In an interview with Warren Buffett, Adam Smith, author of Supermoney, asked how “regular” investors can find good investment ideas.

Warren Buffett: [Investors should] do exactly what I did forty-odd years ago, which is to learn about every company in the United States that has publicly traded securities, and that bank of knowledge will do him or her terrific good over time.

Adam Smith: But there are twenty-seven thousand public companies.

Warren Buffett: Well, start with the As.

Here’s how.

Your Advantage Over Early Buffett: Technology

When the SEC stole ☺ my idea of RSS feeds for EDGAR filings, they added a great feature – RSS feeds for the latest filings. Rather than subscribing to a particular company’s filings, you can be notified every time any company files an annual or quarterly report.

Among others, I have two of such SEC RSS feeds that come to my Outlook every day:

• Latest 10-K (Annual Reports) – RSS Feed
• Latest 10KSB (Annual Report for Small Business Issuers) – RSS Feed

Last year, more than 16,000 companies filed 10-Ks or 10KSBs with the SEC. Assuming they come in evenly (they don’t, but we’ll say this for simplicity’s sake), that would be more than 4,000 annual reports a quarter, or roughly 44 a day, each and every day of the year. Forget holidays, vacations, or your kids’ birthdays – you’ve got annual reports to read!

Though it sounds like an impossible task, it’s not.

Most Can Be Glossed Over and Discarded

While there is much more to a company than its financials, starting with the financials will allow you to quickly dismiss thousands of these filings. Over the past two days, I’ve looked at more than 500 companies and only found one potential investment – a great company that is slightly overpriced. (Obviously, I’m waiting until it drops 30% or so.)

As an example of companies that can be “glossed over and discarded,” look at this filing from Modena 6, Inc:

I know I don’t need to do a thing but close the filing and move on. The worst part? I had to wait a second while the page loaded.

Another example is this filing (a small business quarterly report) from OmniReliant Holdings (ORHI) – the “Warning” notes are mine:

I’ll spend more time explaining here than I spent actually reviewing the filing itself.

Warning: A Development Stage Company. I don’t like “development” or “exploration” stage companies unless the numbers really jump out at me. When I see “Development” stage, I put my guard up immediately.

Warning: $17.4 million in derivative liabilities compared to total GAAP assets of $14 million (less if we had to fire-sale the businesses). I am gone.

Warning: $29 million shareholder deficit. I didn’t notice this until I posted this, because I didn’t spend more than five seconds on this business.

Bad Businesses? Par For The Course.

Out of 500+ businesses that I looked at, I was able to immediately discard 450 or so because of their negative balance sheets. When a company has a weak balance sheet, everything else about is often highly unstable.

The remaining 98% of the businesses were discarded in under a minute or two. Mediocre balance sheets, massive negative cash flows, and ungodly issuances of stock to managers were the primary reasons for passing. With such weak foundations, such poor past performance, and such disregard (or misunderstanding) of value and the use of stock options, I didn’t need to spend any time figuring out where these businesses would be in the future. When they hit my radar again next year (through the RSS Feed), I’ll see if anything changed.

Thus, to get through 500 or so companies took about an hour, with just three having moved to the “more research” pile. Two of those three were discarded ten minutes later; just one moved to the “yes, but wait for the price to drop” pile.

500 companies an hour x 20,000 or companies = 40 hours a year. Add in additional time for research on the “maybes” and you could get through every filing company in about 60 or 70 hours.

If You Don’t Have a Few Hours a Day

You don’t have to look at every company out there. In fact, you can make very good returns by sticking with familiar brands when they are selling at a discount. But, if you want to spend the time taking your learning and investing to the next level – if you want to “start with the As” as Buffett suggests – the SEC’s Latest Filing Feed is the first step.

Without getting too technical, Extensible Business Reporting Language (XBRL) is an XML-based specification for publishing business and financial information. In Plain English, it means that annual and quarterly reports filed by public companies will have to be “tagged” so that information is quickly and easily accessible. Once tagged, it can then be easily pulled from the SEC’s database and quickly (and automatically) formatted and customized.

