Someone who reads my articles sent me this email:
Geoff,
I am a senior in college and I am in the process of interviewing for full-time positions in asset management/equity research. I have a "super week" on campus… where I will have a number of important interviews, and I would like to be able to tell the interviewer, 'I know a lot about x industry.' I am familiar with many industries, but I wouldn't say that I have a deep understanding of any one in particular. Can you recommend an industry that I could sit down and study for the next month and develop a deep enough understanding to tell an interviewer 'I know a lot about this industry'?
I know a lot about oil and gas compared to what I know about other industries, but O&G is such a deep industry that I would feel much more confident trying to master a simpler industry for interviewing purposes.
Thank you for your advice.
- Ted
Honestly, I would go with your instincts. With what you are already interested in. If you know a lot about oil and gas, I would study oil and gas. The most important requirement for understanding anything is your interest in it. Often, it's not enough to "need" to know something. You have to "want" to know it.
My focus is almost exclusively on industries where customer behavior is easy to understand. Where once you have a good idea of how the customer sees the product, how they search for alternatives, etc. you have a good understanding of the business. To me, the simplest industries are industries in which costs are less important to the company because they are less important to the customer. Usually, I am focused on industries where the purchase decision does not involve a very large amount of money relative to the customer's total purchases.
So, I think of simple industries as food, entertainment, etc. And anything where logistics provide a competitive advantage. I mentioned a company I own shares of – George Risk Industries (RSKIA, Financial) – before. Its advantage is the ability to deliver a cheap product on time. They can't produce the product for less than the competition. If the purchase price was huge relative to what the end customer was purchasing as part of the same activity (the end customer is construction in this case) price competition would be important. Instead, delivery is important.
This is similar to Mid-Continent Tab Card Company. Warren Buffett invested in Mid-Continent Tab Card Company back in his partnership days. Another example of a company that competes on delivery is ADDvantage Technologies (AEY, Financial). It's going through some changes now – due to a new (adverse) agreement with Cisco (CSCO). But, historically, it competed on delivery alone. By having products in stock and ready to ship – their motto is “on hand on demand” – ADDvantage could compete with original equipment manufacturers even though those manufacturers could sell the same product (in large numbers and slow delivery times) for much less.
That's my biggest concern with whether an industry is easy to understand or not. If a competitor offers to sell its product for 5% less than you charge, how do you respond? Do you have to respond? Can you ignore price competition like that?
Now, there are obviously industries where price competition is critical and yet the business is easy to understand. Groceries, auto insurance, etc. Even the deposit gathering aspect of some banks is very simple and easy to understand.
The lending part… not so much.
My concern is a durable competitive advantage. Something that I can recognize. I have to be able to understand it. In some sense, to actually imagine it. There are many companies with competitive advantages that are just too esoteric for me to understand. I’d probably recognize them if I worked in that industry day after day. You notice things when you’re close enough to see them illustrated every day in a million different anecdotes. Reading about an industry from afar is much harder to do. So the competitive advantage has to be pretty plain and simple. Or I won’t see it when I read it. But that’s competitive advantages. And I'm not sure competitive advantages are the topic of greatest interest to the folks you'll be interviewing with.
I know that when it comes to what stocks people are most likely to make money on – it often comes down to familiarity. Are you willing to study the company? And then are you willing to trust your judgment when the stock price moves against you – as it almost certainly will – at some critical moment in your holding period. That’s how it seems to work with stocks. Picking the right stock is not enough. You have to be able to hold it too.
I know you didn’t ask about buying stocks. You asked about a job interview.
But the topic you’ll sound best talking about is the topic you’re most interested in.
Really, you should go with what you are passionate about. What you are curious about. If you are interested in an industry and apply yourself to understanding it, you'll do fine. I would recommend coming up with a list of public companies in the industry you want to study. Print out the 10-K, 10-Q, and 14A for each. You can get them at EDGAR. Have a pen in hand. Take notes. Compare the companies.
