管理层访谈：投资中最欠开发的技能 | Ross O'Toole

Today we've got a slightly different one for you. Ross O'Toole, who wrote the book I'm holding up for those of you watching the video, Breaking the Script. There'll be a link in the show notes. Of course you should click on that and go read it. It is only about 75 pages, I'd say, so it's a super fast read. Breaking the Script is all about management interviews. I find management interviews fascinating, and I will admit I was also thinking about podcast interviews when I was reading the book. It's all about how to improve management interviews.

I find management interviews fascinating because I use the term double-edged sword for them. Management teams are very skilled; they talk to a lot of investors, and they're very good at telling a story. I always walk away from them saying, “Am I having the wool pulled over my eyes? How much can I trust this? Did I just gain false confidence by talking to a management team that reassured me, or am I finding out new information?”

And look, I think they're vital. Even if you're like me—a little bit of a skeptic and a little bit worried about getting the wool pulled over your eyes—they're so useful, because if you've got a bad management interview, it can be such a red flag and save you from so many disasters. I won't say the name of the company right now, though if you're an OG who's been listening for about a year and a half, you can figure it out. I did a management interview last year that set my hair so much on fire that I instantly published a public letter to the board because I thought, “This management team is going to destroy this company if they're not held accountable.”

So even if you don't think the upside is there—which it might be—the downside protection is there, and half the game is avoiding the downside, right? Ross has written the book, and we're going to dive into how to improve management interviews, taking notes, and all sorts of stuff.

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Today I'm happy to have, for the first time, Ross O'Toole, who wrote the book Breaking the Script: Mastering Management Interviews. Ross, how's it going?

Good. Thanks for asking. How are you doing?

Good. Doing good. I'm excited to talk about the book and perfecting management interviews, which is something I've done a lot of and thought a lot about. I'm super excited to talk about that.

Before we get there, a disclaimer: nothing on this podcast is investment advice. I don't even know if we're going to talk about stocks today, but people can see the disclaimer in the show notes and at the end of the podcast. I have my copy of the book here; my daughter put a little sticker on it. But let's dive into the interview. Ross, you wrote this book. Let's start: why did you write a book on conducting management interviews?

I've been investing for 25 years, and over the last 5 or 10 years, I realized there really isn't anything in the public domain specifically related to the investor-management interview. I've read over 500 investment books, and I found that surprising, since for fundamental investors, a large part of our job is talking to management teams.

I've worked at 4 or 5 different asset managers, and it's something that's never been handed down, at least at the firms I've worked at. There really wasn't anything—whether books about valuation or competitive advantage—about how to actually conduct this interview. I originally thought I would have a book of questions. I had a large book of questions that I would just keep adding to over time. Then that slowly turned into, “Well, maybe I should actually address some of the principles and tactics of doing an interview.”

It's a book I wrote for myself. I thought if I were coming out of college and starting a career in investment management, I would buy this book. I would want to have a reference guide to some of the key tactics or principles that you can use. I set it up as a reference book, so if you're an experienced investor, you don't have to read it front to back. There are still parts of the book that I hope even experienced investors will read and think, “That's actually pretty interesting. I should incorporate that into my process.” That's the reason I wrote the book.

No, spot on. And it's so funny you say that. When I was reading the book—and I can prove I read it, as I told you—where is it? On the bottom of page 41, I caught a typo. So there you go. Anyone can go read it and see “Andrew Walker.”

My first thought was, man, if I hired an intern or a first- or second-year, this would go right to the top of what I want them to do. Depending on the program, they might not have first- or second-years leading interviews; whenever they're transitioning to leading interviews, this goes right to the top. As you said, that's not to say someone who's in their 20th year couldn't benefit from it, because I was reading it and the whole time I thought, “These notes don't just apply to management meetings. I want to apply them to how I conduct podcast interviews.” It's just how to do interviews, but I'm with you.

Let me go into the management interview itself. Stepping away from the book, my big worry with management interviews is that management gets the upper hand because they're good salespeople. That doesn't mean salespeople in the sense of used-car salesmen; they're just good at selling themselves. They tend to be much more personable and all this sort of stuff.

Depending on the day, they're probably dealing with multiple investors a day, and they probably deal with more investors than I deal with management teams. I worry that whenever I'm going into a management interview, if you don't know who the patsy at the poker table is, you're probably the patsy at the poker table. Despite having all these skills, it's very rare that I walk away from a management interview and think, “That management team just embarrassed themselves.”