What This Means For Regular Investors

Before I give an example of now versus soon, let’s discuss what this means. First, you won’t have to pay a big company to get data. Those guys have supercomputers working 24/7 to scan documents and pull information, and then they have people in the background verifying it – and you would be paying for all of that.

Once XBRL becomes the standard, the company filing the report is responsible for creating a tagged, XBRL document that is ready to be read by a standard reader (like the SEC’s reader, discussed later), or ready to be manipulated by a customized software solution. No longer will annual reports need to be “scraped” for content; no longer will you have to worry about typos or other human error.

Second, it means that you will get information the second that the big boys do. There will be no data lag. You won’t have to wait for something to be filed, then read, then parsed, then verified, then made available. Will this greatly affect your investing? Probably not. But it levels the playing field a little more.

Test Drive XBRL

I can talk until I’m blue in the face, but you really need to try it to see how much better it is. The SEC has made a work-in-progress interface that you can use to really experience the benefits of XBRL. Let’s walk through it to compare the future with the present.

First, go to the SEC’s Interactive Financial Report Viewer. You’ll see some companies listed on the left. Click the plus sign next to 3M Co. After a few seconds, a list will open and you’ll see Annual and Quarterly Reports for the company. For this example, click Annual Report (2006-12-31) and you are taken right to 3M’s Income Statement. Want to see the full Statement of Cash Flows? Along the top, click “Cash Flow from Operations – Indirect Method” to see that section, or click “Statement of Cash Flows” to see the rest. Head over to “Statement of Financial Position” to view the balance sheet.

Sure beats the heck out of going to the EDGAR database, entering “MMM” into the search box, searching for Form 10-K, clicking [HTML], interpreting which file to open, scrolling down to the Table of Contents, finding the Financial Statements, scrolling down to the Statement of Cash Flows, and then scrolling up and down to get your data!

We’re Not Done Yet!

The SEC’s barebones, beta viewer has some awesome functionality. You can draw a chart for easy comparison between periods, or export the financial statement to Excel without having to reformat everything once it’s in your spreadsheet.

Not sure what an item is? Click the description to learn more. On 3M’s balance sheet, I click “Property, Plant, and Equipment, net” and I get the definition:

Tangible assets: 1) Held by an entity for use in the production or supply of goods and services, for rental to others, or for administrative purposes and 2) are expected to provide economic benefit for more than 1 year; net of accumulated depreciation.

By clicking “All Reports” at the top, I can see all of the financial statements together.

First XBRL, Then XBRL Tools

As XBRL becomes the standard, you will start to see more robust stock screeners and less costly data aggregators. Sites like Yahoo! Finance, Morningstar, Google Finance, and others will have to start presenting full financial statements to stay competitive. Though the data is free today to anyone willing to visit the SEC’s EDGAR database, it is still a pain to do so.

As XBRL becomes the standard, we will enter into a whole new world of financial reporting. EDGAR changed the face of financial reporting in the 1980s; XBRL will change it again.

Don’t Get Your Panties In a Bunch

Before you start drooling (like I am), we have a ways to go. XBRL is just rolling out now and it’s going to start with just the largest companies. Over the next three or so years, the SEC will expand its XBRL filing requirements to eventually include all companies. As they work the kinks out of the program, it will get better and better.

And I commend the SEC for taking further initiatives. You can visit their Interactive Data Viewers page to see what else they’re working on. At the time of this writing, the SEC has:

• Interactive Financial Reports,
• Executive Compensation comparisons,
• Financial Explorer to view and visualize company financial data in various ways, and
• Mutual Fund Reader to compare fund investment objectives, strategies, risks, costs, and performance.

Learn More About XBRL

You can learn more about XBRL by visiting the SEC’s website (using the links I provided above) or by visiting XBRL.us. As I learn more, I’ll let you know.

And a special thanks to George over at Fat Pitch Financials for getting me invited to the conference call.

