The core interaction in the investment process is a series of interviews.
Across 20 years in the business, I conducted interviews with money managers two or three times a day, totaling thousands. In all that time, I only peripherally thought about the process of interviewing until I started the podcast.
Interviews are different from conversations. Conversations are casual discussions between people. They are back and forth interactions often balanced in airtime.
Interviews are conversations with a purpose. For the most part, interviewers ask the questions and interviewees answer. An allocator’s purpose in a manager interview is to gather information and evaluate the manager on both content and persona. CIOs seek to confirm or refute the validity of their hypothesis for investing in the manager. At the same time, each interview offers an opportunity to learn about social interactions and trustworthiness for a partnership that may last years or decades. These interviews require focus and attention in every aspect of the conversation.
That purpose sounds straightforward, but we’ve all experienced ineffective meetings in which the objective gets subjugated to an allocator peacocking by expressing their views to prove their intellectual worth. Tom Bushey found in his initial market meetings for Sunderland Capital that probably two-thirds of the people interviewing him told him why what he was doing was ludicrous and how they would do it instead.
A podcast interview is different. I discuss many of the same subjects I did when interviewing as an allocator, but evaluation is no longer my objective. I let CIOs and investment managers tell their stories, and I have no need to decide if I want to invest with them afterwards.
Other forms of interviewing carry a different purpose and call on different skills. Jon Wertheim has written and conducted interviews for Sports Illustrated and 60 Minutes for 25 years. His interviews have sought quotes for stories, entertainment for television, and facts for journalistic investigations. When filling a story with a quote, Jon wants just one nugget. A half-hour conversation can be horrible for 29 minutes, but if the subject gives a sound bite when wrapping up, he will have accomplished his mission. He may purposefully express boredom, excitement or provocation, all in the interest of getting one little gem.
His television interviews are the opposite. The medium requires a cadence and flow throughout that matters as much as the material. If the interviewer and subject interrupt each other, the television viewing will be poor and will usurp otherwise great content.
Investigative journalism is different again. Conducting research for a story requires in-depth probing and verbal interrogation techniques where substance matters more than style.
The style and techniques of interviewing across podcasts, stories, television, and investigations are all different from the evaluative interviews conducted by allocators. At the same time, the different disciplines share common techniques that are effective across the board and useful for allocators to improve their skills for evaluating managers.
Preparing
Sitting in-between managers and clients as the co-CIO of a fund of funds, I was stunned how frequently interviews took place with no prior preparation.
Time in front of managers is limited. Wasting that time drawing out easily accessible information that could have been learned in advance is highly inefficient.
Great interactions come from preparing to blend structure and flow in the conversation. Interviewing legends Larry King and Cal Fussman take different approaches that both rely on detailed preparation. Larry conducts research and develops an outline for the interview. He never contemplates specific questions ahead of time. Cal does his research by creating a long list of interview questions, picking out a few of his favorites, reading them carefully, and then throwing away the list before he conducts the actual interview. He plans for the conversation without getting anchored to specific questions.
I had the opportunity to vary my degree of preparation across podcast interviews. In the first few podcasts, I massively overprepared. I created long question lists and brought them into the session with me. In the actual interview, the question list was a weighty anchor. I glimpsed at it often to make sure I didn’t miss anything, distracted myself, and whiffed on asking obvious follow-up questions as a result. That over-preparation created a rigid agenda that took me away from being present and in the flow of the conversation.
The more I backed off prepared questions, the more I trusted my instincts to follow up with questions in a dialogue. At one point, I grew sufficiently comfortable that I toyed around with skipping my preparation entirely.
I underprepared and got by, but I knew the interview would have been better if I had put in the work. I ultimately found a sweet spot in preparing outlines for the flow of conversation and steering clear of specifics, blending a structure with open space to allow the conversation to flow naturally.
Allocators can similarly do homework in advance of a meeting to discover areas of exploration. This preparation includes reading all available materials and past meeting notes, determining an objective for the meeting, and structuring the meeting to elicit information. In Appendix A, I share a sample outline and Cal Fussman-like set of questions to help prepare for a first meeting with a long-short equity hedge fund manager.
Meeting objectives may vary. Early meetings focus on information gathering and getting to know the principals. Meetings with long- standing managers in a portfolio may dive into a specific investment, theme or organizational issue. Each meeting may call for a different set of questions, depending on the investment strategy, team, process, and risk appropriate to implement that strategy.
Allocators also consider the organization of the meeting itself – who is attending from both sides, who will lead the questioning, and how will they interpret verbal responses and body language. Conducting manager interviews with more than one person expands the team’s bandwidth to divide and conquer, with one focusing on questions and content and another on behavior and style.
Setting the Stage
Manager interviews are designed to gather information, so talented allocators can create an environment to elicit as much information as possible. People open up when they are at ease. The physical setting of the interview can be an important factor in the tone of the discussion.
Most manager meetings take place across the table in a conference room, a directly confrontational set-up. Over time, allocators find ways to spend time with managers away from that setting. Scott Malpass regularly invited managers to attend Notre Dame football games. Jon Harris of Alternative Investment Management goes out to dinner with a manager and their spouse or significant other in advance of allocating capital. CIOs exercise, play sports, and attend cultural or charity events with managers to learn more about their personality. I once backed away from an investment after playing golf with a manager and observing how abysmally he treated the caddie. The outing helped explain why his organization had experienced an unsettling amount of personnel turnover.
Beyond the physical setting, an allocator’s tone and style in the interview can also influence the manager’s degree of openness. Allocators can consider a number of shared lessons that help foster a productive chemistry in manager meetings.