Are management interviews as valuable as you and I seem to think they are? We're probably talking to management of every company we invest in, going to conferences, and doing tons of management interviews. Are they as valuable, or are we deluding ourselves?

It's a good question, and it's something that I've thought about myself. I don't actually know what the answer is. I think, to a certain extent, we want to believe that we're very good at reading management teams. This industry has a lot of alpha personalities; you have to be both confident and humble to be a good investor.

I think there's an aspect of it where, if you have a career in this business, you think you have good judgment and can decipher which management team is telling you the truth and which one is not. We probably overestimate our ability to do that.

On the other hand, there are benefits to having this conversation with management, and there are, again, techniques that you can use to hopefully get better responses. One example would be—and I think Howard Stern does this well—a technique called poking. I have a chapter on poking.

And you mention 2 other interviewers.

Yeah. In his world, he's asking a provocative question, usually about one of his guests' relationships, and it sort of embarrasses or makes his guest laugh, but he's doing that on purpose up front. He'll continue to do that through the interview because eventually it sort of breaks down this wall, and his interviewee wants to answer the question.

And so, if you can structure an interview and continue to come back to the same question, I think asking follow-up questions in different ways—where it’s the same question but just asked differently—makes it hard for someone to keep a straight story unless they’re actually telling you a believable story.

There’s that movie with a police scene where he has 2 suspects in different rooms and is playing them off each other. This is why police will ask for someone’s story once, then bring them back in and ask for the story again and again, because if you’re lying, you’ll end up not being able to tell the story the same way all the time.

So, it’s kind of a long way of answering. I don’t know if it’s helpful, but as a fundamental investor, it’s a big part of our job. I do think there are benefits to it. I think the benefits are probably more longitudinal. If you can talk to the same management every quarter, year after year, you’re going to start to discover whether they’re more credible or not, because you’re going to have a baseline. So that’s helpful.

And I think it’s not necessarily—for me, it’s not necessarily about the numbers. Asking the atypical question is a good example. At the end of the day, there is an aspect of trying to find out: Do the CEO or CFO think logically? Are they nice people? Are they just good—not even outside of the business aspect? Businesses are run by people.

Actually, you hit on a lot of things that I wanted to touch on in this interview. Rather than dive into the 6 different things that you touched on, because I think we’ll hit them, I’m just going to stick with my script that I prepared.

Okay.

One of the things I was thinking about is, I’ll go—and I’m a journalist—I’ll look at any company I’m interviewing. Let’s choose 2 diametrically opposed companies: a coal company CEO versus the CEO of a plastic surgery company. Those are 2 wildly different tasks, right? Should I be grading them on a scale, or should I kind of have the same scale for everyone?

Because the plastic surgeon—again, I have trouble investing in things that do medical sales because they sell to doctors, and those guys are just like the kings of salespeople. I’m always like, “Oh God, little me sitting in my closet of an office. I’m going to go in and they’ll be like, ‘Dude, we try to sell plastic surgeons $100,000 worth of surgery equipment in 5 minutes. This investor who wants to buy stock? I’m a fish to them.’”

That’s versus a coal company CEO. Not that coal company CEOs are going in and actually swinging the pickaxe anymore, but they tend to be a lot sleepier. Or small-bank CEOs, small-insurance CEOs. Should we be grading them on a scale, or should we kind of have the same scale for everyone?

Yeah. Let me think about that for a moment. Well, I think you could do it either way. At the end of the day, in the interview in your example, maybe you’re not trusting the medical device company CEO as much because, in that industry, it’s extremely important to be good at sales, and so you’re running the risk that they’re pulling the wool over your eyes in terms of what they’re telling you.

The management interview is just one part of our jobs, right? That comes back to more of the mosaic theory: you’d have to marry that interview up with what you’re seeing in the financial results, with maybe what you’re reading in other expert network calls, and with what you’re talking to the sell-side or other analysts about to come to a fuller picture.

The interview itself would probably give you false ideas if you were only relying on that, because you’re also kind of playing into some of your—and it’s not just yours; we all have our own individual biases, right? The bias is that I might go into an interview with a medical device CEO not trusting that as much as if I go and speak to a CEO of a coal company, where I feel more comfortable about that industry and so I’m more inclined to believe what they tell me.

