture insight – and new space in my portfolio, I researched and bought shares in Steelcase, a leading office furniture maker. My top down thesis is that more and more companies will return to the office over the next 5-10 years, so Steelcase is likely to grow sales. My specific reasoning to buy Steelcase and not other companies in this sector are the relative price of its shares compared to its value, and that the other big competitors are going through difficult merger processes.

Limits to top-down stockpicking

The challenge with top-down stock picking is spelled out in my last two sentences. First, I have to be right in the thesis that office furniture sales will go higher. Then, I have to pick the right company to express that thesis. It’s a little bit more of a 1-2 combo instead of a straight uppercut of a stock idea. You see this plague a lot of growth stock stories, where investors get excited by a new technology, while discounting how much competition there will be and how hard it is to pick the winner. This difficulty plagued early railroad investors, early airline investors, and automobile investors. It was also a challenge in the computer industry, and will recur with most modern technologies.

*Warren Buffett often jokes that “if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville (Wright) down.” Buffett went on to lose money on the airlines in 2020 in the immediate pandemic aftermath.

Top-down stock picking is a common approach, though, and it may be easier to understand as you start your investing. If you don’t always have an insight on a company level, you might have one on a ‘way the world works level.’ You can then express that insight using top-down stock picking.

Any way to find a stock

For experienced investors, finding a new great stock idea is like finding a diamond in the rough. Or a needle in a haystack. Or gold on a riverbed. It’s a rare feat, and one that could go a long way. Charlie Munger, Warren Buffett’s partner, is said to have read Barron’s, the weekly stock newspaper, for 50 years and only found one idea. He made $80M on that idea, though, which then turned into $400 or $500M. The power of an idea.

If you’re a newer investor, the idea itself doesn’t matter quite as much. You have to learn how to evaluate stocks, and you have to get your feet wet with holding and following stocks. An idea only gets you so far.

In my first month of investing, my buys involved a number of approaches.

• I bought Apple because the iPad 2 was about to be announced and I thought that would be good for the stock. I also saw it on the S&P 5-star stocks list I mentioned. Peter Lynch + Screener/other people’s ideas
• Costco because I knew Costco was great. Peter Lynch
• RAVN and MTU* and INT because they were on that 5-star list. Screener/other people’s ideas
• FNF, as mentioned, and then FFIC. Random + other people’s ideas
• Honeywell because my wife’s grandfather recommended it. Other people’s ideas
• Velti because I was scanning for busted IPOs, and it looked good to me. Screener

*This is Mitsubishi Financial. It lasted about two weeks in my portfolio – I sold it at a loss shortly after the Fukushima tsunami / nuclear plant accident.

And I was top-down fitting these into a diversified portfolio concept I had learned from reading Jim Cramer’s Mad Money book*

*I don’t take Jim Cramer very seriously anymore, and think he’s stretched too thin. He has a less than great reputation among active investors. But, his book was helpful to me. From what I’ve heard from people who worked with him, he’s both a decent guy and absolutely as crazy in real life as on TV.

I only held onto Apple and Honeywell for more than a year, and I didn’t make great money on the others. But I didn’t lose money either, and I got repetitions in how to look for stocks and evaluate them.

Which is what I’ll cover next time out: how to evaluate stocks. An idea only gets you so far: how do you decide if the stock is right for you? That’s what we’ll talk about in the next couple videos.

In the meantime, have a look at our five ways to find stocks. You might gravitate towards a favorite approach. But it is good to keep each of them in mind. Finding stocks using random and top-down methods can be powerful, even if they are diametrically opposed.

Disclosure: I have positions in Apple, DKI3 (Daikin), FG, and Steelcase. I have no plans to change those positions in the coming weeks.