Asking Difficult Questions

OVERVIEW

Published on:14 August, 2019
Asking tough questions which shed new light on the opportunities and challenges facing companies is a non-trivial task. Asking difficult questions involves not just preparation but also an understanding of Q&A techniques and a willingness to shed the deference that analysts naturally have of CEOs.

“Getting the right question is the key to getting the right answer.” – Jeff Bezos

“When you’re a student, you’re judged by how well you answer questions. Somebody else asks the questions, and if you give good answers, you’ll get a good grade. But in life, you’re judged by how good your questions are.” – Robert Langer, MIT professor

Questions, curiosity and creativity
“Question everything” said Albert Einstein. The link between curiosity, creativity and questioning is intuitive as at the root of all three behaviours is a yearning for exploring, for probing, for understanding better and/or knowing more than what others do. We have written before creativity and how it has its roots in non-conformist and sceptical/questioning mindset – see/marcellus-non-conformism-underpins-original-thought/
We have also written about the questions that investors need to ask their fund managers – see https://marcellus.in/blogs/marcellus-the-most-important-questions-to-ask-your-fund-manager/

Now we turn our attention to the questions investors like us should ask of the companies which we invest in. These questions are not necessarily meant to be posed just to the CEO of the investee company; indeed smart CEOs will be evasive about answering these sorts of questions. Instead they can also be posed to ex-employees of the company, competitors of the company or distributors or suppliers of the company. The questions are also meant to be answered by the investment analyst herself as she examines the Annual Reports of the company over the past decade.

So how can we ask better/more probing questions?
Look for questions rather than answers: When you start analysing a company, the instinctive thing to do is to try look for answers. In fact, from the outset our brain is asking us “How good is this company?”. It takes a conscious effort to switch off this mindset and instead look for questions – rather than answers – which will help us understand the company better. So, for instance, if we can see that a company has generated superior operating margins and ROCEs for over 10 years, the instinctive question will be regarding the competitive advantages which allowed the company to deliver these great results. The more useful question for the company’s CEO would “Tell me about the evolution of your firm over the past decade. To what extent were the success factors external rather than internal to the firm?” With a question like this, you are keeping your mind open to the possibility that the drivers of the company’s success over the past decade might be exogenous to the firm.

Focus on qualitative issues rather than quantitative: Even ordinary CEOs are good enough to deal with most quantitative questions that investors throw at them eg. How will you improve your ROCE? What CEOs are less prepared to handle are questions on the softer aspects of what makes a company successful. Eg. Who are your two most important direct reports and how did you select them? Another eg. Take us through your capital allocation process.

Ask open ended rather than closed ended questions: As Donald Rumsfeld famously noted, we live in a world with unknown unknowns i.e. there are lots of things you don’t know that you don’t know. That’s why open ended questions (eg. What are your recruitment techniques?) are more useful than closed ended questions (eg. Are you satisfied with your recruitment techniques?) because the former leaves the door open for “unknown unknowns” to emerge. Another example of an open ended question would be “Why do you think growth has slowed down?” whereas a closed ended question would “Has revenue growth fallen below your expectations?” [Note: closed ended questions are defined as those which can be answered with a yes/no.]

As short questions rather than long questions: When confronted by successful senior executives such as the CEO of a listed company, most analysts want to avoid getting on the wrong side the executive. This results in the analyst asking wordy questions which are heavily caveated and often closed ended eg. Given that we have had an unusually heavy monsoons, will your second quarter profits be impacted? Short open-ended questions are usually more effective eg. How is business?

Ask follow-up/funnel questions to clarify and/or to probe further: If you ask open-ended questions, you tend to get answers which are broad ranging. It makes sense at that juncture to push the CEO towards specifics. So, for example, in response to your question “How is business?”, the CEO answers “We are suffering due to the economic slowdown”, you follow-up questions could be: “How are you measuring the impact of the slowdown? Is there an indicator that can do this for us?” It’s useful to keep a few follow-up questions in your back pocket. Even if you’re looking for a factual response, digging a little deeper can lead to more insightful answer.

Use negative framing to your advantage: In a hierarchical society, most CEOs are used to being told what they want to hear. Hence if you learn to negatively frame most situations, you are more likely to take the CEO outside his zone of comfort. A CEO’s irritation at negatively framed questions can be very revealing. Eg. What can we learn from the sharp slowdown in revenue growth over the past years? Another eg. Given the slowing economy, what red flags are you watching out for in your company’s financial performance? In this context, you might want to read our blog on how to spot CEOs who lie: https://marcellus.in/blogs/spotting-the-liar-in-the-boardroom/

Take notes and refer back to them: If you are meeting companies every week, you need to keep track of what the CEO said in July 2018 so that you when you meet her again in January 2019, you can refer back to what she said seven months ago. Furthermore, it is also useful to set up a system where suppose I met the CEO in July 2018 but in January 2019 it is my colleague Rakshit who meets the same lady, Rakshit should be able to readily access all of my notes on the company. Otherwise we have no way of assessing whether the CEO delivers on what she promises. Software which makes it easy for your firm to record and retrieve notes are therefore a useful investment.

Investment implications
Investment teams who answer the toughest questions (of themselves, of the data at hand, of the company and of their primary data sources) usually deliver superior investment insights. In contrast, investment teams who use standard business school frameworks to analyse companies deliver conventional investment insights. To ask probing questions takes not just preparation but also the willingness to confront the hierarchical mindset which pervades corporate life in many parts of the world. Here are a couple of examples of smart interviewers probing powerful interviewees:
https://www.youtube.com/watch?v=Xx92bUw7WX8: Henry Blodget probes Jeff Bezos for 40 minutes. Blodget is polite and unrelenting in his probing. Bezos is thoughtful and candid in his responses.
https://www.youtube.com/watch?v=vFHYiOfBRng: British journalist David Frost’s 1975 interviews of Richard Nixon (who by this time had stepped down from being the US President due to the Watergate scandal) are the stuff of legend. Not only does Nixon break down under tough questioning from Frost (who had prepared meticulously for this interview), the interviews form the basis of an award winning movie made in 2008.

To read our other published material, please visit https://marcellus.in/blog/

Saurabh Mukherjea is the author of “The Unusual Billionaires” and “Coffee Can Investing: the Low Risk Route to Stupendous Wealth”.

Note: the above material is neither investment research, nor investment advice. Marcellus does not seek payment for or business from this email in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services and as an Investment Advisor.