CHAPTER 12
How to Deliver the Message
In the previous two chapters, we discuss how to overcome obstacles of stock selection by matching the portfolio manager’s schema (Chapter 10) and how to overcome obstacles regarding the content of the pitch by answering the portfolio manager’s four key investment questions (Chapter 11). We discuss in this chapter how to overcome obstacles when delivering the message, as shown in Figure 12.1, with the goal of being efficient in your delivery and minimizing any extraneous factors that detract from the content of your message.
Figure 12.1 Obstacles to Getting the Idea Adopted
There is a middle ground that bridges the gap between content and delivery. The goal is to capture the portfolio manager’s attention. You start with a 30-second hook and, if successful, the manager allows you to proceed with your two-minute drill, which hopefully results in five to ten minutes of the manager showering you with follow-up questions. These three elements—the 30-second hook, the two-minute drill and Q&A—comprise the pitch. Think of these distinct components as three modules that can be used in either written or spoken form.
The 30-Second Hook
For instance, you can use the 30-second hook as a stand-alone module in several different circumstances. In written form, you can use the content from the 30-second hook for the first few sentences of a research report; as the investment summary in a posting on a website such as SumZero, Value Investors Club, or Seeking Alpha; or as part of an e-mail or cover letter you send to a portfolio manager. In spoken form, you can use the 30-second hook if you run into a portfolio manager in the office hallway, on the street, or at an investment conference. The 30-second hook can also be used on a job interview, on the phone with a client, as the introduction in a stock pitch competition, or at an idea dinner.
For instance, the 30-second pitch for Cloverland in the previous chapter is:
Cloverland Timber owns 160,000 acres of forest in Wisconsin and has a market cap of $156 million. Based on a rigorous analysis of a wide range of information that I will discuss later, I have concluded that Brownfield Capital will be successful in forcing a sale of Cloverland Timber, which would then close in 9 to 12 months. The stock, which is currently trading at $90, is worth $140, a 56% potential return. Given the sleepy nature of the shareholder base and the stock’s illiquidity, the stock appears to be mispriced as the market is not properly incorporating the true value of the timber or the actions of the activist investor into the stock price. Even if Helve is not successful, there is little downside risk because timber is a hard asset.1
The Two-Minute Drill
The two-minute drill can also be written or spoken. In written form, you can use the content from your two-minute drill as the introduction or executive summary to any research report you write. In the spoken form, you can use the two-minute drill in any face-to-face meeting with a portfolio manager, such as the ones we discuss in the previous chapter. You should always be prepared to roll into the two-minute drill when having a conversation with a portfolio manager, no matter the situation, once you get past the 30-second hook.
However, even when delivering the two-minute drill verbally, we suggest that you offer the portfolio manager supplemental written material for him to reference during your pitch and refer to after your meeting. It is important to remember that portfolio managers hear numerous pitches every day and you want him to remember yours. As Gekko said to Fox, “I hear a hundred ideas a day. I pick one.”
Make It Easy for Them
To make the portfolio manager’s job even easier, you should provide him with supplemental information to your pitch that we call a pitch pack.2 The pitch pack includes your slide presentation, any reports you have written, and the company’s financial documents, such as its annual report, most recent 10Q, and latest earnings release. Portfolio managers might want to flip through the material during the meeting and afterward appreciate having this material at their fingertips so that they don’t have to hunt around for basic information on the company. You need to make it easy for them. You want to serve it up on a silver platter wrapped with a big red bow.
If you mail your report ahead of the meeting, include the 30-second hook in your cover letter, and send with it the company’s annual report, most recent 10Q, and latest earnings release. Then give the entire pitch pack to the portfolio manager again when you go to the meeting. Do not expect that they will have saved it and bring it with them when they meet you. It is most likely lost in one of those tall piles of paper on their desk.
Most students create incredibly busy slides, either to prove they have completed exhaustive research or because they do not know what is the most relevant information to present. The overly dense slides often leave the portfolio manager more confused than informed. Not only do the slides overwhelm the manager, who is forced to spend time trying to decipher the information, but the slides themselves are usually hard to read, often because the analyst uses a small font to pack as much information as possible onto the slide. The slides in Figure 12.2 are typical.3 You do not know where to look first when the slide flashes on the screen, and your eyes bounce around until you focus on one area of the slide, hoping to absorb at least some of the information before the speaker moves on to the next slide. Making matters worse, few people can multitask effectively, therefore, if the portfolio manager is trying to read the slide while you are talking, he is either comprehending what is on the slide or listening to you, but not both.4
Figure 12.2 Typical Overcrowded Slides
Because clearly articulated investment ideas are usually easy to explain, the student projects a lack of confidence in their analysis when they overpopulate their presentation with facts and figures. Although a stock pitch is not a TED Talk, much can be learned from the simplicity of the presentations used in that forum, where the slides are uncomplicated and easy to read.
Topography of a Simple Slide Deck
What should your slide deck include? It should be brief! In the immortal words of Judd Kahn, “Less is more.”
Slide 1: Company Overview
It is important for the portfolio manager to be able to put the company in context and understand what the company does. That is easy with Cloverland, as it is a timber company and everyone knows what a forest looks like. What about IEH Corporation? You could say that the company “is the only independent US producer of hyperboloid connectors, which are used in military, automotive, and industrial markets.” However, it is likely that the portfolio manager has no idea what a hyperboloid connector is, what it looks like, or where it is used. Instead, you can show the portfolio manager a picture of a hyperboloid connector, like the one in Figure 12.3, and he will most likely understand instantly what it is.