Many of the most important aspects of every company – and the industry itself – will be obvious just from these reports. They are most useful because they are essentially primary sources. A lot of the information you will read about a company or industry has already been shaped by some other analyst (or reporter's) opinion. SEC reports are less likely to cause you to embrace the conventional wisdom where it is wrong.
One thing I would strongly suggest is to avoid reading resources prepared with investors in mind. When doing stock research, you should either use rather dry and formulaic information dumps like the 10-K, 10-Q, and 14A or you should read documents that were specifically created for non-investors. Depending on the industry, there is sometimes a lot of information that was created by or for academics, regulators, customers, industry participants, and general interest audiences. Some of this stuff can be very useful if you make connections with what you find in other reports. Some folks will listen to industry gossip. Others will read the SEC reports. Far fewer will bother to connect the two.
If you can talk to anyone in the industry – whatever their role – I would encourage that. This is easy to do if you gather information on their company, industry, or function ahead of time. If you demonstrate you already know something about the topic and are interested in it all you have to do is let them talk. People love to talk about themselves. And actually talking to folks in the industry can help in a few ways. The most useful is in terms of human behavior. People can often reveal why prejudices and biases exist in certain decisions made in their industry. They can help you understand the human element.
Warren Buffett mentioned doing this before his recent investment in IBM (IBM, Financial). Basically, he wanted to know why people would be likely to prefer IBM to competitors and why they stay with IBM. In his CNBC interview, Buffet seems to say there is a certain tendency to bet on the known quantity when it comes to IT providers. He especially mentions this in regard to foreign companies. It was interesting to see Buffett mention doing this kind of scuttlebutt with IBM – because in past interviews he's said that while he used to do all the Phil Fisher scuttlebutt – he'd gotten to the point (by the 1990s and 2000s) where he kept Phil Fisher’s principles in mind but he could basically make a decision just from reading public reports.
Talk to Geoff About Understanding an Industry [email protected]
Geoff,
I am a senior in college and I am in the process of interviewing for full-time positions in asset management/equity research. I have a "super week" on campus… where I will have a number of important interviews, and I would like to be able to tell the interviewer, 'I know a lot about x industry.' I am familiar with many industries, but I wouldn't say that I have a deep understanding of any one in particular. Can you recommend an industry that I could sit down and study for the next month and develop a deep enough understanding to tell an interviewer 'I know a lot about this industry'?
I know a lot about oil and gas compared to what I know about other industries, but O&G is such a deep industry that I would feel much more confident trying to master a simpler industry for interviewing purposes.
Thank you for your advice.
- Ted
Honestly, I would go with your instincts. With what you are already interested in. If you know a lot about oil and gas, I would study oil and gas. The most important requirement for understanding anything is your interest in it. Often, it's not enough to "need" to know something. You have to "want" to know it.
My focus is almost exclusively on industries where customer behavior is easy to understand. Where once you have a good idea of how the customer sees the product, how they search for alternatives, etc. you have a good understanding of the business. To me, the simplest industries are industries in which costs are less important to the company because they are less important to the customer. Usually, I am focused on industries where the purchase decision does not involve a very large amount of money relative to the customer's total purchases.
So, I think of simple industries as food, entertainment, etc. And anything where logistics provide a competitive advantage. I mentioned a company I own shares of – George Risk Industries (RSKIA, Financial) – before. Its advantage is the ability to deliver a cheap product on time. They can't produce the product for less than the competition. If the purchase price was huge relative to what the end customer was purchasing as part of the same activity (the end customer is construction in this case) price competition would be important. Instead, delivery is important.
This is similar to Mid-Continent Tab Card Company. Warren Buffett invested in Mid-Continent Tab Card Company back in his partnership days. Another example of a company that competes on delivery is ADDvantage Technologies (AEY, Financial). It's going through some changes now – due to a new (adverse) agreement with Cisco (CSCO). But, historically, it competed on delivery alone. By having products in stock and ready to ship – their motto is “on hand on demand” – ADDvantage could compete with original equipment manufacturers even though those manufacturers could sell the same product (in large numbers and slow delivery times) for much less.