Find common ground
We are inclined to embrace those who are like us. Discovering commonality across backgrounds, relationships, or interests at the onset of a meeting can go a long way towards shifting the tone of the interview from transactional to relationship-oriented.
Ask simple, brief questions
Jon Wertheim discovered that simple and brief questions are the most effective across all formats. He noted:
It’s taken me way too long to learn that sometimes less is more, and a simple question and letting the subject fill in any silence is better than jumping in and trying to prove that you belong at the table.
He further suggests avoiding a common temptation to show how much research you’ve done and how smart you are. Remembering that at the end of the day, it’s about a connection.
Start with how, what, or why?
Open-ended questions that start with How, What, or Why provide space for managers to tell their story. By phrasing questions in a way that encourages broad answers, allocators can glean information beyond the particulars of the question they had in mind.
Let people talk
My uncle used to say, “You have two ears and one mouth, so listen twice as much as you speak.” It is amazing what you can learn when you let people talk. If the purpose of conducting an interview is to learn, then it should follow that allocators listen far more than they speak.
Express humility
Investing is a humbling business, even for the best managers. Allocators can similarly be humble. The best interviewers are not afraid to ask naive questions. Asking for help to better understand the basics is a welcoming approach.
Be curious
An allocator’s job offers the gift of continuous learning. Approaching interviews from an inquisitive perspective rather than an evaluative one allows allocators to take in all the information available from a manager. Tom Russo at Gardner Russo & Gardner has a knack for remembering details of his conversations. When he hears something surprising, he regularly follows up with personal notes recalling those facts.
Lose the script
The best interviews flow unpredictably. Thorough preparation includes an outline and list of questions, but sticking too closely to a prescribed Q&A will create distractions from hearing what the manager is saying and asking clever follow-up questions.
Active Listening
Once the preparation is complete and the meeting begins, great interviewers become great listeners. Charley Ellis describes the importance of listening to the success of Capital Group:
Jon Lovelace had a very strong interest in helping people learn how to be very good at listening. Not listening to hear what was said, but listening to hear what was meant and what was different from last time. That’s very helpful when you’re trying to learn about companies, but it’s also great when you’re working with the other folks preparing to make a decision for the fund.
Listening to learn is at the heart of a successful interview. It entails clearing your mind of distractions, being present, and paying attention to what the subject is saying without reacting. Listening gets blocked when thoughts pop into your head, and you can’t let them go. The set of tools to listen actively in an interview include noting distractions, mirroring, validating, and empathising.
Noting Distractions
Listening without cluttering your mind with thoughts is challenging. Like a meditation practice, noting when your mind drifts and bringing it back to the conversation keeps an interviewer focused on the content at hand.
Mirroring
I first got exposed to mirroring at a relationship workshop taught by Harville Hendrix nearly 20 years ago. Since then, I found the same concept as a core tenet of communication across casual conversation, spousal relationships, business decision-making, and hostage negotiation. Interviewing managers is another use case for mirroring.
Mirroring is parroting back what someone says, although it sounds a lot simpler than it is in practice. Good follow-up questions often arise spontaneously from something an interview subject has just said. By repeating back parts of their thoughts, you can ensure you have listened and let them know they have been heard. Mirroring leverages neural resonance, slows down the pace of conversation, and softens emotional triggers. As a result, it creates a magically safe space to communicate.
Validating
Validation is the process of letting the other person know that what they said is logical. Whether or not you agree with the points made, you can confirm that they have followed a sensible thought process.
Effective validation requires presence. Oftentimes, we have a different opinion about what the interviewee is saying and react. The trick in validating is confirming their perspective without needing to agree with it.
Empathizing
Expressing emotional empathy can open up an interviewee to discuss difficult subjects. Empathy is often the antithesis of what investors expect to encounter in the world of money, as it moves away from thoughts and touches on feelings.
Receiving Feedback
Most investment professionals are not frequent solicitors of feedback, in stark contrast to participants in most high-performance fields. Elite athletes have coaches and business executives have boards and reviews, but investment managers carry on independently in their own bubble.
Among the podcast interviews I have conducted, only two guests went out of their way to explicitly request feedback on their performance. Who are those two you ask? Author and former poker champion Annie Duke and Farnam Street creator Shane Parrish – two experts in human behavior and decision-making. Having studied the field, they know the importance of receiving feedback.
Conducting post-mortems on interviews can be a valuable tool for both podcasting and investing.
Podcasts are recorded interviews, which gives me the opportunity to listen back and critique my work afterwards. I regularly listen to my interviews to spot my ever-changing flaws, and periodically ask others to do the same. I frequently unearth different inflections in the sound of my voice, missed questions, and verbal tics. I figured out that asking a compound question usually results in the guest only answering the second part of the question, and that shortening questions prevents me from influencing the guest’s answer. Similarly, allocators can debrief about manager interviews with team members to critique their performance.
Over the last few years, I regularly re-engaged in my past work investing in managers and advising allocators. On one occasion, I caught up with an investment manager on behalf of a foundation for whom I serve on the investment committee. Rather than assume my prior allocator evaluative interviewing style, I naturally began the meeting as I had grown accustomed to from the podcast. We connected personally, reviewed the investment program philosophically, and then talked strategy. I listened actively, mirrored, asked why, and explored topics of interest in the portfolio. To my pleasant surprise, the conversation was richer and revealed more about the manager than any I had conducted with him previously.
Investment teams interview managers every day. Preparation, setting the stage, listening, and feedback all contribute to interviewing skill.
Hours upon hours spent interviewing managers leave allocators with a wealth of information to make decisions about the managers to hire, retain, or replace. The process of making good decisions is tricky, so let’s turn to that to make sure all these interviews don’t go to waste.