Let me hard-switch to a different question. A lot of your book is based on, “I’m investing”—and you can tell me if I’m wrong—but I think the baseline interview structure for this is: I’m investing in maybe not necessarily a Berkshire Hathaway-style compounder, but I am investing in a good company. I’m probably investing in a good company at a good price, or I’m looking to invest in a good company at a good price and hold it for 3 to 5 years.

I tend to be a little bit more of a bottom feeder, and I think a lot of people listening to this are more event-driven, bottom-feeder, deep-value—that sort of stuff. A lot of times, when you’re event-driven or deep-value, you’re not looking for a good insurance company that’s going to put up an ROE of 15% for the next 5 years or something. You’re looking for the company that says, “Hey, guys, our costs are over,” or, “The new plant is 6 months behind and 50% over cost,” or, “We just blew our earnings estimate and lost our largest customer. Our stock is down 50%.”

When you go to those calls, they tend to be more contentious. I hate to say it, but if you were holding the stock before, it’s probably going to be pretty contentious. If you weren’t holding the stock and you’re coming in, it’s still probably going to be a hard interview because you’re asking, when you’re doing those types of stocks and those types of interviews, with the stock down 50% and earnings a disaster: How does that change how you’re interviewing the management team?

Yeah. I think what I would tell you, at least in the book, is this sort of comes to the question around how you frame your questions, right? You’re going to make an already contentious interview more contentious if you use questions that start with “why,” versus using questions that start with “what.”

I think this is one of the better chapters in the book because when you say, “Why did you miss results?” as an example, versus, “What were the reasons that your results didn’t meet your expectations?” it’s really the same question, but the “why” creates defensiveness on the part of the other person. They feel like you’re almost attacking them. It comes across as, “Why did you do that?” versus, “What were the reasons you did that?”

If you’re in a contentious meeting or in the types of situations that you’re referring to—and really, this works across all interviews—it is better to structure the questions with “what.” You’re likely to get better responses. You’re going to create that rapport that I talk about in the book. You’re going to maintain that trust. You’re still asking a challenging question, but I think you are more likely to get an expansive response than if you attack the person with “why” questions.

As you’re kind of alluding to in our entire interview, and as I mention in the book, no one can give you the best questions to ask a management team. Every situation is different, and every interview is different. It could be the first time you’ve met with a management team, or it could be the 5th time. That’s obviously going to influence the type of questions you ask.

You’re going to have a different rapport if it’s the first time you’re meeting with them than if it’s someone you meet every quarter. These are just tactics and examples of things you can use to hopefully get better responses.

There’s Cameron Crowe, the filmmaker behind Almost Famous, and he has a new biography out. He has a section in there where he’s 14 and interviewing Kris Kristofferson, who was a musician and actor in the 1970s. He asks him a question, and Kristofferson doesn’t give a great response. Crowe is 14, so he’s like, “Oh my gosh, this is going to be a terrible interview.”

He almost involuntarily stays silent, and that silence is then filled by Kristofferson, who starts talking and spilling his guts in a way. By the end of the interview, Kristofferson tells Crowe, “This is one of the best interviews I’ve ever done. You’re one of the greats. You’re such a great listener.”

I think there are aspects of that that you can take into the management interview, or any other interview, but the management interview, too, where you’re just trying to create the space for them to talk.

This framing of questions—“why” versus “what”—is important. If you feel like you’re being attacked, you’re more likely to button up. You’re more likely to give yes-or-no answers. You’re more likely to not want to be totally honest with someone. Whereas if you feel like the person is on your side and is really trying to understand the reason behind what happened, rather than saying, “You suck,” you can frame things this way, and you’re likely to have a better conversation.

It doesn’t mean you will, and it doesn’t necessarily mean that it’s going to lead to better alpha. This is the other dirty little secret: Is this going to lead to better alpha? At the end of the day, that’s what we’re trying to do, right? We’re trying to pick stocks that we can generate alpha on.

But I do think it can give you a fuller picture and a clearer understanding of where management teams are coming from. You still have to use your own judgment.

Let’s pick on that. You mentioned generating alpha. I mean, you’re right, right? Everything as an investor—everything you do—should be in the pursuit of alpha in some way, shape, or form, right?

