How to better understand businesses and articulate investment ideas?
More of an open ended discussion, but how do you all try to better understand businesses when going through potential investments, ex. understanding how the operations work, the value proposition, and being able to articulate it to the investment committee. Anyone have any tricks of the trade or any general insight?
Background is a fairly strong business program on the east coast in undergrad followed by immediately joining a buyside shop, so didn’t do my first 2 years in banking. In terms of what I’m having trouble doing, I can grasp a business relatively well while reading CIM’s, however when trying to speak to the operations of the business and the behind the scene, what is the best way to articulate that in an investment committee meeting, in addition when you are presenting a memo to the the investment committee, how do you antiticpate any questions they may have and try to know the ins and outs of the business completely
As for articulating in IC, try not to go too much into details. What you want to do is keeping the discussion at a level above your deepest one (which is rarely comparable to those of an operator), so that there's some headroom if you are requested to give more details. In terms of anticipating questions they may have, there are 2 classes of questions:
1) specific ones, here it is a bit more unpredictable. Despite partly covered by what I've said above, it is partly unpredictable due to some kind of in depth knowledge of the industry someone may have
2) risk related ones, if you think in terms of SWOT analysis, this could be either internal or external
Another thought, think about the big building blocks of a business and describe with those blocks; 1. Why do customers buy - price, quality, experience 2. How do companies produce - high volume, custom, highly engineered 3. Market positioning - brand, etc 4. Businesses structure; SGA, distribution, asset heavy or light, etc
A business is generally 80% boring and 20% opportunities, so just describe the 80% and expand on the 20%
Some examples; - Quality and demand are there but our pricing is wrong, here's the solution... - The company lost focus trying to expand from aero to auto. They kept quality and delivery but never adjusted SGA to match the lower margins. - The company had a great reputation for quality and delivery until they wrecked the balance sheet with a new venture. So, it's a financial problem and here's the solution... - Demand and margins are good but poor deliveries have limited growth opportunities, here's the solution... - This is a mediocre company hitting on all cylinders but missing real opportunities in a parallel market, here's how we can get there...
I think this also controls/contains/directs the questioning so you're not getting hammered from all sides.
Hope that helps