Give me your best examples of first hand research / edgy view!

Got some awesome feedback that I can come across as a vanilla long only compounder guy after an interview (although I will add I was never directly asked to do an in depth pitch in the interview, but that is besides the point for now).  
I liked to believe that I am capable and insightful when it comes to "first hand research," and that I have uncovered some differentiated insights and do quite a good job at it, but alas upon reflection I am questioning if I really have, or if I am mostly interpreting generic sell side research, conferences, and industry transcripts, and then just offering up generic risk/reward set ups. I have spent time at a potential targets headquarters learning the ropes with their training, visiting factories, getting into weeds with insiders on specific competitive dynamics, but I never got the chance to share it.
Main question is: would love to hear examples from those of you that have found an edgier view that led to a sexier pitch or investment, and what went into the process? Do you believe it mostly came down to your ability to source underappreciated information, and if so where do you find it? Or was it mostly interpreting the right disparate data points from a new perspective? 
If the latter, what are some common mental models you rely on to uncover those differentiated views? Any one off anecdotes to share to help drive that original and creative due diligence juices.


All I can think about now is that maybe I do suck since I don't have that edgy pitch in my pocket right now. I've got a solid "if I win we get 60%, and if I lose we are only down 10%, and two stocks that just ran their thesis recently in similar ways, but no one wants to hear that shit lol. 

 
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Going to add one more question here in case I can find any takers for either topic. Lets say a PM were to ask you what your investment process is?

Mine is fairly standard: Start with 10k, investor day, earnings transcripts, conferences, etc, understanding the basic drivers of the business and begin developing my own perspective on key business drivers. Then start to move through sell side + industry research and whatever else is needed to capture a better basic understanding of the landscape. Build the early financial model to get a more granular sense of unit economics, trends in the business (rev, margins, cash conversion, ROIC, etc,) and at this point I should be developing a more thorough understanding of the "1-3" key items that really drive this stock, as well as the prevailing major debates and ranges of views. I try to hone in on really understanding market embedded expectations and identifying the opportunities for variance with an eye on objectivity at all times, which requires marrying disparate data points and thinking originally. By this point I spend the majority of my time doing a deep dive on those 1-3 key variables that can drive the opportunity - generally involves channel checks, insider conversations, or getting the right data/indicators I need. At this point we have usually spoken to management, attended a conference and spoken to insiders, and I am focusing on identifying the catalysts, building a view on timing, assessing the risk/reward, and viola I have my basic coverage done. I caveat that it is an iterative and circular process in some aspects, with each part informing the other, rather than a step by step linear check list. As such, it is not the same process every time; sometimes it is more about finding a mis-priced distribution of outcomes with a good margin of safety, sometimes it is about identifying a major inflection point / perception changing event, sometimes it is about wading through an exogenous negative overhang that will dissipate, etc., but I try to rely on pattern recognition and possibly previous examples of similar scenarios. As an example of it being iterative, a lot of ideas come from research on a different idea at first. 


I got challenged pretty hard on why I think I can understand market embedded expectations and that I haven't done a lot of first hand research, and I am trying to figure out how to improve so I get better at doing this and finding good ideas. I explained that expectations can be reflected explicitly in consensus estimates or implicitly in the stock's price, and the consensus color comes from sell side research, management commentary, and Q&A from transcripts across the industry landscape. The differentiated views can come from insights from on the ground players, industry experts, underappreciated data, etc.


I think the hard truth is in my current job I don't have the time and resources to go super deep on channel checks like I used to at one point, so maybe they are right if they sense I am not doing a ton of that day to day right now. But if you have any commentary to help amend my process, explanations, or general thoughts, it would be helpful. I'm not gonna let this one experience persuade me into thinking I can't eventually make the jump. 

 

Your shit doesn't work anymore. You work hard but not smart. Every fool on the street uses your process, it's so crowded your process won't yield any real superior insights. You have to basically 1) get insider information or 2) go to the future with a time machine to see the winners/losers and come back. 

 

Couple interesting research projects come to mind, both were shorts...