Figure 12.3 IEH Corporation’s Hyperboloid Connector
Although a picture is worth a thousand words, we are shocked how often analysts launch into their pitch without explaining what the company does, and the few who do rarely use pictures.
Slide 2: Summary Data
Figure 12.4 shows a simple, uncluttered slide containing summary data for a company. This slide should list only bare-bones information, including:
Figure 12.4 Typical Summary Data Slide
- Stock chart and basic statistics such as the stock’s ticker, current price, 52-week range, and shares outstanding
- Valuation metrics: Enterprise value, market capitalization, and corresponding valuation multiples such as P/E, price to EBITDA, caprate, and current dividend yield, if appropriate
- Income and cash flow metrics: Five years of annual revenues, gross profit margins, operating profit margins, EPS, EBITDA, and free cash flow
- Balance sheet metrics: Total assets, total debt, and shareholder’s equity Profitability metrics: Five-year history of the company’s return on invested capital
That’s it! The student should include the rest of the company’s financial information in an appendix.
Slide 3: Your Variant Perceptive
Slide 3 in Figure 12.5 presents the four main arguments, as we outline in Chapter 11, that address the portfolio manager’s four key questions: How much can I make? How will the next guy figure it out? Is this too good to be true? and How much can I lose?
Figure 12.5 Variant Perspective for Cloverland
The next four slides should each delve further into the four specific arguments shown on the slide in Figure 12.5. The eighth and final slide should contain only the analyst’s contact information.
How to Handle Q&A?
While Paul S. graduated from Columbia Business School in 1995, he went back to the school three nights a week for the next year, one night to be the teaching assistant in Paul J.’s class on securities analysis, another to be the grader for Bruce Greenwald’s Seminar on Value Investing, and the third to audit Pat Duff’s advanced security analysis class, which focused on primary research.
In Duff’s class, students were assigned an industry and had to pitch ideas to guest portfolio managers. Paul noticed that the portfolio managers all had similar questions, most of which punched holes in the student’s presentation and exposed gaps in the student’s analysis. Repeatedly, the guest portfolio managers raised elements of the four key investment questions—How much can I make? How much can I lose? What is the market missing? How will the next guy figure it out?
To anticipate possible questions, it is important to identify any weaknesses in your arguments and which part of the argument is most likely to be attacked during the Q&A period: the evidence, warrant, or backing.
The portfolio manager will probe your arguments during the Q&A period with the goal of exposing weaknesses in your arguments to prove them wrong. The more convincing you are with your responses, the more confident the portfolio manager will be that you are presenting a well-researched idea. While your recommendation should already be a close match to one of the manager’s schema, he will ask probing questions trying to further match your research and analysis to his investment criteria. This exchange is especially important because the portfolio manager’s questions often reveal his subjective criteria by exposing the issues he feels are most important in the analysis.
The analyst should have additional slides prepared to offer as further evidence when presenting rebuttals to counterarguments. As a simple trick, it is often best to assemble your presentation with a binder clip, rather than being stapled, so that you can pull out the relevant pages when responding to a portfolio manager’s question.
The most common mistake we see young analysts make in pitching a stock is to arrive for their meeting with a 30-slide PowerPoint presentation, expecting the portfolio manager to sit patiently while they drone on with their pitch. We can think of no time in the history of stock pitching when this has happened (unless the manager falls asleep). In fact, most portfolio managers interrupt on the second or third slide, which forces the analyst to jump to a later slide to address the question, only to be interrupted again, forcing the conversation to a different slide. And so on throughout the rest of the meeting. Although the portfolio manager is slowly piecing the story together in his mind and answering the four investment questions he wants addressed, the analyst usually becomes increasingly frustrated because his pitch was interrupted and he never got to return to the first few slides to resume his original plan for the meeting.
The analyst should never forget his prime directive, which is to present ideas that the portfolio manager finds attractive. The analyst serves at the pleasure of the portfolio manager and, therefore, should let the manager drive the conversation. To adopt the idea, the manager needs to have confidence in the analyst’s recommendation. Each portfolio manager has his own way of vetting an idea, and the analyst should conform to the portfolio manager’s process, not the other way around.
Paul J. had a recent experience with a young analyst who asked for a meeting to practice his pitch before giving it to a portfolio manager the following week. The student launched into his 20-slide presentation with impressive enthusiasm, only to have Paul interrupt in the middle of the second slide with a question. The student looked stunned, caught his breath, and told Paul, “You can’t interrupt; I am not done telling the story.” To which Paul responded, “I think your presentation just ended.” Paul then informed the student that the portfolio manager decides how the pitch will unfold and how he will consume the information. The fix? Stick to the format we have suggested, with five primary slides answering the manager’s four key investment questions, and a longer appendix with all the backup material necessary to support your arguments and address the manager’s questions. And be flexible.
We have also found that some portfolio managers act combative during presentations, partially out of impatience and partially to see how the analyst will respond. Most young analysts get flustered in these moments, which often fuels the portfolio manager’s desire to get even more aggressive. We recommend that the best way to disarm aggressive portfolio managers is to stick with the facts as much as possible and leave the eventual debate centered on any conjecture in your analysis, which is where the potential disagreement should focus.
