How to tell good buys from bad: Talk to people, trust your gut

AVNER MANDELMAN Saturday, June 3, 2006
Two months ago Giraffe put an ad in Report on Business, looking for a research analyst. We asked for a one-page résumé, a half-page letter, and a one-page tech stock pick (or pan). Why the last part? Not because we lack ideas (though you never know where another good one may come from), but because I've found in my past Bay Street incarnations that good analysts, like good magicians, actors, or secret agents, are best picked via a test-audition.
So we published the ad and waited. Over the following few weeks we received many responses, which we culled down to a handful, to be called in for an interview. That's the part I like. (I know it sounds odd coming from a techie, but although I like gizmos, I actually like people more.)
The candidates were a brainy, well educated lot -- professional engineers, possessors of MBAs, CFAs, and other degrees given to those who were taught to deal with the real world via its symbolic echoes. All presented themselves well, and some even gave interesting stock picks (or pans).
But two things were missing: First, nearly all had based their analysis on public, second-hand data -- the kind that everyone else sees also. Very few did primary field research and none thought it important to highlight exclusive information. Instead, the recommendations were rife with data copied from the Web, corporate filings or famous analysts' reports.
It was clear the interviewees saw their role as financial scientists massaging data gathered by others, rather than gatherers of exclusive info themselves. Second, very few spoke of the company's people. The engineers spoke of the gizmos' features; the MBAs spoke of strategies; the CFAs spoke of alphas, betas and financial ratios. All necessary and useful. But what of the people behind them?
Very few candidates spoke of the character of their pick's chief executive officer, the trustworthiness of the chief financial officer, or the high integrity of the company's team when compared to the competition. This lack of people-mention was glaring.
It was as if the possession of degrees made one see the world through concepts only. Or was this because the candidates were trying to sell themselves to Giraffe as investment scientists?
Without saying it explicitly, they seemed to be selling their reasoning power and learned ability to manipulate symbols. This was not a bad proposition, actually, since all were smart and well educated.
But at Giraffe we have a certain reservation about relying on mere smarts and degrees as our main competitive advantages. Other fund managers have smart people also, and if we pitted only our smarts against theirs, our advantage would be small.
What is the best advantage, then? As you probably know by now, in my opinion it is the relentless seeking of primary, important, exclusive information, the kind obtained by talking to people both high and low. Now, I don't want to denigrate our interviewees' academic degrees. After all, I myself have a few.
But in my opinion, relying on formulas can blind a person to the raw commercial world behind them, where real people steal each other's clients, patents and girlfriends, where some act honourably and so may deserve investment dollars, while others don't. How to find out who is who?
I hoped you'd ask. Why, just last week two Enron executives were found guilty after a dozen regular citizens listened to their story in court and said they didn't believe them. No CFAs, no Nobel-prize winning math theories, just normal people using the inbuilt lie detector that every human is born with -- you, me and everyone else.
If the poor fund managers who "invested" in Enron had done the same before and listened to their gut, perhaps some would have stayed away. But then, how many fund managers consider the gut-check proper research? I suspect very few do.
Indeed, several of our interviewees tilted their heads in perplexity like the RCA Victor puppy when I asked whether they had sought primary people data. "Like what kind?" one asked. Like asking ex-employees what they really thought about the company and the CEO; or asking previous colleagues of the CEO whether he was trustworthy. (Enron's chief had issues before.)
Or seeking the CEO's ex-secretary to ask her what she really thought of him. (These are especially valuable sources.)
Only two candidates had done some people checking. One also asked us questions, and listened to the answers. He knew tech, yes, but he spoke of people too. We hired him. Now we'll have to develop his sleuthing ability further. But it isn't hard. He'll only have to talk to people or look them in the eye, then let his inbuilt polygraph tell him whether he trusts them or not. You, too, have such an inbuilt natural device. If you use it more you'll prosper.
Avner Mandelman is president and chief investment officer of Giraffe Capital Corp., a Toronto-based money management firm.