Legendary investor Peter Lynch said, “The person that turns over the most rocks wins the game. And that’s always been my philosophy.” You won’t find a Graham Corporation – or any Small Fish for that matter – in a traditional stock screen for solid companies. Let’s look at how you can turn over more rocks.

The Traditional Stock Screen

When screening for stocks on Morningstar, MSN, Yahoo!, Zacks, or virtually any other site, people tend look for some or all of the same characteristics:

• high returns on equity (or invested capital);
• 5-year revenue growth of 10%;
• 5-year earnings growth of 10%;
• low debt-to-equity ratio (less than 1 or 1.5);
• market capitalization over $500 million; and/or,
• positive free cash flow for up to ten years (on Morningstar Premium).

Wouldn’t that be a wonderful company to own! If you find a company that meets these criteria and can be expected to do so in the future, you stand to make a ton of money. The problem is that companies like this are few and far between, and they don’t usually sell at a substantial discount. While patience is a virtue, you have to remember that these are businesses – businesses that can have a bad quarter, a bad year, or even two or three bad years.

A single year of negative free cash flow at an industry leader isn’t bad, but it’s enough to get it kicked off the above list. A single year of bad earnings – particularly if it was the most recent year – might block it from the list. Here’s the rub: the bad earnings would likely make the stock price plummet, thereby creating a potential opportunity. If you live inside this very rigid screening structure, you’ll never see it.

What Is a Good Business?

A good business is one that can survive through the bad times and thrive in good times, right? When times are bad, prices get beat down; so, we would be wise to wait until the bad times – or just after the bad times – to start buying. I’m not talking about economic bad times (like we’re having now) that send the markets down 10%, 15%, or more. The bad times are rough periods for an individual business.

Remember our Wal-Mart discussion nine months ago? Too short a timeframe to judge performance; still, Wal-Mart was experiencing tough times. Consumers were blowing money elsewhere, Wal-Mart was lowering guidance for the next fiscal year, and comparable store sales were weak. Wall Street had beat the stock down some 20% over the previous two months as speculators panicked about the short-term outlook on Wal-Mart’s stock.

Wal-Mart was having a tough time on Wall Street. If the economy didn’t start to tank as quickly as it had, Wal-Mart would have continued to have a tough time and we wouldn’t have nearly bottom-ticked it as we did. (Better lucky than good, right?)

Tough Times In Business

Forget stock price for a minute. Let’s focus on the business. What signals that a business is having a tough time? For one, its operations are not generating enough cash to support itself. Borrowing ensues, stock is sold, and it sheds assets to try to find a balance to survive. Then what?

If the business can survive that tough period of the cycle, it should be able to get back to positive cash flow – cash that can then be used to pay off the debt, repurchase stock, and/or begin acquiring assets (physical or human, like sales staff). Now in a balance again, the business can start focusing on growth through increased sales or larger sales that convert into more cash.

Though the plan doesn’t always work out for some companies (they can’t get out of the rut), this is the general cycle of business:

A lot of value investors try to find that absolute bottom – the point at which the business is beginning to turn around and growth is about to start happening. I’m not that adventurous; so, I try to buy in the recovery stage when it looks like the next growth cycle will be higher than the last (if I’m looking at these type of businesses). Turnarounds seldom turn; so, I wait until the turnaround is well underway.

The Graham Turnaround

If you look at the Statement of Cash Flows Morningstar presents (1998-2007), you’ll see that Graham appeared to be in that contraction phase from 2002 to 2005, at which point it hit a balance and started its recovery. If things continued to be bad for much longer, Graham may have fallen off the face of the Earth. Instead, it was able to head into a recovery in 2006 and 2007.

Then, it started heading towards the peak of its next growth cycle. There is no way to know when that peak will hit or how high it will get; still, Graham was certainly growing rapidly – and well beyond the last peak.

How Do You Find a “Graham”?

Think about it: What happens when a business goes through a tough time? Negative cash flow. Negative earnings. A drop in Shareholder Equity. What happens when it starts to recover? Positive cash flow. Positive earnings. Growth in Shareholder Equity.

