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Three Critical Steps for Extracting Great Insights (Step 2: Calm Their Concerns)

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Meditate“I can’t believe you would be so insensitive!”

“How could you say something like that?”

Have you ever heard these statements directed at you? What was your initial reaction? A voice in your head probably said, “Be very, very careful what you say next.” It’s human nature to raise our defenses when we feel attacked, which is an important concept for equity research analysts to internalize when interviewing or emailing information sources (including management of the stocks under coverage).

In a prior post, I made the case that by using best practices found in journalism and the legal and law enforcement professions, analysts can elicit more thorough answers from their information sources.  Using my ICE™ framework, I discussed the “I” for identifying parameters as the first step for success. In this post I cover the “C” to calm their concerns.

Be mindful, none of the individuals you interview are required by law to provide answers to your questions and as such, it’s imperative to put them in a mindset where they are comfortable responding. The more interviewees are put at ease, the more likely they will give full and helpful responses. (Conversely, if they feel defensive, your likelihood of getting helpful information is almost nonexistent.)

Screen Shot 2015-11-17 at 4.00.56 PM

In situations when the interviewee has no restrictions on what can be said (such as senior management of a non-public company or industry consultant), this step has less importance, but when the interviewee is concerned about sharing too much, these tactics can help extract answers that will develop unique insights critical for stock picking.

Use Non-threatening Language and Terms

  • Phrase questions positively; if you’re too forceful or negative, it will exert control over the interviewee, who will likely attempt to gain back control by being restrictive with the response
    • Avoid this: “Why has management allowed margins to drop to such disappointing levels?”
    • Instead be more positive: “Can you help me understand why margins are 300-500 basis points lower than your competitors?”
  • Use “and” rather than “but” to be less confrontational
    • Avoid: “As I understand it, the company saw the new expansion wasn’t going well, but continued to do more marketing.”
    • Instead be less confrontational: “As I understand it, the company saw the new expansion wasn’t going well and continued to do more marketing.”
  • De-personalize sensitive questions, by avoiding the use of “you” and instead using “company” or “management.” Use “us” and “we” (instead of “I” or “me”) to show it’s not just you that has a concern:
    • Avoid: “I would like to know why you had such poor holiday traffic.”
    • Instead be less confrontational: “Please help us understand why NewCo (the interviewee’s company) experienced holiday traffic well below its competitors”
  • Avoid using words and phrases that will put the interviewee on the defensive. Examples of bad vs. good words include:



Huge mistake

Poor strategic decision



Tell me...

Give me...

What is...

How much did you...

Can you help us understand…

How much would you estimate...

  • Use terminology and vocabulary level that puts the interviewee at ease. If you’re speaking to the manager of a coal mine, use mining terms that will be understood and avoid financial terms like “ROIC”, “EBITDA” or “DCF” which could cause anxiety.
  • For sensitive topics, refer to the past rather than ask for a forecast:
    • Avoid asking for a forecast: “Do you expect pricing to continue to drop?”
    • Instead reference the past: “Has pricing continued to decline?”
  • Use passive voice (vs. active) to avoid putting the interviewee on the defensive. With the active voice the interviewee (person, manager, company, etc.) performed the action, whereas passive implies the action was performed on the interviewee. Here are examples:

Active (not recommended)

Passive (recommended)

Did management invest too much into the new model handset?”

Was too much invested into the new model handset?”

Will your company likely achieve its growth target?”

Will management's growth target likely be achieved?”

Desensitize Deficits

When probing management about its company’s deficit areas:

  • Blame criticism as coming from others…”I noticed Golden Bull Securities recently downgraded your stock over concerns your growth rate is slowing. Is their thesis warranted?”
  • Focus the criticism on the numbers or performance, not the people:
    • Poor practice: “Why did you so badly disappoint this past quarter?”
    • Best practice: “Why were EPS 10% below consensus this past quarter?”
  • When applicable, start the question with a lead-in to show the company is not an outlier. “Many companies didn’t think they would be significantly hurt by the recession and yet every stock in the sector is down at least 20%. What are some things that could have been done at your company to soften the impact of this downturn?”

Use the Right Question Type and Order

  • Start with easy questions first and then move on to more difficult ones; it will help the interviewee build confidence and feel less defensive, which is critical for getting insightful answers to some of the more sensitive topics
  • Be careful not to use too many closed questions because they take control from interviewees (for example, “Which is your most profitable product line?”)
  • Avoid these question types because they will not likely yield an answer that helps in stock picking:
    • Rhetorical: making an assertion or eliciting a response from the interviewee that the interviewee is unlikely to answer directly, such as “Why does the company seem to get beaten up so much by the sell-side?” (What value does the analyst gain in the response?…probably none and it ultimately wastes time that could have been focused on a much better question.)
    • Complex or nested: when multiple topics are covered in one question. For example: “When and where will the next generation of the software be introduced, and why has it not occurred in the original forecast timeframe?” The interviewee may choose to only answer the easiest part of the question, hoping the other elements are forgotten.
    • Insulting: delivered and received in a manner that is likely to be interpreted negatively by the interviewee. For example: “With all due respect, can you explain why your operating margins have been horrendous forever?” Instead, ask in a manner that will elicit a good response such as, “Can you help us understand why your margins are among the lowest in the industry?”

Conclusion (for now)

There’s more to cover in the ICE™ framework, which I’ll need to discuss in a future post. I hope I’m helping convey that if you “calm their conerns” you’re likely to get a better response.

©AnalystSolutions LLC All rights reserved. James J. Valentine, CFA is author of Best Practices for Equity Research Analysts, founder of AnalystSolutions and was a top-ranked equity research analyst for ten consecutive years.

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