One was a service provider to US schools (K-12) and I suspected there was some fraud going on or at least overstatement of their business. Was able to figure out exactly which schools they serviced with and sent FOIA requests to get copies of their contracts. Materials were coming in to me and I was going through processing when the business was sold to private equity. Sad. 

The second was a hospital chain proposing to sell certain hospitals to de-lever and the thought was these sales, if materialized, wouldn't yield sufficient proceeds to achieve their goal. Figured out how to get the hospital-level financials each filed with State regulators and compared to the numbers the company implied they were doing...was a massive difference. Sales didn't work and company filed BK later. 

Your research process sounds pretty vanilla and probably what everyone eventually gets around to doing. The starting point for me is asking why a situation is potentially interesting, what is the basic upside / downside skew, how actionable are the securities, and is there a high level concern or question I think I have the ability to understand or untangle. Instead of trying to check market expectations, I spend most of my time understanding how the business works - like really, really works. As in, how does revenue come in and turn into cash flow...sounds basic, but most would be surprised with how much reported revenue out there is actually non-cash; this requires an understanding of revenue recognition and other accounting policies. How does working capital work? Are there supply chain financing aspects to be mindful of? How else does the business finance itself and what are implications of that? My experience is that most people are not super thoughtful on these questions until it is too late. Other fixed vs variable cost considerations embedded in the business is important as well. I would say this is adopting an operators mindset. Once I'm comfortable that I know how a company "breaths" I can understand how the business responds to different scenarios. Sometimes this can lead to variance with consensus, most often because there are structural aspects to business models that are not well understood...I don't think I've ever tried to "one up" KPI estimates or anything like that, generally bigger picture.

 

The examples you are referencing seem extraneous no? In the hospital scenario where they filed for BK, I think a lot of people would like to think they could have also found that discrepancy also had they been covering the company deeply. Everything else you reference is great but it doesn’t seem to me all that actionable and/or different. Most good analysts probably know how the companies in their coverage universe recognize revenue, convert cash, etc. It’s good advice and those are good ideas but my question is could those ideas be found consistently in a universe of 30 companies?

 

I think you nailed it with this advice, the interviewer (PM possibly) in this case is saying you have a great process but explain to me how you break shit? That is the sense I get how do models break, how do you actually miss stuff, how does the market fall behind a name and so on. Or possibly tell me a story/theme and not just how you would write a the research needed on a name.

Both examples provided here explain how stuff breaks...

I think the way the feedback was phrased was really not necessary, but ehh that is how people do things at times. A much better approach would have been like "okay that is great process, but could you identify a time that the process stopped or changed quickly cause you think you identified something others have not", sort of thing.

Likewise as mentioned if you phrased your answer a different way the interviewer would probably not as challenged so hard later on. 

 

Appreciate the commentary and advice - you are right in that my walk through is fairly vanilla, so I really need to find ways to demonstrate my ability to get underneath the covers on names in creative ways. The best illustration is pitching obviously (although in this scenario I never got to do my pitch which was unfortunate). 

Sometimes it feels like I am struggling with time and resources to cover my companies at work and also do a channel check with my name/title and have it be unrelated to work - bad excuse I get it, just thinking out loud. I probably should reflect on a new way to express my process that really solidifies the point early on and quickly in an interview that I am capable and resourceful when it comes to uncovering edgy dislocations. It is a catch-22 where someone wants to see your work at a HF to display you do the HF job, and no one wants to hire someone doing something else on the potential basis... I mean makes sense you can do shit all with potential and its all about making money. 

Gonna workshop my process again and make sure I communicate the game appropriately, and get a sexier pitch in there. 

 

I think you could solve this problem by weaving in prior investment / trade examples as you walk through your research process. For instance, when talking about primary research, you could say "I owned shares of XYZ and the thesis there was underpinned by primary work completed around XYZ...". That way, you can keep the conversation grounded in a more practical sense as opposed to conceptual. If there are things you really want to address in interviews I think its gonna have to be on you to make sure the conversation goes that way as opposed to waiting for an invitation. 