Play around with your stock screeners. To find Graham, I searched for companies with:

• free cash flow (Year 3) < 0
• free cash flow (Year 2) > 0
• free cash flow (Year 1) > 0

Then, I turned over a bunch of rocks and was able to narrow down my candidates to just a handful (50 or so) of opportunities. Then, I watched them for a few quarters to see what was happening at the business. Eventually, I found two opportunities – one of which was Graham Corporation.

Look for businesses that are coming out of tough times, and then see if you can predict their future and value them. You probably won’t get the absolute bottom. Then again, you don’t have to.

So, I put my web designer to the test. The result? Sit back, put your feet up, and let your companies come to you.

Introducing the EDGAR Filing Feed

The F Wall Street RSS for EDGAR Filings (accessible at any time from the left menu The SEC finally entered the 21st century and now offers RSS feeds on the EDGAR site) allow you to subscribe to any company’s or individual’s filings with the SEC. Obviously, the company or person in question must be a SEC filer – a public, reporting company, an executive/insider, etc.

What this means: Rather than checking the EDGAR database for filings and updates, this tool will allow you to be automatically notified when new forms are filed. Insiders selling? You’ll know when the SEC does. Something upsetting the applecart? Be informed before reporters have time to write (and break) the story.

Fancy. But how does it work?

This tool pulls the data directly from the EDGAR database and creates an RSS feed. By subscribing to that feed, you’ll be notified when new forms and filings appear on the EDGAR system. You’ll be looking at the same information; it’s just presented differently. Rather than just being there for you to find, filings and updates are sent to you.

I don’t use RSS. Should I start using this free, timesaving gift from the technology gods?

Obviously, I like RSS. You should get to know it – it’s the future of information dissemination. It’s free; it’s fast; it’s convenient. Here’s a free YouTube tutorial on using RSS.

I currently subscribe to about 40 RSS feeds. Rather than going to each of those 40 websites and reading the news/articles, I sit back and let them come directly to my Outlook. Right now, I have 2,200 news pieces on possible workouts that I have to go through. Don’t want to read them? Delete All.

Best of all: It’s free, and you can unsubscribe to any feed at any time.

Let me know what you think about the RSS for EDGAR Filings. Enjoy!

See for yourself with the EDGAR database.

Investors like Warren Buffett (via Berkshire Hathaway) must file a quarterly report with the SEC disclosing their holdings at that time. Such filing is done on Form 13F or 13F-HR (Form SC 13G for money managers like Pabrai Funds or for Buffett personally). On that report, they list the stocks they hold and the number of shares. For example, on its February 14, 2008 amendment to Form 13F-HR, Berkshire reported holding $2.4 billion of Kraft Foods, or 69.6 million shares.

There are a zillion websites out there making that purchase big news, but it is not super-helpful from a “I want to understand his past purchases” perspective. For that, we turn to EDGAR.

First, Get Yourself To Berkshire

In the EDGAR Database Primer, we took a look at how to get on EDGAR and find a company’s filings. Let’s take it a step further. First, we head over to the EDGAR search screen and search by company name. I’ll put “Berkshire” in and see what happens:

There are a ton of results for Berkshire (in alphabetical order), so we need to scroll down a bit to find Buffett’s company – Berkshire Hathaway Inc. To the left of the company name is the CIK (Central Index Key), a unique company identifier for filing with the SEC. Clicking that CIK number [0001067983] will take us to Berkshire’s filings.

Having clicked the CIK, we come to a somewhat (now) familiar screen – the list of all of Berkshire’s filings. For our purposes here, we don’t need to see the letters from the SEC, the Form 4s, or other filings – just the Form 13F-HR and any amendments. We’ll use another search box, this time found in the top right of the page we are on.

Narrow The Results

We want to search for Form 13F-HR (amendments will automatically be included) and we want to see 100 results per page. Because we are requesting a specific form, we can ignore the “Ownership” selection because ownership forms (3, 4, etc) won’t appear anyways.

Hit Retrieve Selected Filings and there you have it – every Form 13F-HR and amendment for Berkshire Hathaway leading back to May 15, 1999. You can now see every purchase or sale Berkshire disclosed and then start ripping apart those investments.