Do management interview techniques, just to come back to my question on different sectors, seem more useful in some sectors versus others? I'll give you an example: coal. If you're the coal CEO, and you're the best coal CEO of all time, I'm not saying you couldn't create value, but you're still going to be limited by your assets, the environment, and a lot of things outside your control. A great CEO is a great CEO, and they find a way, but a great CEO in coal versus a great CEO in tech—why is MySpace gone and Facebook dominant? It's Mark Zuckerberg, right?

Do you think management interviews matter a lot more in certain areas? If somebody came to me and said, "I just don't want to do management interviews," could I say, "Cool, go focus on coal"? Or if somebody said, "I think I'm awesome at management interviews," would I say, "Hey, biotech and tech are the 2 areas where you can get the most alpha from"? Do you think there's something to that, or does it cut across disciplines?

I think that's fair. That probably speaks more to what you mentioned earlier. If you're a deep-value investor and you're more reliant on—or your process is more dependent on—a reversion-to-the-mean-type strategy, a quality company, or maybe a non-quality company, gets to the point where it's just cheaper than what it really is for the quality of the company.

I'm not sure your coal example would matter as much when it comes to having a management interview with that CEO. It might be, "Hey, this company is trading at a 50% discount to its asset value and its net asset value, and I think that gap will close over time." That might be all you need to know. You might just need to study the financials, know how cyclical industries work, and have a view on the commodity price.

Management is definitely not responsible for commodity prices, so that's a different situation. Versus, if you're trying to look at a technology company—if you were studying Meta, or Facebook earlier in its career—you might want to understand Mark Zuckerberg's vision. How does he see the world developing over the next 3 to 5 to 7 years, and how is he positioning his company to compete in an industry where technology moves very quickly? There are more qualitative responses than quantitative answers in a financial statement that are going to be more important for you to get comfort or conviction around your investment.

It is funny you say Zuckerberg, because I said Zuckerberg, right? But if you interviewed Zuckerberg in 2008 or 2009, his vision almost would not matter, right? It was still Facebook desktop. What would have mattered, I think, with the people who backed him, would have been, "Hey, this is an N-of-1 CEO, and he'll figure it out," right?

You hear that so many times when I talk to VCs. They're like, "Oh, I invested in this guy, and I actually kind of think the business he's building is shitty, but he'll figure it out. This guy is awesome." I wonder if a management interview would have helped. If you had given me foresight of the next 20 years, except for who the winners were, and I had gone and interviewed Zuck in 2008, I think I would have said Facebook is toast. The mobile shift is coming, these guys are going to be dead, and there's this startup app called Instagram that's going to eat all the young people.

I would have been totally wrong, right? He would have bought Instagram and convinced them his stock was worth $2 billion instead of $1 billion. It's interesting how that happens. Would the interview have helped you, or not? I guess that would be my question to you.

Yeah, it's a good question. I'm old enough to remember when Google went public, and obviously Facebook went public, and in retrospect, Amazon was the same thing. In retrospect, these seem like easy investments, right? But when Google came public, the stock went down the day it went public, right? They did a Dutch-auction IPO. People had concerns. It actually went down the day they came public.

Facebook went down 50%. I think it IPO'd at around $36 a share and fell to $18. CNBC was talking about it every day on the news. It was right at the time when the iPhone was coming up and mobile was taking over. They were predominantly an advertising business on desktop, and the market immediately thought, "Are they going to make this transition?"

Of course, they did. In retrospect, it seems so obvious: It's Zuckerberg, it's Facebook, and they were always going to be dominant on mobile. But in a way, this is a different discussion about markets, narratives, and how quickly they can change. I'm not sure. I think if you had had a conversation with Zuckerberg and he was able to explain why he thought they could make the transition to mobile, hopefully you could ask some smart questions or at least get further information to give yourself conviction that everything you were seeing on the news was wrong. It is pretty amazing that the stock fell 50% very shortly after its IPO.

Let me go back to something you mentioned earlier. You said a lot of these interviews are better if you're interviewing management over and over again. You interview them once and then again. This can be a problem if you're parachuting in after a single earnings blowout. A, it's a contentious interview, and B, you have nothing to baseline it against.

Let me ask you about repeat interviews. When I've done repeat interviews with management teams, one issue I have is that they say something, and when I'm trying to compare it to the last time, human memory is frail. How are you benchmarking and keeping track of what happens over time? When I rely on memory, a lot of times I can forget, or even during the interview, management can shape my thinking. I'll ask some questions and they'll say, "Well, if you remember when we talked about this last time," and I'll be thinking, "Is that how we mentioned it last time?"

