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Questioning to Make Better Investments

Professional investor Manish Kataria comments

As a trainee fund manager studying for my CFA, I found myself on a  steep learning curve. Analysing company accounts, valuation metrics, risk management and diversification were some of the things I needed to learn, fast. Although the technical knowledge was available through various resources, the other side was about acquiring experience and mindset. That meant needing to be around the right people.

Fortunately, my boss - my mentor - was an experienced fund manager who also happened to be the biggest sceptic I had ever known! Soon enough though, I realised that a healthy dose of scepticism is an essential starting point for evaluating investments. At every opportunity my mentor drove home the simple but effective principle of questioning everything.  

Honda’s CEO – knowing his agenda
One of my earliest lessons came from being sent to a meeting with the management of Honda, the Japanese car manufacturer. During this meeting I thought I had just received breaking news. Excited to report it back to my mentor, I rushed back to the office and declared we should buy more Honda shares - adding to our already sizeable position. I said its earnings growth was set to accelerate with a new plan to increase production by 20% through a new joint venture (JV) in China. His raising of eyebrows suggested a ‘calming down’ was in order! I told him it was the CEO himself who took me through the plan in his slides. It was there in black and white, I asserted, even the head of investor relations confirmed it. At this point, his eyebrows reached new highs!

Later that day we reconvened and my mentor explained it was not necessarily false news - just not “new news”. We looked through the data in some research reports which confirmed his hunch that this production growth was already in market forecasts – i.e. it was already factored in the share price. As a fund we (i.e. my mentor) had already anticipated this earnings growth, explaining our large position in the stock. But I think others might well have bought the story late on, encouraged by a compelling CEO.

My mentor also described the related concept of ‘knowing their agenda’. CEOs and investor relations staff are measured on how much investment they raise and, ultimately, on the performance of their company’s share price. It was important to be aware of agendas and the need to question everything and everyone – CEOs of large companies included.

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