Understanding Form 13F-HR

As we look at this Form 13F-HR filed on Feb. 14, 2001, we can peak at Berkshire’s portfolio (save any investments he was then making for which he filed for confidentiality and later disclosed on a 13F-HR/A). At that time, he held 7,697,500 shares of H&R Block, a position he increased by 2.4% over the next three months, as can be seen by this Form 13F-HR filed on May 5, 2001.

Using Form 13F-HR For Your Own Research

What was happening during those three months that Berkshire was buying? What was attractive about H&R Block back in 2001 and why did Buffett start selling it last year? What else can you learn from Buffett and others?

The 13F-HR is not the prettiest form in the world and a number of websites track these “guru” purchases and sales; still, it is a heck of a place to do your own research and look into the past to help you invest for the future.

Of course, those discussions were based on the premise that everyone is familiar with the EDGAR database. For those that are not, let me introduce you to EDGAR.

By law, companies and others who are required to file documents (e.g., annual reports, merger agreements) with the SEC must generally file those forms through the Electronic Data Gathering, Analysis, and Retrieval system – EDGAR. For the most part, data goes back to 1994 – certainly a long-enough timeframe to get to know your business.

What Will I Find on EDGAR?

Not all forms are filed on EDGAR, and not all forms are filed electronically (some are on paper and can’t be accessed). Here’s what you will generally find:

• Annual Reports – Forms 10-K, 10-K/A (amended annual report), and 20-F (for foreign companies);
• Quarterly Reports – Forms 10-Q and 10-Q/A;
• Other Business Reports – Forms 8-K (e.g., press releases, announcements) and 6-K (monthly report for foreign companies);
• Form 4 – Statement of Change in Beneficial Ownership, buys and sells required to be filed by 5+% holders of the company;
• Form SC 13G – Form required when your company takes a 5+% stake in another public company (eg., Microsoft filed this Schedule 13G reporting its 7.26% stake in Comcast);
• Proxy Statements – Preliminary and definitive proxy statements; Agreements and Plans of Merger; other matters to be put to vote;

The list goes on and on. In short, virtually anything that is required to be “disclosed” to the public needs to be filed on the EDGAR database.

How Do I Find This Stuff?

Over the next week or so, we’ll be going through the EDGAR system so that this seemingly overwhelming beast can become your best friend. For now, let’s dive in and familiarize ourselves with the layout.

To start, head over to the SEC’s EDGAR page. I have put a permanent link to EDGAR on the left side of this page, under Blog Resources. You’ll be taken to a page where you’ll see something similar to the following:

For this exercise, we are going to look at Home Depot (ticker: HD). We can search by company name or enter the ticker symbol. We’ll do the latter. When initially looking at a company, I choose “Exclude” Ownership Forms so I can focus on the annual and other reports. I’ll do the same here:

At this point, we are now at the screen that shows all of Home Depot’s filings, less the ownership forms (Forms 3, 4, and 5). The screen is overwhelming at first, and yet it is very self-explanatory – Form, Formats, Description, Filing Date, File/Film N(umber).

Let’s look at Home Depot’s Form 8-K (Current report) filed on December 17, 2007 (2007-12-17). We can view the [html] version or the plain [text] version. We’ll choose [html] because they sometimes have links to help us quickly jump around the document. Click [html] next to that Form 8-K.

We are now at the page that lists all the documents associated with this 8-K. In this case, there is just the one document (the 8-K) and the Complete submission text file. (Compare that to the 8-K filed on January 18, 2008 that contains the 8-K, an Exhibit (EX-99.1), and a graphic). We want to see the 8-K, so we click a07-31480_18k.htm.

Voila! We now have the Dec. 17, 2007 “current report”:

On December 13, 2007, Larry Johnston informed the Company that he is resigning from the Company’s Board of Directors, effective immediately, due to increasing demands on his time. Mr. Johnston did not cite any disagreement on any matter relating to the Company’s operations, policies or practices.

