As Henry VIII said to his wives: “I won’t keep you long”
I was mentoring some London Business School students last week in the black art of pitching investment ideas. It got me thinking about common flaws in pitching and how to improve. In general, the students had performed excellent analysis. Unfortunately, their great analytical work was often let down by their pitch.
This affliction plagues professionals too. Many a time I’ve been in an investment committee (IC) meeting listening to a 45-minute pitch. I’m sure parts of it were relevant, but I question whether an analysis of the company’s pre-world war 2 history as well as the dietary requirements, morning routines and medical history of the management team was necessary. I was left praying for death’s sweet release.
An investor’s job is to maximise the alpha they generate per hour. If you can’t get your ideas across in a persuasive and succinct manner, you’re wasting a lot of your and your team’s time.
Two skills are required for success as an investor: analysis and pitching.
Brilliance in the first, without ability in the second, will lead to a long and frustrating career.
Scarcity of the first combined with brilliance in the second will lead to a short career.
Both skills are essential.
So what makes a good pitch? By the time you’re ready to pitch you should have done weeks of research and prepared a rather substantial write-up, but the pitch itself should be quite short. Ideally, it’s comprised of 3 sections.
Thesis in brief
The introduction should last no more than 30 seconds. Its main purpose is to provide a framework upon which you will hang the rest of the thesis. It contains 4 parts:
The name of the company and what it does
Why it’s a buy or sell (“X is a buy as the market underestimates the revenue growth potential at the company”)
What it’s worth (and why)
The time frame over which you expect the thesis to play out.
For example (and this is not investment advice):
“Technogym (TGYM) is a manufacturer of fitness equipment for gyms and hotels around the world. The stock is a sell as the current price implies overly optimistic revenue growth over the forecast horizon and beyond. To justify its current share price, the company must grow revenues at a 16% CAGR over the 2 years to 2022, then grow at 5-7% in perpetuity beyond. These are demanding expectations to say the least particularly in the context of end customers who are likely to spend the next few years repairing their balance sheets and sweating existing assets. Taken together, these factors indicate a company that is likely to struggle to justify its current valuation – a scenario the market is likely to recognise by the end of 2021.”
2. The thesis in brief
This should last 4 minutes at most. Use the framework you articulated in step 1 to guide you. The goal is to outline what the market is misunderstanding about the company and why that’s happening. You should also summarise the research you conducted to arrive at your alternative viewpoint.
In the example of Technogym, it’s clearly a pitch about revenue, so articulate why revenue is most important, and the analysis you performed to estimate its likely path. Revenue is a combination of price and volume, so focus on those and speak a little about end customer demand.
At this point, close your prepared remarks and hand it over to the PM or IC for questions. Usually, this is the richest section of the pitch. Any concerns can be aired and if you’ve missed something, this will provide the opportunity to come back once you’ve investigated further.
So why do we see pitches run for 45 mins and beyond? I think it’s mostly a fear of questions - in trying to head off as many of these questions as possible, the analyst attempts to tell the IC everything about the company. Understandable, but clearly there are better uses for everyone’s time. Additionally, the analyst has usually performed weeks of research on the company and trying to distil this into ~5 minutes is an incredibly challenging task. Sometimes, the analyst is just trying to show the IC how much work they’ve done.
First, being asked questions isn’t all bad. It’s an opportunity to improve as an investor by either: getting better at pitching or realising flaws in your thesis before you’ve lost client money. Furthermore, questions speed up investment decisions because they draw attention to the information the IC actually wants to know.
Second, trying to head off every question is a fruitless exercise. You will never know the answer to every possible question about a company, nor should you. You’re an investment analyst, not a company expert. Your job is to know about the things that generate alpha, not all the things. Some questions from the IC will be irrelevant to the thesis. They’re not being asked because the IC is stupid, they’re just trying to improve their understanding of the thesis. Admittedly, some portfolio managers have the people skills of a centipede, so their questions can sound like accusations. It’s a counterproductive practice because, in my experience, it tends to make the analyst close up and become defensive, which is the opposite of what you want: rigorous debate, but one that encourages openness, cooperation and a willingness on the part of the analyst to share information. My advice? Don’t take it personally, they’re just trying to understand the thesis, in their maladaptive way.
Third, if you’ve correctly identified the most important driver, most questions should relate to it. If they don’t, they’re probably not relevant or are unlikely to have a huge impact. I think the best policy here is to shift the questioner back to the most important driver. For example, Technogym is a thesis about revenues. If I was getting margin questions, I’d say something along the lines of:
“The drivers of margin are pricing, cost base and operating leverage. Pricing can’t be pushed much more than inflation because you’ll start losing customers. The cost base consists mostly of raw materials and staff, which make it difficult to find efficiencies. Furthermore, the cost base is almost entirely flexible, so you won’t get much operating leverage. Indeed, over the last 5 years revenues have doubled, and operating margins have remained unchanged. I think revenue is the key thing to focus on here.” (I’m not sure any of that is true for Technogym, I’m just trying to illustrate a point).
Finally, if you don’t know the answer to something, say you’ll investigate and come back.
So, pitching: a critical skill and often the hurdle at which great investors stumble. It should be concise and persuasive and focus largely on Q&A. Leave a lecture on the history of the company for your write up. Above all, remember the wisdom of Henry VIII.