 

i once set up my own CAD designs & manually submitted a couple hundred RFQs to a bunch of different vendors in a particular niche manufacturing space to get a view on price & delivery time trends in that peer group of companies

 

Seems to me like that was a great walk through. Have you heard this multiple times or from this particular person. To me it seems like this is a one off hardo. People like to act like there is some magic diligence item through some proprietary deep dive process nonsense that unlock the true value  that no one else knew about. Please. Almost all of that extra stuff is just back fill to support the initial thesis. Are there ways to be creative and find extra info, certainly, but seems like you're doing a great job so don't beat yourself up. 

 

Was just this guy / first time I heard it. Have done this a few other times now and got good reception on it I think (one time for sure I did, as I made it through multiple rounds to the final one, but then the position they were hiring for was eliminated for exogenous reasons...), but I'm not sure his commentary should be discounted 100p. While some of it may have been hardo-esque, I do come from that long only product so it is something I need to be extra diligent about to make sure I can present myself the right way going forward.

I think the other comments about taking the opportunity to highlight more quickly examples and prove with a thesis vs. waiting for the opportunity was also very accurate. It is a tough balance to hit the things a PM is looking for specifically, and to weave the right examples at the right times and lead things yourself, and he kind of started in a less traditional way. For example he didn't want to hear my background, cut me off when I tried to do a pitch, picked at random things about my current job - so I struggled to craft the narrative I usually get to, which maybe amends my firm's process with the hours and hours and years and years of additional study and other theses that I work on. Not like my job is super soft now either, but it is indeed a long only product. 

Regardless I was pretty hard on myself initially, got me thinking if maybe I have been missing some bigger picture, but I think was a mix of all these variables and sometimes it just doesn't gel in the right way and so I missed my chance to really impress. Frustrating as I only get a few opportunities here. Quickly turned to some hardo revenge in my mind of "don't ever come across as vanilla again" lol. But really its all gonna allow me to continue to reflect more deeply about my process, the quality of my current pitches, where I can improve, and my ability to illustrate value for the next one! 

 

Quasi merger arb play where arbs were just buying small volumes of target to monetize gross spread in context of a probability calculated without any real sector knowledge and found myself in two long positions whereby acquirer was being overly penalized by other l/s who just sold the stock and wouldn’t buy because special sit. 40%+ return as market Re rated stocks as if deal wasn’t going to happen and then buyer made material steps to quell anti competitive nature of transaction to push thru, which pushed target share price up meaningfully.

 

I’ve never reinvented the wheel or gone so against consensus such as Druck/Soros (the England play) or Burry (CDS).

But I have gone against the consensus and benefitted well. I got into semis coming out of the down-cycle before the boom due to numerous tailwinds (COVID, new tech, and etc.) by pitching Long AMD, Short INTC (+37% vs -37%). I got into cybersecurity before that was well-established mainstream coverage (MS, JPM, GS) and got Long PANW, Short FTNT (~2y 92.21% vs 54.48% with strong correlation movement-wise between them which reduced volatility tremendously). 2022 stayed mostly cash (thankfully), thought everything was too expensive or priced-in given projections.

So I have done fairly well during my short time professionally ( 

My investment process is definitely not first-hand though. I just start by thinking about a specific industry that may have mis-pricing potential vis-a-vis trends + market data/sentiment (volume, RSI, MAs) when determining the enter/exit of an investment (the particular size is up to my PM). Then I map out the players and the drivers in each segment. Following that I analyze a handful of firms that have direct exposure to a change in trends. In that, I also analyze and compare sell-side analysts perspectives, assumptions, and track-record. I then determine a recommendation (Buy/Neutral/Sell) and attribute a personal sentiment to it (Must-have/Like it/Meh/Don’t like it/Toxic). I consume research from mainstream to specialized boutiques, consultants to academic experts. Whatever can give me a thorough understanding market-wise of that space.

Just to clarify, I have done some fuck-ups at times, but never on a big scale like -15/20% net and less often than the winning picks.

Now, some may say I was just lucky. To which I say all good investors rely somewhat on luck, but the performance data would suggest (I believe) that my picks aren’t random.

Just find the method you think is best and most appropriate. Can’t use the same metrics across different sectors, times/trends change, and etc.

 

Great way to summarize a research process.

By the way, what's the point of ranking your coverage by product differentiation etc...?

 

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