How Ted Ohashi determines which management teams to believe in
QUESTION: I know management is a key to your investment philosophy. When you meet the management of prospective companies you invest in, what are the specific things you look for and specific questions you ask to determine if they meet your expectations? Obviously, the track record of individuals is important but you can get that information without meeting them. I was conned once in the past and it was an expensive lesson. I’m far more cautious now. What's your qualification process when you meet them in person?
D.M. from Toronto, Canada
ANSWER: Boy, I could write a book on that subject. But as you point out, being able to make such judgements in the investment world is important. It is critical especially when dealing with smaller companies. It’s hard enough to make an above average return on an investment let alone if you had no chance from the beginning because it was mostly fraudulent in the first place. But being able to make assessments of people is also important in many other aspects of your life. Buying a new suit or outfit? Tying to choose a financial advisor? On the lot with a salesman buying a car? It is something that enters many aspects of everyday life.
I don’t ever get into a management interview without have done some preliminary research first. I will have spoken to associates or friends to see what I can find out. I must admit I’m probably more skilled when it comes to investment interviews or presentations because I have more experience. I’ve probably owned fewer than a dozen cars in my life but I guess I’ve been involved in over 2,000 management interviews or presentations.
I don’t approach an interview with questions designed to trick anyone. I like interviews that are relaxed and conversational. Also, during an interview you are gathering information about the company, the industry, the business plan, and so on. So management is an important consideration but it’s not the only consideration. As I often say, “I’d rather invest in good people with a bad idea than bad people with a good idea.” Of course the search is always for good people with a good idea.
One of the things everyone looks for is honesty. Most people can tell when a person knows the answer to a question and when someone doesn’t know the answer but tries to give you an answer anyway. I see this all the time when politicians are interviewed on television. I really appreciate someone who says, "I'm not sure about that but I'll find out." Then I want to hear back from them when they have the answer.
Closely related to this is to do your homework ahead of the interview. This enables you to detect whether the discussion makes sense relative to what you know about the company or the industry. If you watch Christiane Amanpour conduct an interview on BBC, you end up with the sense that she knows more about the subject than the expert chosen to discuss it and she is able to do it without being overbearing or self-centred. The ideal is to let the interviewee know they have to be sharp, alert and at the top of their game. Again, that is the ideal – a strong interviewer and an equally competent interviewee.
Another important consideration from my point of view is the way management presents its responses. I like to leave an interview excited by what has just transpired. I like management that is excited about the prospects for their business and can communicate that enthusiasm and excitement in the way they describe their company and the potential they see. The ability to communicate is crucial.
I've been doing this for a long time so after an interview I have confidence in the impression I am left with of management’s ability. On rare occasions, if I believe the business model for the company is strong enough, I will try to find out if management will be willing to step aside at the right time.
But the bottom line is if I have doubts I pass and go on to something else. You don’t have to board every bus that comes along.