Stock Pitching Contests
Both authors continue to be amazed at how poor the pitches are in stock picking contests. Although the participants are eager, bright, attractive, and clearly hard-working, the presentations are generally confusing and poorly organized, and remind us of the puzzle problem we laid out at the beginning of Chapter 11.
Imperial Airship by James Ng, redrawn with permission.
Most contests allow students 10 minutes to present their recommendation. Rather than think of the pitch in the way we have structured it, most students elect to present a fire hose of information with the hope that demonstrating how much work they did will help them win the contest. We think this strategy is ineffective because it leaves the judges with the unenviable task of putting the random pieces together to finish the puzzle. And, as Paul S. often comments, the inevitable winner is the best of the worst.
You can think of the three components of the pitch—the 30-second hook, the two-minute drill, and the Q&A—as modules that can be tailored to fit the allotted time. For example, if the format of the contest is a 10-minute presentation followed by five minutes of Q&A, you can adjust the modules to fit the time frame.
For instance, you can use the 30-second hook as an introduction to your pitch and then spend a little time discussing what the company does to give the judges context. This part of your presentation should take no more than a couple of minutes and cover only a few slides. You should use the next four to five minutes for an extended two-minute drill, adding additional evidence, warrants, and backing to the original argument. You should use the remaining four minutes to address any anticipated counterarguments.
There is a total of eight slides in the earlier example. With an extended two-minute drill and discussion of counterarguments, the total number of slides5 in your presentation should not exceed 15.
Delivering the Message—You Are the Envelope
Think of a letter.6 The letter’s content is the message—the actual words on paper. You cannot simply write a letter and drop it in a mailbox hoping that it will reach its destination. The letter must be put into an envelope. It is the envelope that delivers the message. When making a pitch, you are the envelope.
Imagine you have an interview with a portfolio manager, and he asks you to send a write-up of your investment idea to him before you meet. What envelope will you choose to send him the report? Each envelope shown here is an option. Each would contain the same content, the investment report you wrote. However, it is important to understand how the manager will perceive each envelope as he flips through the stack of mail on his desk.
It should be obvious that the portfolio manager will form an initial impression the instant he sees each envelope, even before opening them. The FedEx envelope conveys urgency and importance. The second envelope looks businesslike. The third looks like an invitation, the fourth looks like junk mail, and the fifth is an absolute mess.
The portfolio manager will likely open the FedEx envelope first. Subconsciously, he is thinking, “When someone spends $30 and takes the time and trouble to send something FedEx, it is usually important; therefore, I should open it first.” Conversely, the portfolio manager might not even bother looking at the last two envelopes because he is thinking, “This is junk mail; I’m not going to waste my time.” Or “This envelope is filthy; I don’t even want to touch it.” If the contents of the envelopes are identical—each contains the same investment report—then why should it matter what the envelope looks like? Isn’t the actual content more important than the envelope it is delivered in?
Each envelope conveys information that will cause the portfolio manager to have a different initial impression, which can be positive or negative. The sender wants the envelope to enhance the content, not detract from it. Similarly, the delivery of your pitch will affect its content and be directly influenced by many factors, such as how you look, how you sound, and your body language. Like we say, one cannot simply drop the content into a mailbox and hope it reaches its destination. We will show why the way the content is delivered is a critically important part of the pitching process.
Depending on the circumstances,7 the portfolio manager will begin to form an impression of you even before you meet, most likely from reviewing your resume and reading any research reports you might have sent to him before the meeting.
Nonverbal Signals
The portfolio manager’s initial instinct when he enters the conference room to meet you for the first time is to look at your face and establish eye contact. He then shifts his attention to observe your physical appearance and the clothing you are wearing. This process is subconscious and takes milliseconds. However, the portfolio manager is generally unaware that he is making these instant judgments. And, because you have yet to utter a single word, all the information you are conveying is nonverbal and becomes the foundation of his initial impression of you.
As the phrase implies, nonverbal communication is communication between people that does not involve spoken words. It includes body language, facial expressions, and posture. It also includes the tone, pitch, speed at which you speak, and other qualities in the way you express yourself. It is not what is being said, but how it is being said. Nonverbal communication comprises everything in the pitch except for the actual message itself (the content), which is why we believe it is important to separate the delivery of the pitch from its content.
Academic studies show that a high percent of the information conveyed when individuals communicate is nonverbal. Alfred Mehrabian, a professor at UCLA, performed several experiments in the late 1960s, where he concluded that communication was 7% words, 38% inflection and tone, and 55% body language. These observations have morphed into the widespread, and commonly repeated, belief that more than 90% of communication is nonverbal, which is known as the 7-38-55 rule.
Like many other widely accepted “truths,” this one is clearly wrong. One cannot visit a foreign country and understand 90% of the message being communicated based on just body language, voice inflection, and tone. You will need to understand the language being spoken and not just for 7% of the communications. Nonetheless, Mehrabian’s research highlights the importance of inflection, tone, and body language when communicating.
