We all like to talk about the stocks we own. If you are anything like me, you also do a lot of analysis into the companies you own. You can’t develop the conviction to hold without spending the time to know your positions better than most. It could take weeks or months to conduct due diligence and to acquire shares for the A-account (yours), preferably before others. After you’ve bought your position you would like to tell others about this gem you found that was buried in the weeds.
Some investors like to look down upon those that talk their book. I laugh at this because EVERYONE talks their book. It’s the way we are hardwired as humans. You spend countless hours doing anything and of course you want to tell others about what you’ve been doing. My rule has always been, Put Your Money Where Your Mouth Is Or Shut Your Mouth.
One of the best ways to find new ideas is networking and communicating with other investors online or in person. MicroCapClub is a collaborative microcap idea engine that utilizes the talents of the membership (network effect) to turn over thousands of microcap rocks in search of the next great company. The Club has been very successful in generating actionable ideas, but I still enjoy talking to investors in person and on the phone.
“Our best source of deals is word of mouth, generally in industries we’re invested in.” – Warren Buffett
Talking to other investors is one of the best ways to hear about new ideas. My favorite question is: What is your favorite company at the current price? I want to hear an investor’s best pitch. Coincidentally, it’s also why we have an afternoon devoted to the Pitch Session at the MicroCap Leadership Summit.
The perfect pitch is an art. I learned from one of the best in the game, but before I get into the delivery itself, the most important thing is to find a company that is worth pitching. The perfect pitch doesn’t mean putting lipstick on a pig ie: bad or mediocre business, it means finding a truly great opportunity. Ultimately the businesses characteristics and industry dynamics should make it an easy and compelling story.
Last week I watched a fascinating Google Talk with Chris Voss who was the former FBI lead international kidnapping negotiator. He wrote a book earlier this year called, Never Split The Difference: Negotiating As If Your Life Depended On It.
Several minutes into the Google Talk, Voss mentions that one of the tools he uses to get the person on the other side of the negotiating table to say yes is to first get them to say “that’s right”. He said there is a mental epiphany that occurs when a person sees or hears something that they completely agree with and believe to be a complete truth.
When I heard this I had a flashback to 12-13 years ago during my own investing journey. I was still in graduate school during this time, trying to compound my capital while also building up my reputation on public stock message boards. I formed friendships with several people on the stock message boards, first virtually online, and then in person. One of them was someone I would consider a mentor. He was a stock promoter of sorts but he had this way about him. He was the best stock pitchman I ever met. He could sell you anything. Many would be turned off by his promoting nature, but I was a firm believer that I could learn something from anyone. So I befriended him and he would show me the ropes on how to “pitch a stock”. He was also a real professional when talking to management teams. He had this likeability about him which made him even more persuasive. We actually traveled together to meet management teams and invest in a few companies. I learned a lot from him.
The most important part of the perfect pitch is the first 30 seconds. One of the first things he told me was that when you are pitching a stock to someone you have less than 30 seconds to get them to agree with you. In essence, out of the gate, get a “that’s right”. Communicate the “Why” of a company in a convincing way. He had me practice it. He would give me a few companies and like a drill sergeant would tell me to pitch him on the companies. Over time I became very good at “the pitch”. When I started my own advisory firm after graduate school I used a lot of these skills with management teams and also other investors to pitch my investments.
The older I get the less interested I’ve become in convincing others of the investing merits of my positions. This is mostly due to my long-term investment time horizon while most microcap investors have short-term time horizons. Quite frankly, attracting traders and short-term thinkers into my positions doesn’t benefit me or the company.
But one of the ways I still find creating “the pitch” useful is breaking down a company into a simple, digestible form. Keep it simple. The ability to quickly communicate to someone what need a company fulfills is a great mental exercise. A big part of my investment strategy is focusing on simple businesses. Simple businesses aren’t always great businesses but great businesses are almost always simple businesses.
Like Voss does in negotiating, I think it’s very useful to develop a mental model and deconstruct a business into its simplest form to get a “that’s right” or a “yes” quickly. The purpose isn’t necessarily to convince others, but to convince yourself. I know I’ve passed on several companies because they were just too complicated. Extraordinary returns follow extraordinary discipline. Warren Buffett and Charlie Munger call it the “too hard pile”. Use it often.
When I find what I believe is a new, possibly great company, I’ll research it, talk to management, and formulate an investment thesis. When I’m done buying my first third I’ll often times call a couple close investor friends and deliver “the pitch” to see how they react. I’m not pitching them to necessarily receive confirmation on the investment, but more so to find holes in my thought process. That said, I fire strong out of the gate trying to get a “that’s right” in the first 30-60 seconds. Let me give you a couple examples:
The Pitch- Company A: Would you or any investor trust a company’s financials if they didn’t have audited financials? Of course not. Then why is it you trust what you eat. Most of the organic, gluten free, natural, non-GMO labeled food you buy and feed your kids isn’t audited or verified. You’re taking the producer-manufacturers word for it. Does this make sense to you? Company A dominates the North American market in auditing/third party verifying food production practices. Consumers are now demanding “trust but verify” in what they eat. Large brands like McDonalds and Dannon are now adopting third party verification across their supply chain. The rest will likely follow. The company is 48% management and board owned, profitable, with a long runway of self-funded growth.
The Pitch – Company B: The 2nd largest industry in the world is the textile industry. The clothes that you wear, the upholstery in your car, on your furniture, even the tires on your car. Did you know that 99% of the textile industry still uses humans for quality assurance and visual inspection? They pay people to stare at loom or finishing line watching fabric and other material flying by to pick out defects. Does this make sense to you? Company B has 60%+ market share of those textile companies that have adopted automatic inspection systems. The ROI for customers is normally less than 12-months, and less than 1% of the industry has adopted it which should provide for a long runway of self-funded growth. Company B is 58% management and board owned.
After this first 30-60 seconds, I let the recipient shape the rest of the conversation. Know your positions better than most so you can answer most questions. Focus on finding simple great companies early, not onions where you have to peel back multiple layers to understand them. When you can succinctly and clearly communicate your thesis it helps you solidify your conviction to hold.
I hope you can absorb this article in the spirit it was given. Talking about stocks is fun. Making money in stocks is even more fun. Go out and find great companies early so you can give the perfect pitch.
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