Some Things To Remember

Keep in mind a few things that will help you in your journey: (1) You can’t break the EDGAR database so feel free to horse around and get to know it; and, (2) The “Forms” are standard, but what is filed with those forms and the titling is up to the company.

In this case, Home Depot called the 8-K a07-31480_18k – a unique name probably used to keep HD’s records organized. Compare that to Microsoft’s 8-K filed on Feb. 14, 2008 – the Form 8-K is entitled d8k.htm, pretty easy to pick out of a crowd.

So, head over to the SEC’s EDGAR database and start messing around. You never know what you’ll find.

There are three rational ways to value a business: break-up value, ongoing enterprise (F Wall Street) value, and buy-and-resell (Pabrai or Williams) value. If you can buy at a discount to any of those three valuations, you’ll be on your way. Let’s find some opportunities.

Break-Up Value: Price To Book Ratio

The break-up value of a company is its liquidation value-the cash left over if operations ceased and the company’s assets were sold, liabilities paid, and cash dispersed to shareholders. MSN Money has a nice (free) deluxe screener that allows you to pinpoint opportunities.

I set up a screen for Price/Book Value : <= : 0.75 and Market Capitalization : >= : 250,000,000 and was presented with a list of 165 companies that are trading at or below 75% of their break-up value. But don’t run off and buy them just yet-they require further research.

For example, I was looking into Citadel Broadcasting-trading at what seems to be 60% of its break-up value. When I started reading the last annual report, I saw that the company was in the process of being sued by its bondholders. The long and short of it is that the bondholders feel that the company defaulted on its obligations when Citadel merged width ABC Radio-and the bondholders want their $330 million.

High uncertainty? Yes-Pabrai would love it. But if the suit is successful-and it appears that it may be (they have a good case)-Citadel may have to start selling stations or issuing stock to cover the hit. In that case, the book value would drop-and we wouldn’t be buying it at a discount today.

The moral of the above story is that the stock screener is a starting point for further research.

Ongoing Enterprise Value And Buy-And-Resell Value

When screening for solid businesses to own for the long-term-be it forever or for a few years-the goal is to find businesses with positive owner earnings or free cash flow. We can forgive one or two tough years in ten (even last year), but not much more than that.

We also have to find those businesses when the markets have beat them up or held their stock prices back. To do that, we have to play Wall Street’s game by using their screening criteria.

Yahoo! has a nice screener that allows you to search for companies with positive free cash flow. If you’ve read the past posts, you’ll know that I pay for Morningstar’s premium service because it allows a more comprehensive screen to find companies with ten years of positive free cash flow.

Combining The Tools

On Morningstar, I find 19 companies with 10 years of positive free cash flow and a price to book of less than 1. Now that’s interesting-and worth researching. One such company is Lee Enterprises, down more than 60% this year alone, is offering a 4.15% dividend, and looks to be selling for 80% of book value. Or La-Z-Boy, down 50% on the year. La-Z-Boy is paying a 6.14% dividend and appears to be trading at 90% of book value.

Wait! I’m not saying buy them-but I’m going to be looking. They’re worth a few minutes of my day.

Today’s Debacles

Remember that Mr. Market punishes uncertainty by beating down stock prices. I like to quickly check out the day’s debacles by heading over to Yahoo!’s collection of the biggest price losers (on a percentage basis). Every once in a while, you might find something interesting.

F Wall Street User Contributions

In addition to the above tools, a few visitors have been playing around with screeners and the spreadsheets here. Robert set up an Excel spreadsheet that pulls data from Morningstar to help automate the process, and a few visitors have expressed an interest in using it. If he sends it to me (and allows it), I’ll post it here.

In addition, Sanjay Shetty who blogs at India Investor posted a list of free stock screeners. Check it out.

Always Remember…

You are not looking for the next hot stock-you are looking for the companies that Wall Street is punishing for whatever reason. Let the gamblers and traders overreact. That’s how we make big money.

And Congrats…

…to Allen who reported a handsome one-month gain. Though we do not look for short-term gains, we aren’t upset when we get them. Allen purchased a company at a substantial discount and that company was (one month) later acquired for right around fair value.