That's my biggest concern with whether an industry is easy to understand or not. If a competitor offers to sell its product for 5% less than you charge, how do you respond? Do you have to respond? Can you ignore price competition like that?
Now, there are obviously industries where price competition is critical and yet the business is easy to understand. Groceries, auto insurance, etc. Even the deposit gathering aspect of some banks is very simple and easy to understand.
The lending part… not so much.
My concern is a durable competitive advantage. Something that I can recognize. I have to be able to understand it. In some sense, to actually imagine it. There are many companies with competitive advantages that are just too esoteric for me to understand. I’d probably recognize them if I worked in that industry day after day. You notice things when you’re close enough to see them illustrated every day in a million different anecdotes. Reading about an industry from afar is much harder to do. So the competitive advantage has to be pretty plain and simple. Or I won’t see it when I read it. But that’s competitive advantages. And I'm not sure competitive advantages are the topic of greatest interest to the folks you'll be interviewing with.
I know that when it comes to what stocks people are most likely to make money on – it often comes down to familiarity. Are you willing to study the company? And then are you willing to trust your judgment when the stock price moves against you – as it almost certainly will – at some critical moment in your holding period. That’s how it seems to work with stocks. Picking the right stock is not enough. You have to be able to hold it too.
I know you didn’t ask about buying stocks. You asked about a job interview.
But the topic you’ll sound best talking about is the topic you’re most interested in.
Really, you should go with what you are passionate about. What you are curious about. If you are interested in an industry and apply yourself to understanding it, you'll do fine. I would recommend coming up with a list of public companies in the industry you want to study. Print out the 10-K, 10-Q, and 14A for each. You can get them at EDGAR. Have a pen in hand. Take notes. Compare the companies.
Many of the most important aspects of every company – and the industry itself – will be obvious just from these reports. They are most useful because they are essentially primary sources. A lot of the information you will read about a company or industry has already been shaped by some other analyst (or reporter's) opinion. SEC reports are less likely to cause you to embrace the conventional wisdom where it is wrong.
One thing I would strongly suggest is to avoid reading resources prepared with investors in mind. When doing stock research, you should either use rather dry and formulaic information dumps like the 10-K, 10-Q, and 14A or you should read documents that were specifically created for non-investors. Depending on the industry, there is sometimes a lot of information that was created by or for academics, regulators, customers, industry participants, and general interest audiences. Some of this stuff can be very useful if you make connections with what you find in other reports. Some folks will listen to industry gossip. Others will read the SEC reports. Far fewer will bother to connect the two.
If you can talk to anyone in the industry – whatever their role – I would encourage that. This is easy to do if you gather information on their company, industry, or function ahead of time. If you demonstrate you already know something about the topic and are interested in it all you have to do is let them talk. People love to talk about themselves. And actually talking to folks in the industry can help in a few ways. The most useful is in terms of human behavior. People can often reveal why prejudices and biases exist in certain decisions made in their industry. They can help you understand the human element.
Warren Buffett mentioned doing this before his recent investment in IBM (IBM, Financial). Basically, he wanted to know why people would be likely to prefer IBM to competitors and why they stay with IBM. In his CNBC interview, Buffet seems to say there is a certain tendency to bet on the known quantity when it comes to IT providers. He especially mentions this in regard to foreign companies. It was interesting to see Buffett mention doing this kind of scuttlebutt with IBM – because in past interviews he's said that while he used to do all the Phil Fisher scuttlebutt – he'd gotten to the point (by the 1990s and 2000s) where he kept Phil Fisher’s principles in mind but he could basically make a decision just from reading public reports.
Talk to Geoff About Understanding an Industry [email protected]