For example, when choosing a doctor, you want one who is capable and credible. You might care about her years of experience, her hospital affiliation, and the medical school she attended. You might get a recommendation from a friend or search the Internet to see if any patient reviews have been posted online. Then, when you meet the doctor in person, you form a first impression. Most people want their doctor to “look the part.” You expect her to enter the room in a white lab coat with a stethoscope around her neck, looking like a stereotypical doctor. You want the office to look organized, clean, and uncluttered. When the doctor talks to you, you expect confidence in her voice, good eye contact, and a calm demeanor. These traits make you feel more comfortable and confident in her ability to treat you. It is clear from experience that most people form an initial impression of a doctor, or any professional, the instant they enter the room. A portfolio manager forms a judgment of you the same way.
Academic studies also show that most of the nonverbal information that is conveyed when individuals interact is subconscious to both parties and that first impressions are made in a fraction of a second. Unfortunately, first impressions are difficult to change, hence the cliché, “You never get a second chance to make a first impression.” Sadly, most people are unaware that they are forming these subconscious judgments so quickly and with such limited verbal information exchanged. Understanding the way these judgments are formed should help you to make the right first impression.
Interestingly, several academic studies show that initial impressions of individuals in certain roles can be surprisingly accurate, even when based on only brief observations. For example, Nalini Ambady and Robert Rosenthal, both psychologists at Harvard, conducted a study in 1993 on teacher effectiveness as measured by end-of-semester student ratings. The psychologists showed college students three 10-second video clips of 13 different college teachers without sound. The students were asked to judge the teachers based solely on nonverbal communication, rating the teachers on criteria such as physical attractiveness, attentiveness, competency, confidence, likability, warmth, and honesty. Body language such as fidgeting, frowning, sitting, gazing down, and nodding was also recorded.
The results were surprising. Teachers who were rated higher in their end-of-semester reviews were judged in the study to be more attractive, attentive, confident, likable, and competent. The teachers who frowned or fidgeted received significantly lower student ratings.8
Portfolio managers are no different. They are not judging teachers, they are judging you. Solely based on nonverbal information, the portfolio manager will assemble subconsciously a list of positive and negative traits in his mind as he enters the room and observes you for the first time. He will make an initial determination of you in a fraction of a second based on your appearance, which will influence how interacts with you during the meeting, and he will be completely unaware he is doing it.
Are You Capable and Credible?
As we discuss in the prior chapter, the portfolio manager tries to answer four questions in every pitch he hears:
- How much can I make?
- How much can I lose?
- Is the idea too good to be true?
- How will the next guy figure it out?
As you proceed through your pitch, there is a subconscious dialogue unfolding in the portfolio manager’s mind as he weighs your statements against those questions, with his sole desire of answering a single question: Do I believe him?
In trying to answer the first question, How much can I make? the portfolio manager asks himself, “Is this opportunity analyzable and is the analyst right in their estimate of the stock’s intrinsic value and the time horizon to reach that value?”
While trying to answer the second question, How much can I lose? the portfolio manager worries to himself: “Has the analyst identified all of the risks and has he underweighted or overweighted the probability of any of them occurring?”
When considering if the opportunity is too good to be true, he tries to answer the question: “How can I be sure that the information is not already priced into the stock?”
Finally, he seeks an answer to his final question, How will the next guy figure it out? by asking: “Has the analyst correctly identified a catalyst that will close the gap and eliminate the mispricing?”
Underlying these nagging questions are even more questions: Did the analyst miss anything? Is the analyst right in his conclusion? Can I trust his judgment? Can I trust his research? These additional questions circle back to the original question raised in the portfolio manager’s mind: Do I believe him? We add this additional layer to the process we developed in the prior chapter, as illustrated in Figure 12.6.
Figure 12.6 Portfolio Manager: “Do I Believe Him?”
For the portfolio manager to believe you, he needs to feel comfortable that you are trustworthy, used good judgment in your analysis, didn’t miss anything in your research, and are correct in your recommendation. He is trying to determine if you are capable and credible. If the portfolio manager has a history of interacting with you, then he probably knows your strengths, weaknesses, limitations, and biases as well as how often you are right or wrong in your recommendations in the past, and how thorough you are in your research.
On the other hand, how can the portfolio manager decide if you are capable or credible if he doesn’t know you or your track record? In the moment that he first lays eyes on you, with nothing else to go on, the manager will rely on what he perceives to be your capability and credibility.
Why are capability and credibility important? Capability is the portfolio manager’s belief that you have the ability to answer the four questions he needs to answer before he will adopt any new idea. His assessment of your capability will include his perception of your intelligence, competence, acumen, prowess, talent, creativity, focus, energy, persistence, and resourcefulness. Who would believe an analyst who did not have these qualities?
The portfolio manager initially will assess your credibility based on his perception of your honesty, seriousness, integrity, confidence, thoroughness, reliability, and dependability. For example, confirmation bias is a common cognitive bias whereby individuals discount information that challenges their beliefs and overweight information that supports it. The manager needs to be confident that you did not fall into this common mental trap in your analysis. He needs to feel that you are confident enough to admit when you do not know something, instead of glossing over or covering up deficiencies in your research.