That’s the joy of buying $0.50 dollars!

Let’s narrow it down a bit.

Hemel asked,

One of my challenges has been creating screens to filter stocks. What items would you consider for this? I can understand basic things like industry, size of company etc but what about other tech and non-tech indicators?

I also got an e-mail asking,

One question I had was how do you pick which stocks to do extra [due diligence] and run the value numbers. Do you do a scan or look into up or down sectors? Do you just pick a company out of the air and run the numbers?

The Non-Method To My Madness

I have a number of different ways depending on how I feel that day.

One day, I’ll look at my Morningstar list of all companies with positive free cash flow for the last ten years-about 450 companies. Sometimes I’ll head over to the MSN free stock screener and scan for companies with 15%+ growth in earnings for the past few years. I also like to look at the companies whose products I use: Research in Motion for my Blackberry, HP for my computer monitor, Dell for my computer, etc. or stores in which my wife or I shop (she can single-handedly increase a company’s owner earnings!)

I also check the NYSE and NASDAQ sites daily to see which companies have had the biggest daily drops. When a company plummets quickly, it’s usually because of bad Wall Street news. I like to check those stocks out because they may still be wonderful businesses that the stock market is overreacting to.

I don’t have a specific method to my madness. I try to find opportunity wherever I can.

Use The Tools They Give You

When running free stock screeners, you’ll have to play Wall Street’s game to generate an initial list of targets. By that I mean that you’ll have to use their criteria for searching: growing earnings, high returns on equity and invested capital, etc.

I generally start by setting all of the growth rates to 15% or greater. After I get through that list, I’ll run it again with 10% growth rates.

If using the Morningstar premium screener, scan for companies with positive free cash flow for at least 6 or 7 years-preferably ten years.

The Big Losers

When a stock drops 5%, 10%, 20% or more, it may be that Wall Street is overreacting to news that will otherwise not affect the future health of the company. A prime example (which I screwed up on) was Bankrate in 2004. I bought the company around $11 a share.

A few days later, near the end of October, Wall Street overreacted to a less-than-stellar earnings report and pushed the stock down 16% to as low as $9.20. Stupid me-I panicked with them, convincing myself that they knew something I didn’t. I sold for a one week 10% loss. I was thinking like a gambler, not a business owner.

Two years later, it was a $50 stock. (As an aside, that was the very last time I ever listened to Wall Street.)

Find Opportunities Everywhere

Unfortunately there is no secret list or magic screener that will identify the best businesses. To drive this home, we turn to investment stud Peter Lynch:

The person that turns over the most rocks wins the game.

Of course, don’t expect to run a screen, analyze a business, and run out and buy one today. Sometimes there are great companies on sale; sometimes you’ll sit on the sidelines, accumulating cash and waiting weeks, months, or even a year or two for an opportunity. As Buffett says,

You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.

Remember: Finding a business worth buying is much more difficult than the act of buying. Turn over rocks-you’ll see a lot of grubs, worms, and dirt. Still, the very next rock may be sitting on a box of gold.

There are a million different types of moats. Some are economic; some are brand; some are position. Some are right in front of our faces; some require a bit of digging.

Still, when a business changes your native language, you’ve got moat. Want to look for something online? Google it. Want to listen to music? A few years ago, we had MP3 players. Today, the IPod. But not just Apple’s IPod, Microsoft has the Zune-you know, Microsoft’s IPod. (Microsoft’s Zune is losing to Apple’s IPod because of the “IPod Brand Moat”.) Need something-anything? WalMart’s got it. Even if they don’t, we’ll check there first.

Why was Buffett’s 1988 purchase of Coca-Cola a no brainer? Coke changed the English language. In 1988, if you wanted pop (soda), you asked for Coke.

Moat = increasing owner earnings. How long will that last? That’s the art of value investing. So long as the moat is strong, the business is strong.

Where do you find wonderful businesses? Everywhere. Start with the companies that have changed your life by changing your language.

P.S., Sorry for the late post!