I guess the solutions are recording. I've thought, "Should I just record all my management calls?" But that can be awkward. I say, "Hey, I'm going to record the calls," and management is like, "Well, okay, I'm going to be super buttoned-up here because this is going to come back and bite me in court." Are you taking furious notes while you're doing it? Are you taking notes immediately afterward? What do you think the best way is to get ready to do those repeat interviews with people?

Yeah, I think it's unfortunate that the preparation is probably the most important part of the interview. Really good interviews start well before the interview begins. You're addressing this point: In an ideal world, you would have enough time to go back and review your notes, assuming you took really good notes. You could read the last 4 to 8 transcripts again, and you would go into that interview with a much better memory than if you were just trying to remember what happened last time.

I think preparation is a big part of all interviews, and that's true outside of the investor-management interview process. This is also something I've thought about: Is this book going to be outdated very quickly because of large language models? Large language models are pretty good. If you downloaded a few transcripts and your personal notes and said, "Come up with 5 or 7 good questions," they can do it. A lot of that prep work and the interview process can almost be done by AI in terms of coming up with questions.

In terms of your question around note-taking, that's also super interesting. What I found, at least in the research, is that the ideal situation for interviews would be to go in with a lead interviewer and have a second person in the room whose primary responsibility is taking notes. It's very difficult to actively listen, think about what the person is saying, anticipate the next question you want to ask, and type or write out notes at the same time. Your brain isn't sophisticated enough to multitask across all of that.

I don't take good notes. I wish I took better notes. I really do need a note-taker or to have my conversations recorded, because my first focus has always been that I want to focus on the person I'm speaking to and give them 100% of my attention. I think I have better interviews because of that. But the downside is that I often walk out of them and either need to write down everything I talked about immediately, or I end up forgetting it.

It becomes more of, "Oh, I remember that was a really good conversation, and I remember thinking that I heard a lot of good things," and it leads me to believe it's a better fundamental investment. But if someone asked me for specifics about the meeting, I'm kind of at a loss, because I don't do well with taking notes and running the interview at the same time. It's very hard.

Just to go back to what you said, it's funny you say, "Hey, I wrote this book, and I'm worried it's instantly going to be obsolete because of LLMs and all this sort of stuff." I actually have a different view. My view has been—and this is kind of why I was thinking about recording and great note-taking—

I kind of think LLMs and AI decrease alpha from some skills and really amplify alpha from another skill. My contention would probably be that being a great interviewer is one of those skills. Now, you have to get the data, but being a great interviewer unlocks unique data—unique data in terms of answers to questions and that sort of thing—which, if you've got AI that can analyze everything, becomes even more valuable.

I actually think being a great interviewer would increase in value because it's bringing in unique data. I think it's going to get rewarded in the future. Again, you need to be a great interviewer, and you need a way to get the notes. That's kind of why I was driving at the note-taking question, because if I could get it recorded and get management to answer because I asked a great question in a unique way, I can get unique insight. That's actually unique data that I have that no one else has.

Now, you can't get them to give you MNPI, but the way they frame something can be much different when you present it correctly. I actually think AI would really amplify the alpha that comes with that. I'll pause there. I've got plenty more questions, but I'll pause there if you want to respond to anything I just said.

Yeah. I foresee a future, probably, where these meetings are going to be recorded, right? It would be beneficial to be able to upload your notes. I've read a book about Amazon a few years ago, and it was really about their 6-page memo. It was about a number of things they'd done internally from an organizational perspective, and there was a chapter in there about their interviewing process.

A candidate would come in and interview separately with maybe 5 individuals, and then they would have a team meeting the next day to discuss everyone's perspective on that candidate. What they found was that if someone was just taking notes and sharing the notes, it didn't really represent what actually occurred in that interview. In Amazon's case, as I remember it, they did have a note-taker writing verbatim everything the candidate would say, so that every other person who wasn't in the room could read exactly what the candidate said.

So, I think in the future we probably are going to have recordings of this. Speaking of someone investing broadly, I'm glad I wasn't 22 and coming out of college and being an investor today with large language models, because it seems to me that a lot of younger analysts are using that as a first source.

What I was able to do, because we didn't have that, was create these mental models or frameworks by reading a lot and developing industry points of view. Our job, at the end of the day, is about judgment. Whether or not large language models are going to take that away, I'm still in the camp that human judgment is going to be important, particularly in investing.

