How to call the financial director
Posted on February 7, 2008 by Richard Beddard
Filed Under Investing |
In fact we’re not just shy, some of us are down right sceptical.
If you’re a regular reader of this blog, I hope you’ve noticed I’ve approached each company as an investor, not a journalist. In fact I’ve used the same method I use when evaluating companies for my own portfolio.
It’s Peter Lynch’s from in ‘One Up on Wall Street’ (once my favourite investment book, now one of my two favourite investment books). When he had a stock idea*1, Mr Lynch would research it and write a “two minute monologue” - a theory of why it might be worth investing in the company. If you’ve been reading this blog, you’ve been reading my two minute monologues. Two minutes is how long it takes to read the monologues, not how long it takes to research them.
I can’t remember Mr Lynch’s method precisely, but mine evolved from his, and I only have one aim:
- To understand how a company makes money
If I can (and I’ve got the cash and it fits into my portfolio), I’ll buy it, if it’s trading at an attractive price*2.
The research*3 boils down to:
- Reading annual reports,
- Calculating various financials ratios and growth rates,
- Checking recent financial news, for developments, and…
- Brainstorming threats to the business.
By then I have my theory, a draft monologue. It might be like Abcam: the company is better at selling antibodies than the competition. Or it might be like Dignity (next week’s company): a reliable slow grower, boosting earnings with financial engineering.
It’s important that I can sum my theory up in a sentence or two.
It’s only a theory though, and usually I have questions. That’s when I call the financial director.
Peter Lynch advocates talking to management, but two of my other investing role models don’t, James Montier (author of my other favourite investment book) and Mohnish Pabrai.
They think managers are professional optimists. An investor’s more likely to be misled by a director’s optimism than enlightened. Well, I think that depends what you ask, which is where my objective comes in.
It’s my job to decide whether a company is viable, and it’s up to me what price I pay. All I want from the ‘phone call is to understand his business. Having done my research I know (to do a Rumsfeld) what it is I don’t know, and that’s important because I don’t want to waste his time, or mine.
So I call the company. Nine times out of ten this happens:
- Reception put me through to his office…
- His assistant tells me he’s out/in a meeting, but if I’d like to put my questions in an email, she’s sure he’ll get back to me…
- I send an email, and…
- The FD calls me back.
That’s right he calls me back. Occasionally he emails, but usually he calls. Here’s the text of a recent email:
Dear Mr xxxx
I’m analysing xxxx for Interactive Investor, a financial publication, and hope you can answer a question for me. I called your office, and was informed that email would be the best way today, but I’d love to talk if you can, and would promise not to take up much time. You can reach me at my office from about 3.00 to 6.15 or on my mobile after that:
Direct: xxxx
Mob: xxxxMy question concerns the loan notes, and what assets they are secured against. If it seems like an ignorant question, I apologise, but it seems to me the company has fewer assets than the value of the notes? Perhaps you could explain.
Many thanks,
Richard.
Some tips:
- Don’t pretend to be researching the company for a financial publication if you’re not! Just say you are a shareholder, or you are thinking of buying shares,
- Don’t try this on results day or you’ll be competing with hordes of journalists, analysts and investors,
- State your question or questions clearly, just one - or two. If you’ve got more, do more research on the company or give up on it. Some are just impenetrable,
- Don’t ask stupid questions. A stupid question isn’t one you don’t know the answer to. That’s a good question. A stupid question is a question you could have answered by reading the company’s annual report or website,
- Reassure him you won’t take up much of his time,
- Ask him to call you back,
- Make sure you’ve told him when you will be available, especially towards the end of the day when he’s tying up loose ends.
When he calls I get my answers. Then, because I haven’t wasted his time, there’s perhaps five or ten minutes to discuss the business. Sometimes his answers lead to subsequent questions.
Usually I test my theory, or part of it. That’s why it’s important to be able to boil the theory down to a sentence or two. There’s no need to push it because I always conclude by confirming that he’s happy for me to call him back.
Just in case you’re thinking “yeah, but:”
- I’m calling from the almighty Interactive Investor, and the FD’s only replying because he wants to make sure his company gets a good write up. Not true. If I’m researching the company for my own portfolio I introduce myself as an investor, as I did before I started writing about companies.
- You’re only a ’small investor’. Why would they bother with you? They will. If you’re well prepared you won’t sound like a small investor. I’ve never been asked how much I’m likely to invest and if I were, I’d tell the truth - about £5,000*4 or $10,000. That’s not going to make or break a company, but I can’t imagine the FD hanging up!
- It won’t work with bigger companies. It’s harder with FTSE 100 companies who employ cadres of investment relations and public relations people to shield managers from press and investors and, to be honest, I don’t have any in my portfolio so I’ve only approached them as a journalist. But we’re overloaded with information about the biggest companies anyway. Have you seen the size of HSBC’s annual report? If you read that lot you’ll be in no condition to talk to the FD
My approach is to get in and out quick. I’m not trying to get close to management, though other investors can and do. In the swinging 60’s they had a term for it: the ‘zipless ****‘ (you know word for sexual intercourse, begins with an F, ends with a K - I used my yearly quota of it in an article on French Connection).
Footnotes
- A subject for another day
- Another subject for another day
- I think perhaps you can guess this footnote
- I used to do it when I only had £1,000 to invest per company. Hopefully one day I’ll get to do it with £25,000 to invest per company!
Comments
5 Responses to “How to call the financial director”
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Your article interested me but I think many would have trouble sorting out the wheat from the chaff in company’s accounts. Those that can will want to know about return on capital and relevant accounting ratios.
When TransTec existed I remember on two three occasions ‘phoning and being put through to Richard Carr the CEO (FCA) when I had concerns about the share price drifting downwards (I had invested £32k). The significant thing he said was that the shares were worth about 34p on a ‘gone concern’ or ‘fire sale’ basis, or similar words. I should have sold then, at a great loss, but held on. On another occasion Geoffrey Robinson, MP., ‘phoned me from his car; whatever figures I was looking at he said the main one’s are Earnings Per Share. Now that was a funny answer to give out. The point is they are aware the company is in trouble and they have their ready answers to give the sucker Investor.
I have found ‘intuition’ is your best guide.
The figures I always check are Net Current Assets; borrowing ratio/gearing; and the direction of the 5 year profit trends.
Hi Neil, thanks for your reply.
I think you’re right, and that’s why I don’t ask about drifting share prices or the next earnings figure. Legally the directors are limited in what they can say anyway, so that and their propensity to spin is likely to lead to a reaffirmation of what you should already know(i.e. you could have found out the information by checking the last results announcement or trading statement) or some bland reassurance.
So I regard the conversation as an opportunity to learn about how the company makes money, rather than its current trading. That’s useful to me because it helps me form an opinion on its long-term viability.
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