Industry knowledge

[jobyts]

How do you start learning about a specific industry? Say, auto industry. Are there any books you read about auto industry? Or it is from the related magazines to be aware on the current trends? Or it is by reading the annual reports of the companies? What is the right approach to learn about an industry? My question is about start learning. I think reading the annual report (and reading magazines to some extend) are more of a sharpening the saw, rather the starting point. If it is through books, please advise what books to read. Not just for auto industry, but for others too.

[Travis Wiedower]

Various companies produce primers (i.e. overviews) of industries that I've found helpful in the past. I was recently working through a 500 page guide on the oil and gas industry from Deutsche Bank that was very informative. I did a quick Google search for the automotive industry but the only one I saw was from 2006. I'm sure newer ones exist but even older stuff can give you good industry background.

 

Besides that, researching specific companies will certainly help you understand the industry. I guarantee reading through the GM thread on this forum will get you to see what makes the auto industry tick.

[jobyts]

Thanks Travis. Searching for "Industry primer" looks promising.

 

Trucking Industry:

http://onlinepubs.trb.org/onlinepubs/circulars/ec146.pdf

 

Energy:

http://www.ferc.gov/market-oversight/guide/energy-primer.pdf

http://www.tphco.com/Websites/tudorpickering/Images/Reports%20Archives/Electric.Power%20Industry.Primer.04.02.09.pdf

 

Technology, Media, Telecom:

https://www.wellsfargoresearch.com/Public/TRACS/TRACS%2017%20Technology,%20Media,%20Telecom%20Primer.pdf

 

Semiconductor:

http://www.semismatter.com/2014/11/24/equity-research-semiconductor-industry-primer-2014/

 

Others please feel free to add similar kind of primer documents for other industries to this thread.

 

 

[Valueguy134]

I was putting something together in the book section.

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/industry-primers-10852/msg176975/#msg176975

[netnet]

You also should do some 'primary' research. As Philip Fisher says in his investment classic Uncommon Profits ask around and find out the 'scuttlebutt'. 

 

Here Buffett, who is a 15% Fisherer, as opposed to a 85% Grahamite, says:

 

Now I did a lot of work in the earlier years just getting familiar with businesses and the way I would do that is use what Phil Fisher would call, the “Scuttlebutt Approach.” I would go out and talk to customers, suppliers, and maybe ex-employees in some cases. Everybody. Every time I was interested in an industry, say it was coal, I would go around and see every coal company. I would ask every CEO, “If you could only buy stock in one coal company that was not your own, which one would it be and why? You piece those things together, you learn about the business after awhile.

 

Funny, you get very similar answers as long as you ask about competitors. If you had a silver bullet and you could put it through the head of one competitor, which competitor and why? You will find who the best guy is in the industry. So there are a lot of things you can learn about a business. I have done that in the past on the business I felt I could understand so I don’t have to do that anymore.

[Jurgis]

You also should do some 'primary' research. As Philip Fisher says in his investment classic Uncommon Profits ask around and find out the 'scuttlebutt'. 

 

Yeah, sure. Go talk to CEOs. Cause they really gonna chat with every value investor doing scuttlebutt. Good luck.

 

It might be a great practice for someone who wants to build up confidence in cold calling and maybe build up their rolodex (haha). But I think that for a huge percentage of individual investors this is not realistic.

[netnet]

You also should do some 'primary' research. As Philip Fisher says in his investment classic Uncommon Profits ask around and find out the 'scuttlebutt'. 

 

Yeah, sure. Go talk to CEOs. Cause they really gonna chat with every value investor doing scuttlebutt. Good luck.

 

It might be a great practice for someone who wants to build up confidence in cold calling and maybe build up their rolodex (haha). But I think that for a huge percentage of individual investors this is not realistic.

 

Of course it is not realistic for a huge percentage of individual investor, but that is why people are on this forum to begin with, to separate themselves from the pack.

 

Obviously, you are not going to get to talk to many CEO, just as obviously you are not Warren Buffett.  This after all is a quote from WEB, the gist remains: talk to knowledgeable people in the industry, go down the corporate ladder and even talk to former employees. Buffett started talking to the janitor at GEICO,  who led him to the future CEO.  (By the way as an MBA student, I did in fact cold call CEO's of listed companies, including Intel and National Semi,  and one of my friends walked up to and talked to the head of Citi and one of the bigger insurance companies. So it is doable.)  And if you go to industry conferences and annual meetings, you should be able to ask a lot of questions.

[oddballstocks]

You also should do some 'primary' research. As Philip Fisher says in his investment classic Uncommon Profits ask around and find out the 'scuttlebutt'. 