I'm glad I've developed those skill sets, because I think it's just too easy to outsource your judgment to other people. Lots of investors already do that with sell-side research. They read a sell-side research report and allow that to dictate what they think of things.

Jim Chanos used to talk about working from the inside out, not the outside in. The first place you start is reading the SEC documents, reading the 10-K, reading the transcripts, and reading the company presentation before you even look at anything else. Form an opinion yourself before you start taking information from other sources.

Speaking of information from other sources—non-SEC information—one of the things that jumped out in the book is the chapter on asking for examples. What this means is, simply, if a company says, “Hey, our new product saves our clients 10% per year,” you ask for an example. They say, “Hey, we worked with Starbucks, and they cut their spend on napkins from $1 million to $900,000 with our product.”

That one jumped out at me because I have found asking for examples to be one of the biggest double-edged swords I've found. The example can help you build so much conviction. The reason you ask for examples is because humans are narrative-driven. Somebody says, “This saves 10%.” It goes through your head, right? But somebody gives you a specific example, and now you've got something to hang your hat on.

The reason I found it to be a double-edged sword is that it's a real conviction-builder. If I've got a great investment and they gave me a great example, that's always what I'm going to lead with. But my biggest losses, when I look at them, have been companies that have this great product or this great example of their product saving something.

They go and give that Starbucks example and say, “Hey, we helped our largest customer save 50%,” or grow 50%, whatever it is. Companies do this on the call. I was reading the Meta call last night, and Meta was calling out an Indian brand that they helped grow by 95% in a quarter with their AI. Companies know this works really well.

The reason I say this is that my biggest losses have been, “Hey, the company says it,” and then, guess what? The only person who used it was their largest customer or something. So, I found it to be a double-edged sword, and this probably loops back to my first question, where CEOs tend to be pretty good salespeople. If you say, “Hey, give me an example of that,” you've just teed them up to sell.

How do you think about the double-edged sword of asking for examples? Examples help you build conviction and help you build the story that we all are looking for, versus my bear case, where they tell you this story, you've built conviction, and that's the only good story they've got.

Ross O’Toole

Yeah, it's a really good point, and it also relates to my point about asking leading questions, where you just get management to tell you what you're already asking them to tell you. The obvious answer here is that whenever you ask for examples, you should always ask for a negative example, or even more than 1 negative example, so that you get a balanced perspective from the management team.

If they're going to tell you, “Here are all the customers that use it,” then find out why customers don't use it. If you have a 5% attrition rate, why are they attriting? It's not perfect, but as investors, we always have to think about the negative side.

Humans are generally optimistic. Optimists own the future; pessimists sound smarter, but optimists sort of own the future. It's natural to gravitate toward the things management is telling you. I've read tons of transcripts over the last 25 years, and rarely do management teams tell you that things are going wrong. Even when things are going wrong, they spin it into something good.

It is a really difficult thing, but you just have to always push for the opposite. You always have to ask, “For every positive example that you provide, I want to hear the opposite side. Tell me about a customer that you lost. Why did you lose them?” It's not going to be perfect, right?

No, it's just so funny. When I was preparing for one of the last podcasts I did, it was on United Parks & Resorts, which owns SeaWorld and a few others. I was looking at them, and for 4 years in a row—15 of the past 16 quarters—they've blamed poor results on bad weather.

It's like, hey guys, eventually, 15 of the past 16 quarters were bad weather. You're stacking it up. Did it go from, “Oh, there was a little rain,” to, “Oh, there was a Titanic-style typhoon sitting in our thing”?

Ross O’Toole

Well, this again goes to the scaling question, too. In your example with United Parks & Resorts, I would love to ask that management team, on a scale of A to F, what grade would you give yourselves in terms of your execution versus the external environment over the last 4 to 6 quarters?

If they say, “Well, we give ourselves a B+,” that's where the preparation comes in. You say, “Okay, well, you blamed weather for those 6 quarters.” Of course, they might not say, “Well, do we really deserve a C−?” But it does give you insight into whether they're really being honest and whether you want to invest with them.

That's not an end-all, be-all. Most people are always going to overgrade themselves. But by starting there, and then following up with a question like, “You blamed weather for the last 4 quarters. Do you want to reconsider your grade?” it would be really interesting to see what they say.

People—it's okay that management teams make mistakes. We all make mistakes. But I would generally want to invest in companies where the management team is at least realistic about what they've done and can say, “Okay, yes, we didn't execute in this part of our market as well, and we need to do a better job.”