The Portfolio Manager’s Subconscious Biased Schema
Capability and credibility are enhanced or eroded by another underlying factor: likability. An analyst’s likability will be influenced by factors such as physical attractiveness, charisma, disposition, polish, warmth, cooperativeness, respectfulness, cleanness, temperament, and enthusiasm. Likability will not add to or subtract from the quality of the idea or the underlying arguments, but it will affect the receptivity of those arguments and augment or retard the effectiveness of the arguments. If the portfolio manager likes you, he will perceive you as being more capable and credible, and be more receptive to your arguments. Conversely, if the portfolio manager does not like you, he will be more skeptical of your arguments and less receptive to any idea you pitch.
As unbelievable (and perhaps unfair) as this might sound, the portfolio manager has already (subconsciously) formed a first impression of your capability, credibility, and likability before you even say hello and shake his hand. You might ask, “How can the portfolio manager possibly make an assessment from just looking at me?” It’s simple, he uses a schema.
As we discuss in Chapter 10, humans use schemas all the time to evaluate pretty much everything, including, but not limited to, teachers, doctors, policemen, politicians, CEOs, and even potential mates. Our schemas are like an internal radar system that we use to classify individuals, size them up, and form judgments about them, all very quickly and completely subconsciously. Portfolio managers are no different from the rest of us, and they use schemas to evaluate all new analysts they meet. Their mental checklist is formed from prior interactions with other new analysts, including both positive and negative experiences. And, just as we needed to figure out the manager’s schema to find an ideal stock for his fund, we need to understand what happens when he applies his schema and selection process to you.
The portfolio manager’s schema for assessing new analysts is structured similarly to the schema they use to evaluate new investment ideas we discuss in Chapter 10, with new idea substituted with new analyst, as shown in Figure 12.7.
Figure 12.7 Portfolio Manager’s “New Analyst” Schema
The harsh reality is that many people have subconscious biases, prejudices, and stereotypes with respect to age, race, height, weight, and gender, that frequently play a role in the schema they use to evaluate other people. These biases are often hardwired into their mind and create barriers to effective communication.
It is important to recognize that portfolio managers have cognitive biases and hold stereotypes that will influence their impression of you. A bigger problem is that most portfolio managers are completely unaware that they have these biases and that their prejudices are influencing their actions and feelings. Whether their impressions are accurate is irrelevant because they still present a potential barrier to your message being heard.
These biases come in two basic forms—specific to you, and general to all analysts. The personal prejudice might be justified, at least partially, if it is based on a previous experience the portfolio manager had with you. For instance, the manager may not trust you or your analysis because he feels you did substandard research on a prior assignment. Whatever the cause, this perception creates a significant barrier because the portfolio manager is skeptical of your idea before you even get to pitch. The fix? You will need to work hard to rebuild your credibility with the manager, and the most effective way to change his impression will be with the quality of your work on future projects.
The most important general prejudices concern the analyst’s age, experience, and pedigree, which are often intertwined. For instance, it is impossible for you to have 10 years of investment experience if you are only 22 years old, unless, of course, you were a child prodigy and started your investing career at the age of 12. Age bias can be a significant barrier to overcome. Why does age matter? Because age is often equated with experience, and in the investment business, experience matters.
How Nonverbal Signals Form the Portfolio Manager’s Initial Impression
We state that a portfolio manager instantly forms an impression of your credibility, capability, and likability, but it is important for you to understand what subconsciously triggers these feelings. As we mention earlier in this discussion, most people focus on the eyes and face when they meet someone new and then on their physical presence, posture, and clothing.
For example, Alexander Todorov, a professor of psychology at Princeton University, has conducted several fascinating studies showing that facial features such as curvature of the mouth, distance between the eyes, and fullness of lips are important in forming first impressions and affect how individuals perceive intelligence and trustworthiness in people they meet. Todorov concludes in one study that “faces perceived as distinguished, intelligent, and determined were older, had thin lips, and had wrinkles at the eye corners.”9 Apparently, wrinkles are not necessarily a bad thing! We do not discuss these physical attributes in detail because individuals cannot change them, although we mention it to increase awareness that these biases exists.
On the other hand, there are many factors that can be changed. Since the goal is to eliminate, or at least minimize, as many extraneous factors as possible, it is important to identify anything that you can change so it does not detract from the content of your pitch. Think of yourself as being in a race pushing a wheelbarrow full of bricks. The more bricks you remove, the faster you can go. For instance, you might be at a disadvantage if you are young, have full lips, and do not have wrinkles, at least according to Todorov’s research. These are bricks you cannot remove. There are, however, bricks you can remove. The two simplest physical characteristics that you can modify are your hairstyle and wardrobe. And, believe it or not, wearing eyeglasses, even if they are not needed to correct your vision, can create a more a positive image.
Dr. Marianne LaFrance, a psychology professor at Yale University, authored a study in 2001 that related hairstyles to first impressions. She concluded that there is a perceived inverse relationship in hairstyles between attractiveness and intelligence for both men and women. For men, she found that medium-length, side-parted hair indicated intelligence and affluence, while long hair was viewed by most people as indicating brawn, with no brains, yet also a generally good-natured person. Women with short, tousled hair were viewed as the most confident, intelligent, and outgoing, while women with medium-length, casual hair were viewed as intelligent and good natured. Long hair on women was viewed as the most attractive.10
Your clothing also conveys a tremendous amount of information that other people will use to build an impression of you. While there are numerous studies on the subject, we feel one is most representative. A group of researchers at the University of Hertfordshire in England and Istanbul Bilgi University in Turkey conducted a study in 2012 that produced surprising results. A total of 308 participants were shown pictures of a male model wearing a suit with his face obscured. In one of the pictures, the model was wearing a custom-made suit and in the other he was wearing a store-bought, “off-the-rack” suit. Both suits were the same color and fabric pattern. The study’s participants were shown each image for five seconds and then were asked to rate the model’s confidence, success, trustworthiness, salary, and flexibility, on a scale from 1 to 7. The model scored higher on all five attributes when he wore the custom suit. Although the participants viewed the pictures for only five seconds and the differences between the suits were very subtle, the meaningful difference in the rating indicates that clothing plays a large role in subconscious perception of personality traits.