 

Yeah, sure. Go talk to CEOs. Cause they really gonna chat with every value investor doing scuttlebutt. Good luck.

 

It might be a great practice for someone who wants to build up confidence in cold calling and maybe build up their rolodex (haha). But I think that for a huge percentage of individual investors this is not realistic.

 

Of course it is not realistic for a huge percentage of individual investor, but that is why people are on this forum to begin with, to separate themselves from the pack.

 

Obviously, you are not going to get to talk to many CEO, just as obviously you are not Warren Buffett.  This after all is a quote from WEB, the gist remains: talk to knowledgeable people in the industry, go down the corporate ladder and even talk to former employees. Buffett started talking to the janitor at GEICO,  who led him to the future CEO.  (By the way as an MBA student, I did in fact cold call CEO's of listed companies, including Intel and National Semi,  and one of my friends walked up to and talked to the head of Citi and one of the bigger insurance companies. So it is doable.)  And if you go to industry conferences and annual meetings, you should be able to ask a lot of questions.

 

Here's the funny thing about calling CEO's.  Everyone assumes that everyone else is calling, but my experience is that's not true.  There are many of these guys sitting in an office waiting for the phone to ring. 

 

In larger companies you're going to have better luck getting questions answered by IR.  But small companies will direct your call to the CFO or CEO.  If you have intelligent questions, know the industry some and aren't a complete idiot you'll probably have a nice conversation.

 

For all the introverts out there here's a tip my dad gave me regarding cold calling (he was in sales most of his career).  People LOVE to talk about themselves.  All you need to do is ask intelligent questions to get people talking about things they like or are passionate about.

 

So ask things like:

"can you walk me through what makes your business unique?"

"Why would a potential client choose you over a competitor?"

"If you could start this business from scratch what would you do differently?"

"Where do you see opportunity?"

 

Simple questions like that.

 

Be respectful, ask great questions and get out of the way.  You'll be able to learn a lot.  I've learned a LOT more in conversations with others about how industries work compared to reading primers.  An hour on the phone is more valuable to me than reading some giant 80 page primer that I'll forget most of.

[Jurgis]

Here's the funny thing about calling CEO's.  Everyone assumes that everyone else is calling, but my experience is that's not true.  There are many of these guys sitting in an office waiting for the phone to ring. 

 

If the CEO is sitting in an office waiting for the phone to ring, don't invest into his company.  ;D

 

Honestly, I'm not a CEO, but I know how busy our managers are and the VP level management too. So unless the CEO is a dunce, he's not sitting in an office waiting to talk to you. Maybe it's different in other industries.

 

It might be cultural thing too. Maybe Americans love this. If someone asked me the questions you suggested, I'd tell them that they are wasting my time and to go bother someone else. :) (Yeah, and here I'm on the internet forum wasting my time without anyone even asking, oh, the irony :)).

 

Anyway, I said, go ahead and do it if you are a person who likes doing it and sees a benefit in it.

[augustabound]

An hour on the phone is more valuable to me than reading some giant 80 page primer that I'll forget most of.

 

Maybe, just maybe one day when you're able to read 500 pages a day you'll get it.  :P

[netnet]

You also should do some 'primary' research. As Philip Fisher says in his investment classic Uncommon Profits ask around and find out the 'scuttlebutt'. 

 

Yeah, sure. Go talk to CEOs. Cause they really gonna chat with every value investor doing scuttlebutt. Good luck.

 

It might be a great practice for someone who wants to build up confidence in cold calling and maybe build up their rolodex (haha). But I think that for a huge percentage of individual investors this is not realistic.

 

Of course it is not realistic for a huge percentage of individual investor, but that is why people are on this forum to begin with, to separate themselves from the pack.

 

Obviously, you are not going to get to talk to many CEO, just as obviously you are not Warren Buffett.  This after all is a quote from WEB, the gist remains: talk to knowledgeable people in the industry, go down the corporate ladder and even talk to former employees. Buffett started talking to the janitor at GEICO,  who led him to the future CEO.  (By the way as an MBA student, I did in fact cold call CEO's of listed companies, including Intel and National Semi,  and one of my friends walked up to and talked to the head of Citi and one of the bigger insurance companies. So it is doable.)  And if you go to industry conferences and annual meetings, you should be able to ask a lot of questions.

 

Here's the funny thing about calling CEO's.  Everyone assumes that everyone else is calling, but my experience is that's not true.  There are many of these guys sitting in an office waiting for the phone to ring. 