Again, it's one part; it doesn't mean you shouldn't make the investment. But I think we should all be a little concerned if a company is blaming weather for multiple quarters and gave themselves a high grade in their performance.

It should make you step back and say, “How do I feel about this?”

No, well, 2 more questions. That transitions nicely. I think activism is a really interesting space of the market, and if a company blames weather for 15 of the past 16 quarters, that might be a signal that an activist needs to step in and hold management's feet to the fire. There are a lot of proxy fights. How do you think about conducting a management interview in a company that is under activist pressure?

And I see it in a few ways. On the one hand, you're talking to the management team, and you might be thinking about voting for the activist slate. The management team knows the activist is hanging over everything that they're saying, so they might be under a little more pressure. How do you think about that dynamic when there's an activist involved?

So I think this also comes back to preparation. Management teams probably have more of a contentious relationship with their investor base when their investor base doesn't really understand their business or the industry as well as they probably should, but has a high opinion of its perspective on what the management team should do. I think that probably creates some unnecessary tension that, if you really prepared for it, might lead to a better conversation.

If you're in a situation like that and you really did understand the company and had a point of view, and if it's rational and logical, backed up by a true understanding of the business, then hopefully the management team, if you're addressing that, would see your point of view. I think that's what the activists are probably going for. They believe they have a perspective on whether it's allocating capital, a strategy, a divestment that's distracting management teams, or whatever it is.

But if you just randomly say, “You should divest this business,” or, “You really should buy back stock versus making these capital investments,” or whatever—if that's all you're saying, it's just not management. Management can read through that: you're not really that well informed, and you're not going to get anywhere.

If you go in and say, “I know you have a better understanding of your programs. You have a better understanding of what the ROI on that is relative to your stock price,” and you walk through the math—maybe even have something written down and show them—if at that point they're still pushing back, that's part of the conversation. Then that's part of your analysis of them and how they do things.

I mean, I think the really good activists convince management teams that they're right. A lot of times, I've also heard the dirty little secret of activism is that you're getting the board and the management team to do what they already need to do; it's just that you're providing cover for them to do it.

One more. I think it was Buffett—it was someone Buffett-adjacent, if not Buffett—who used to ask, “Hey, if I gave you a silver bullet and you could kill one of your competitors, which competitor would it be?” Another way to frame it was, “If you couldn't invest in yourself, but you could only invest in one of your competitors, who would you invest in?”

I could be wrong, but I think one of the ways he uncovered Capital Cities was by asking all the media investors, and they'd say, “Oh, Tom Murphy. That's who we invest in.” I could be wrong. Maybe it's a failing on me, but I've never been in a management interview where someone has said that, and I've never asked that. Maybe I've just got a mental wall preventing me from it because I feel like it's company-dependent, too.

Again, like an oil and gas company—maybe they just pick someone, because what does it matter if you're Shell and Exxon? What Exxon does doesn't super matter unless you're building this mess. But I've never asked that question. Have you tried that? Do you think that would be a useful question? Because I don't believe it's anywhere in the book. Yeah, I think I might have a similar question at the end of the book, where I have just a big list of questions.

I'm looking at those. Yeah.

Ross O’Toole

Yeah. I mean, this raises a really interesting point, and I've definitely seen people on Twitter throw shade at that question: “No one ever asks it. It's the dumbest question ever.” I go both ways on that. I think it's another way of asking the competition question, right?

The other thing about management interviews is that, in all likelihood, 80% of us as investors are asking the same questions, right? “What keeps you up at night?” That's the classic question. If you ask that exact question, they're used to it. They have a rote response prepared.

Finding a different way to ask the same question might get you a different response, and that's sort of what the book is about: finding different ways to ask the same question. Every once in a while, all of us will come up with a super-clever question that they've never heard before and that is really insightful. Even that might not necessarily mean you're going to find alpha in the stock.

I do think that getting management out of their PR answers by asking questions that they typically receive in a way that they've never received that question is more likely to get you a slightly different response. Like you said, a lot of times they might see 8 investors in a single day, and they're just answering the same question the same way every day.

So I do think that is an interesting question. Management teams probably do that. I would imagine, for example, that technology companies in the Valley are probably talking to their customers or their vendors and saying, “Who's really good? What do you like?” That's how they also figure out what kind of acquisitions they should make.