Studies linking eyeglasses to perceived intelligence have been conducted since the early 1940s. The academic studies are consistent as they show that although individuals who wear glasses are considered less physically attractive, they are perceived as being more intelligent.
To demonstrate the subliminal power of these various attributes, look at the two pictures that follow. Quickly choose one of the two—whose stock idea would you be more likely to adopt? Zev on the left or the right?
You, and most portfolio managers, likely would pick Zev on the right. Ask yourself, why would that preference would exist? Probably because Zev on the left looks like he’s just rolled in from a hard night of clubbing. Why should the analyst’s looks make a difference if the content of the message is identical? Because it is vitally important to look the part and not have any extraneous factors detract from your message. It is like the envelopes we mention earlier in the chapter. Which one looks more appealing? They contain the exact same message, but the one of the right is clearly more appropriate for the situation.
That was an easy comparison. Let’s try another. Make a quick decision—Zev on the left or Zev on the right?
The differences in this example are much subtler. By instinct, most senior portfolio managers will pick Zev on the right. At closer examination, you will probably notice the difference in the hair, the clothes, the glasses, and facial hair. While both appearances are acceptable, Zev on the left is probably more appropriate for his age, while Zev on the right is dressed more conservatively. It is important to ask, which mode of dress will minimize any extraneous factors you are trying to avoid?
Zev interned at Gabelli Funds, working in operations the summer between his junior and senior years of high school. Since Paul S. worked there as well, the impression Zev made would indirectly reflect on his dad. They had a discussion of how to dress before Zev started. Paul told Zev he would have to be clean shaven every day. Zev countered that all the interns his age didn’t shave. Paul said to him, “What is socially acceptable really doesn’t make a difference. The fact is that I’m 47, and it is not acceptable to me to go to work in the morning with three days of growth. And Mario is 73 and old school, and I am willing to bet that it is unacceptable to him as well. Mario might say he is fine with it, but subconsciously it will not look right to him. You dress and groom to make an impression on your boss, it makes no difference ‘what everyone else is doing.’” Needless to say, Zev went to work each day clean shaven.
Acceptable dress in the workplace has evolved over time. For example, the “uniform” in investment banking has traditionally been a suit and tie. However, at one of the most respected investment banking firms in the industry today, its founder has set the dress code to what he feels is appropriate: suit but no tie. The best advice we can offer is to model your style after the person at the top. A recent Wall Street Journal article sums up this recommendation perfectly. “There’s a tribal element. . . . It says, we’re all going to wear the same thing, and it’s going to be similar to whatever the leader wears.”11
Also, as inconsequential as it might sound, show up to the meeting with just a single briefcase or small tote (no knapsacks or gym bags). Research shows that individuals who carry more than one item are perceived as disorganized.
Beware—Microexpressions Will Give You Away
There are other nonverbal characteristics that can influence perceived credibility, capability, and likability, including facial expressions, speed or hesitation of speech as well as tone and inflection of voice. For example, say that the portfolio manager asks you a question to which you don’t know the answer and, in response, you show a look of surprise and hesitate as you respond. The portfolio manager will record your nonverbal reactions subconsciously and his perception of your credibility and capability will most likely decline. You might think, “Well, I won’t look surprised nor have any hesitation in my voice when I answer.” The problem is that it is extremely difficult to control your response because it is subconscious and involuntary.
Subconscious, involuntary changes in facial expressions are called microexpressions and last for less than a quarter of a second when they occur. They are usually triggered by an external event and convey an enormous amount of information about the emotions a person is experiencing. There are seven universal emotions: anger, disgust, fear, sadness, happiness, surprise, and contempt, and all trigger microexpressions when a person experiences them.
As an example, say you are at a picnic and a bee suddenly buzzes by your face. Without even knowing what the object is, your brain will recognize a threat and reflexively your hand will move to swat away the bee. You won’t be aware that you had this reaction until after the fact. The reaction was a reflex. If someone took a picture of you at the exact moment that you raised your hand to swat away the bee, the look on your face probably would show a mix of surprise and fear. This facial response is a microexpression. It is involuntary and you cannot control it.
Similarly, if the portfolio manager asks you a question that you didn’t anticipate and don’t know the answer you likely will experience the same reaction you had with the bee, which is a combination of surprise and fear. Your face will reveal these emotions instantly and since they are involuntary, you won’t be able to control them. Although your microexpression will last for only a split second, in all likelihood, the portfolio manager will register it, albeit subconsciously. He might respond reflexively with a microexpression of his own, revealing disgust and contempt. Subconsciously, you will notice his reaction, which escalates your nervousness and causes you to respond with a stutter, become flush, and break out in a sweat. In response, the manager subconsciously detects your body’s response and the vicious cycle continues. That is, until someone breaks the silence with a verbal comment.
