Moderator Note (Andy): Best of WSO - this post originally went up December 2009 and we thought it deserved to go back on the homepage for those who may have never seen it.
I got a PM asking how to prepare for anwith a manager. Since I don't post often, I'm going to post the bulk of my (stream of consciousness) reply here. This may give you an idea of the "it" factor fund mangers are looking for. Just keep in mind these suggestions are for fundamental value investing fund, and can apply to both undergrads and MBAs (with the bar being higher for MBA candidates). The advice obviously differs with the strategy. The key is to try to replicate the things you would do at a fund on your own.
The advice below was specifically written for someone interested in getting an internship and is going through. Before I start, I just want to point out that informational interviews can morph into real interviews very quickly. A lot of the things you end up talking about in an informational interview are the same things that would come up in an interview. I know several people who have had informational interviews that turned into a real interview, and are now working at the funds they had informational interviews at.
Research & What to Cover:
1. Look at past investments the fund has done and think of intelligent questions to ask. Take note if they are overweight a particular position or sector. If the fund has any publicly disclosed positions, try to reverse engineer the position to understand logic of their investment. Stick to big picture and don't spend too much time trying to figure out every detail. If the PM is one of several PMs at this fund, be sure to ask the PM which names are their positions. This becomes a nice talking point to see how your thinking (in terms of explaining why you would or would not own the position at the time they bought) compares to the actual investment thesis at the time of purchase.
2. (See Stock Pitch Advice Below) Come up with a stock you think might be an interesting investment that aligns with the investment style of the fund you're going to talk to. Again, this is an opportunity to get feedback from the PM on your thesis and see how they approach the problem. Look at value investors club to see how people pitch ideas. Also look at the pitches that have been made at various investor conference like Value Investor Congress, Best Ideas, etc.
3. Prepare good questions to ask on their holding period, why they sell, what they look at when they go long/short, do they look at longs and shorts independently or in tandem, how are investments sized/positioned, etc.
During the interview:
I'd start the conversation thanking the PM for their time and briefly laying out what you were hoping to learn during your conversation with this person (i.e. how do they think about investments, walk through a current investment, critique my investment pitch, career advice, etc.). It's good to think about what you want to talk about ahead of time so that you have time to cover all the important stuff (both investments and career advice). Good rule of thumb is 10 to 15 minutes per topic, and add about 10 minutes towards the end for open topics. Some of the advice I have given you is a lot to squeeze in a 30 to 45 minute informational interview so pick your menu carefully. I'm giving you the best case scenario of everything I would want to do in an informational interview. Cut out the stuff that isn't mission critical to you if time is an issue. Early on in the conversation is also a good opportunity to explain your interest in investing and why their strategy interests you.
Most people who grant informational interviews know you're probably looking for work. Don't be afriad to just ask what the PM looks for when hiring people and if there are any internship opportunities at the fund. These things can turn into real interviews if you leave a good impression (and there's an opening).
If you want to really improve your chances, put together a good investment pitch. This includes:
1. Spreading. Bring a printout that compares the company you're pitching with a few peers (4-5 is usually good) on various valuation (forward p/e, ev/ebitda, etc.), (cash, investments, debt), and spending/profitability (ROE, ROIC, capex, gross, sg&a, and r&d margin) metrics. For the margins, be sure to explain how you adjusted COGS, SG&A, and R&D for one-time charges to determine normalized spending. Don't pick a company/industry that is too messy or you'll spend all your time making adjustments. It doesn't have to be perfect and will be a good opportunity to get good feedback since the PM will ask why you used certain metrics, what you see when comparing companies, what they would do differently, etc.
2. "Proprietary" research - talk to people. Show the PM you were on the phone talking to experts/suppliers/customers, visitng stores, etc. You have a great resource at the university. Feel free to talk to professors if they are experts in certain industries. You should be able to network with all sorts of people at your school. Set up brief phone interviews with alums that work in the industry you're researching. Show some proactiveness. Focus on 2-3 investment insights you want to learn better (i.e. why does a company spend more R&D then peers, are products selling or being marked down in store, etc.) otherwise you'll be on a wild goose chase.
A good example of this is whenresearched Green Mountain Coffee. They were originally looking at it as a short and ended up going long after doing channel checks on their k-cups.
"Mandel said thathad considered shorting it until consumer surveys and trade-channel checks done by the fund convinced him of the company's huge growth prospects. His thesis: Green Mountain's installed base of coffee machines in U.S. homes figures to grow mightily in the years ahead, leading to surging demand for its single-serve, gourmet coffee. He bases his optimism on the penetration rates of espresso machines in European homes."
3. Identify the catalysts that may cause the company you're pitching to change in value.
The key of the investment pitch is to show you're enthusiastic, are willing to do the work, and will not be a complete liability as an intern. Spreading comps, adjusting financials for one-time charges, and doing channel checks are very common intern activities. Show the PM you can do those things and you just might have an opportunity to do similar taks for the fund.