If you're an industry analyst and every year you ask that question, then over time—again, this is where longitudinal analysis becomes important—you start to get different responses. That's going to help you figure out what's changing in the industry, who's making progress, and who's falling behind. I think that's actually an important question, especially if you're talking to the same management team over and over again over a multiyear period of time.

Just 2 points on that. It is interesting because the framing of “Which competitor would you invest in?” versus “Which competitor would you kill?” actually makes a big difference. I wonder how honest they would be on the investment side, and I also wonder whether the investment side would reveal them to be very procyclical and pro-momentum.

On the “Which competitor would you kill?” side, it is funny because, for the past 15 years in airlines, I think if you had asked any airline, they would have said, “Oh, we would kill Spirit,” right? If you were an investor and you said, “Oh, that's because Spirit's this low-cost disruptor; they're eating their lunch,” you would have gone bankrupt twice, right? They'd have gone bankrupt and liquidated.

It's just funny because there is no perfect answer. Management teams are just as blind as us. But to your point on getting management teams out of their comfort zone, you're definitely right there. It's very hard. I don't wear a suit, but we're just guys on a Zoom or in person, going and meeting them and asking a lot of the same questions.

Page 41—I mentioned it had the typo—but it also had my personal favorite question that I ask at the end of every investor meeting: “What are other investors asking that I should be thinking about?” I always pat myself on the back. It's like, “Oh yeah, of course, it's in Ross's book.” So we're all the same.

But I guess where I was going was, have you ever seen the interview show Hot Ones?

Yeah. The reason that show is so successful is that they get an actor or an actress, give them the spiciest wings possible, and ask them questions while they're doing it. It takes them so far out of their comfort zone, and they get a lot of real-time, interesting answers. I wonder if we could do Hot Ones management interviews, right?

We take a management team out—it probably wouldn't be recorded—but give them some super-spicy wings and then start saying, “Hey, we won't say why, but what was going on during Q3 when you missed earnings by 50%?” after they have the jalapeño popper, super-hot Reaper wing. That could get some interesting answers.

Yeah, no, I think in our world how you structure an interview can be important. If you go into a meeting, you should hopefully have an idea of what you want to accomplish for that meeting, right?

If you have a meeting with management and your most pressing question is something around margins, I actually don't think—and I think this comes through in the book—you should ask that question first, especially if it's contentious, right? You want to start off. It's not even bad to start off with a softball question. Ask management to talk about their strategy, something they're going to get really excited about, or their culture. Get them on your side.

As you build that rapport through the meeting, it's like an arc. You're crescendoing up to it. You start, then you get to the margin question when they're primed, when they already like you and they've developed a relationship. Hopefully, you're going to get a more thorough answer at that point. You have broken them down a little bit.

This comes back to asking the pessimistic versus optimistic question.

I do think a lot of times it makes sense to ask a question that you don’t know the answer to. You could say, “In my mind, I think you could do 20% margins,” and maybe they can’t really get above 15%, but you just throw it out there to see what kind of response you’re going to get. Then you can follow up with, “Walk me through the levers to that margin growth.” These are typical questions, but you can anchor the management team to a certain number versus just asking an open question: “What should your margins be?”

You could say, “When I do the math, I think your margins are going to be between 25% and 30%. Tell me why I’m wrong.” Versus, you know, it’s just a different way of saying, “If you ask it optimistically, your margins are going to be higher than 30%.” You could say, “I really don’t think your margins are going to be 30%.” You’re going to get different responses depending on how you ask the questions. I think you have to think about the order of questions you ask if you want your harder questions to come a little bit later in the interview.

Great. Cool. Well, Ross, I think we’ll wrap it up there unless there are any closing thoughts or anything you want to hit people with.

No, that’s great. Thanks so much for having me on. I really appreciate it.

Yeah, Ross. The book is Breaking the Script. There’ll be a link in the show notes if anybody wants to check it out. I think it’s just a great refresher on how to conduct management interviews, or, if you’re in a very unique case, podcast interviews, because I was thinking the whole time, “How do I improve my podcast interviewing skills with this?”

One of them was that you mentioned earlier: I’m always just trying to remind myself, “STFU, STFU”—just stop talking and let the guys talk. Hopefully, I did a good job at that. But, Ross, this has been great, and we will chat soon.

All right, sounds good. Thank you.

A quick disclaimer, nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.