It is important to appreciate that microexpressions reveal critical nonverbal information to the other person and will, in most situations, influence their response to you. Unfortunately, there is little you can do to control your emotions and the information they convey through your facial expressions. The only practical way to prevent this behavior from occurring is to not be caught off-guard by questions the portfolio manager may ask. This insight reinforces why it’s critically important for the analyst to understand the portfolio manager’s criteria and anticipate critical issues and questions that he likely will raise during the pitch. In other words, do the work!
Nonverbal Signals Can Also Give You Away
Other nonverbal factors such as eye movement and body language can also reveal your emotional state. For instance, there is a high likelihood that you will be nervous in the meeting, which can result in rapid blinking, flustered speech, or poor posture. These behaviors send subtle, yet important cues to your audience about your heightened emotional state. Pacifying behaviors, such as biting your lip, adjusting your tie, fidgeting with your hands, playing with your hair, or touching your mouth or neck also show signs of nervousness and anxiety. Shrugging your shoulders indicates a lack of knowledge, and leaning back and crossing your arms shows discomfort. While it is extremely difficult to control microexpressions, you should try to minimize these behaviors as much as possible. Like your parents always told you, sit up straight, have good posture, and maintain eye contact when meeting someone new. And smile, although not too much, as that can indicate nervousness as well!
Anatomy of a Meeting
The purpose of a meeting is to get your idea adopted. It is important for you to be aware of different factors that can detract from the content of your pitch in that meeting. Certain factors, such as posture, dress, and the choice of wearing eyeglasses, are controllable and can enhance the content of your pitch. It is critical to understand when the portfolio manager is focused on extraneous nonverbal factors and when he is focused on your content.
Six Stages of a Meeting
To illustrate the importance of being aware of the balance between nonverbal factors and the content of your pitch, we separate a typical first encounter between an analyst and a portfolio manager into six different stages.
The “first glance” stage covers the moment the manager meets the analyst for the first time, much of which we have discussed already. The second stage covers “small talk,” where pleasantries are exchanged as the analyst and portfolio manager shake hands and say hello to each other. The first two stages are similar because most of the communication is conveyed nonverbally, which forms the basis of the portfolio manager’s first impression. As we highlight in lavender in Figure 12.8, none of the content of the message is conveyed in these stages. It is as if the manager is holding the “envelope” in his hands, evaluating whether he wants to open it.
Figure 12.8 Six Stages of an Initial In-Person Meeting
The next three stages (which we discuss at length in this chapter as well as in Chapter 11), covers the hook, where the analyst introduces his idea; the two-minute drill, where the analyst presents his arguments; and, finally, several minutes of Q&A, where the portfolio manager probes and challenges the analyst’s arguments. These middle three stages are similar in that the quality of the content (highlighted in yellow in Figure 12.8) is finally the focus of the interaction.
The last stage is when the analyst and portfolio manager say their goodbyes, and nonverbal communication once again plays a dominant role in the final interaction.
Bud Fox’s Initial Meeting with Gordon Gekko
In the movie Wall Street,16 Bud Fox has hounded Gordon Gekko’s secretary for three months to get an appointment with him. Fox shows up at Gekko’s office on Gekko’s birthday with a box of cigars as a present. After waiting several hours, Fox finally gets ushered into Gekko’s office. Gekko is on the phone and glances at Fox. Within a split-second, Gekko has started his subconscious assessment of Fox’s credibility, capability, and likability.
Gekko informs the people milling around his office as he gets off the phone, “This is the kid. Calls me 59 days in a row, wants to be a player.” Then, turning to Fox, he says, “Oughta be a picture of you in the dictionary under persistence, kid.” Clearly, Gekko’s first impression of Fox was young, ambitious, and persistent. These are the qualities that got Fox into Gekko’s office.
As Gekko is making these comments, a stupid-looking grin appears on Fox’s face. At that point, in about four seconds, Gekko has crystallized his first impression of Fox.
Next comes the small talk. Fox stands up as Gekko gets off the phone and says, “How do you do, Mr. Gekko? I’m Bud Fox.” Fox has good eye contact and extends his hand to give Gekko a firm handshake. Gekko says, “Hope you are intelligent.” And then, referring to the cigars, Gekko asks, “Where did you get these?” Fox replies, “I got a connection at the airport.” Gekko responds, “So what’s on your mind, kemosabe?” Fox is sitting down at that point. His shoulders are tense and his microexpressions convey nervousness and anxiety. Fox coughs and looks down before he speaks, revealing additional nonverbal information. Fox’s voice is tentative and hesitant as he says, “I just want to let you know, Mr. Gekko, I read all about you at NYU Business, and I think you’re an incredible genius and I’ve always dreamed of only one thing—to do business with a man like you.” Gekko’s expression is one of impatience and annoyance as he waits for Fox to finish his pandering. Fox has a deer-in-the-headlights expression on his face, and he seems out of place as he speaks to Gekko. Fox then looks bewildered when Gekko asks him questions about deals at his firm.
Gekko ends the small talk by cutting to the chase, “So what have you got for me, sport? Why are you here?” Fox stands up and snaps the paper in his hand as he launches into his pitch. His voice is suddenly strong and confident as he states, “Chart breakout on this one here. Whitewood-Young Industries. Low P/E, explosive earnings, 30% discount to book value, great cash flow, strong management, and a couple of 5% holders.”
This scene illustrates the first three stages of the meeting structure presented in Figure 12.8. Gekko’s initial impression of Fox before they even met was that the kid was young, persistent, and ambitious. However, Fox does not fare well when he finally meets Gekko in person. His hair is slicked back, he has a silly grin on his face, is wearing an inexpensive suit, and by his body language, looks uncomfortable and out of place. Fox’s voice is hesitant and he conveys a lacks confidence as he engages with Gekko in small talk. Gekko subconsciously absorbs all this information, most of which is nonverbal and extraneous to the actual investment ideas Fox is there to pitch. However, Fox appears confident and assured when he launches into his pitch, while the mix of information Gekko processes shifts from nonverbal communications to the verbal content of his message.
Other Not So Obvious Barriers to Communication
There are a couple of additional potential obstacles that bear mention, albeit briefly. Although these barriers have nothing to do with the actual message and are not specific to the analyst, they need to be overcome nonetheless because they can prevent the portfolio manager from actually hearing the message.
The most apparent barrier is physical, and the most obvious one is noise. For instance, if you are trying to pitch your idea while there is a jackhammer on the street outside, the noise might be distracting enough that the portfolio manager cannot hear your pitch. In another situation, you might be at a business dinner with another person sitting between you and the portfolio manager, making it difficult for the manager to hear your pitch because of the actual physical distance between the two of you. Or, perhaps the ambient noise in the restaurant is so loud that the manager has trouble hearing you even if he is sitting right next to you.17 The fix? Wait for a better time to present your idea or maneuver the manager to someplace quieter or more private where he is not distracted by the noise. Although these examples might seem obvious, they highlight the importance of your thinking about extraneous stimuli that can inhibit the portfolio manager’s receptivity to your pitch.
The manager’s emotions can also be an obstacle. Your message will not get heard if he is preoccupied, angry, or stressed. Pitching an idea to a portfolio manager right after the market’s opening bell, when he is distracted by the start of the trading day and under assault by information coming at him from all directions, is not an ideal time to try to get his attention. Similarly, the anger and/or stress he is feeling from a disagreement with his wife or argument with a large client wanting to redeem their investment in the fund will prevent him from hearing your message. The fix? Wait for a better, calmer time to pitch your idea.
Language can be another obstacle to getting your message heard. This barrier can take several forms. It should be obvious that the portfolio manager will not understand you if you don’t speak the same language. However, a less obvious problem is that even if fluent, an analyst communicating in a non-native tongue might have a limited vocabulary preventing him from using more nuanced or precise language. A thick accent can also be an impediment in the same way as a noisy room, in that the portfolio manager might have a hard time understanding what you are saying. Another language-based impediment is industry jargon. Although understanding the industry’s technical terms may help you communicate the nuances of the business, the words could be foreign to the manager and make it difficult for him to understand your message.18
Although all three examples might seem fairly trivial, it is surprising how many times we have seen them violated in our careers. All three potential obstacles have easy fixes, yet young analysts oftentimes fail to recognize their importance and rarely address them directly.
How Do You Get to Carnegie Hall?
Everyone knows the answer to the classic joke. The same applies to pitching, whether you are pitching to a portfolio manager with whom you have worked for the past few years, in a stock pitching contest, your first stock in your new job, or in a job interview.19 Practice, practice, and then, practice some more. Pitching well is a skill that requires time and experience to master. The analyst needs to practice until the arguments seem natural and the evidence is clear in his mind. Although a comprehensive review of ways to rehearse effectively is beyond the scope of this discussion, we encourage anyone embarking on a career in the investment business to take the delivery of the message seriously. As we say in the book’s introduction, not getting the idea into the portfolio is no different from not having a good idea in the first place.
Gems:
- Always provide the portfolio manager with a “pitch pack.” The pitch pack includes your slide presentation, any reports you have written, and the company’s annual report, most recent 10Q, and latest earnings release. Portfolio managers often want to flip through the material during the meeting and appreciate having this information at their fingertips. You must make it easy for them, which you can do by serving your pitch on a silver platter with a big red bow.
- It is important for the portfolio manager to understand what the company does and be able to put the business in context. Therefore, it is critical that the analyst explain the company’s business simply and succinctly. If the business is complex, use pictures. As they say, “A picture is worth a thousand words.”
- To anticipate possible questions the manager might ask, it is important to identify any weaknesses in your arguments and which part is most likely to be attacked during the Q&A period: the evidence, warrant, or backing.
- Since the goal is to eliminate, or at least minimize, as many extraneous factors as possible, it is important to try to alter anything that can be changed so it does not detract from the content of the pitch. Think of your being in a race pushing a wheelbarrow full of bricks. The more bricks you remove, the faster you can go.
- It is important to appreciate that microexpressions reveal critical nonverbal information and will, in most situations, influence how other people respond to you. Unfortunately, there is little one can do to control their emotions and the information they convey through their facial expressions. The only practical way to avoid this behavior from occurring is to be prepared for any question that the portfolio manager might ask, which reinforces why it is critically important for the analyst to understand the manager’s investment criteria and anticipate the critical issues that will likely arise concerning the investment idea. In other words, do the work!