 

In larger companies you're going to have better luck getting questions answered by IR.  But small companies will direct your call to the CFO or CEO.  If you have intelligent questions, know the industry some and aren't a complete idiot you'll probably have a nice conversation.

 

For all the introverts out there here's a tip my dad gave me regarding cold calling (he was in sales most of his career).  People LOVE to talk about themselves.  All you need to do is ask intelligent questions to get people talking about things they like or are passionate about.

 

So ask things like:

"can you walk me through what makes your business unique?"

"Why would a potential client choose you over a competitor?"

"If you could start this business from scratch what would you do differently?"

"Where do you see opportunity?"

 

Simple questions like that.

 

Be respectful, ask great questions and get out of the way.  You'll be able to learn a lot.  I've learned a LOT more in conversations with others about how industries work compared to reading primers.  An hour on the phone is more valuable to me than reading some giant 80 page primer that I'll forget most of.

 

+1

[Uccmal]

Here's the funny thing about calling CEO's.  Everyone assumes that everyone else is calling, but my experience is that's not true.  There are many of these guys sitting in an office waiting for the phone to ring. 

 

If the CEO is sitting in an office waiting for the phone to ring, don't invest into his company.  ;D

 

Honestly, I'm not a CEO, but I know how busy our managers are and the VP level management too. So unless the CEO is a dunce, he's not sitting in an office waiting to talk to you. Maybe it's different in other industries.

 

It might be cultural thing too. Maybe Americans love this. If someone asked me the questions you suggested, I'd tell them that they are wasting my time and to go bother someone else. :) (Yeah, and here I'm on the internet forum wasting my time without anyone even asking, oh, the irony :)).

 

Anyway, I said, go ahead and do it if you are a person who likes doing it and sees a benefit in it.

 

I have met dozens of company owners, and operators, and been in hundreds of companies over the years in my other jobs.  Ontario is a hot spot for high tech Automobile operations.  I have seen every part of the automobile supply chain.  I can tell you why Magna, Linamar, and MartinRea sit in the sweet spot of automobile operations.  Its not one reason but a whole series of reasons that have alot to do with using high tech in their own plants, and manipulating their own supply chains.  Their workforce is highly skilled and well compensated.  What I cant tell you is why I didn't buy Magna stock in 2009 and just hold it. 

 

I have been in small companies that make office furniture, gone home and read their annual report afterward and run for the hills.  So, in some sense I have benefitted by understanding who makes money and why.

[netnet]

 

I have met dozens of company owners, and operators, and been in hundreds of companies over the years in my other jobs.  Ontario is a hot spot for high tech Automobile operations.  I have seen every part of the automobile supply chain.  I can tell you why Magna, Linamar, and MartinRea sit in the sweet spot of automobile operations.  Its not one reason but a whole series of reasons that have alot to do with using high tech in their own plants, and manipulating their own supply chains.  Their workforce is highly skilled and well compensated.  What I cant tell you is why I didn't buy Magna stock in 2009 and just hold it. 

 

I have been in small companies that make office furniture, gone home and read their annual report afterward and run for the hills.  So, in some sense I have benefitted by understanding who makes money and why.

 

Uccmal cut right to the chase.  Ask people on this board!  You want autos, well there is a SME (subject matter expert) right there, an email away!

 

Netnet

[augustabound]

What I cant tell you is why I didn't buy Magna stock in 2009 and just hold it.

 

Didn't Frank play with the shares a few years ago to his benefit? Huge benefit?

 

I don't remember specifics but I remember a controversy about him gaining on the class of shares he owns around that time.

[Uccmal]

What I cant tell you is why I didn't buy Magna stock in 2009 and just hold it.

 

Didn't Frank play with the shares a few years ago to his benefit? Huge benefit?

 

I don't remember specifics but I remember a controversy about him gaining on the class of shares he owns around that time.

 

Now I remember why I stayed away.  He was paying himself 70 m a year, every year.  Have you ever seen their complex in Aurora.  The family has the biggest castle in Canada.

[augustabound]

What I cant tell you is why I didn't buy Magna stock in 2009 and just hold it.

 

Didn't Frank play with the shares a few years ago to his benefit? Huge benefit?

 

I don't remember specifics but I remember a controversy about him gaining on the class of shares he owns around that time.

 

Now I remember why I stayed away.  He was paying himself 70 m a year, every year.  Have you ever seen their complex in Aurora.  The family has the biggest castle in Canada.

 

Yep, I drive past "Adena Meadows" about once a week. Their corporate HQ, gated community anchored by Frank's Canadian residence and Belinda's IIRC. I'm sure the son has one too. 

Adena Meadows stable for his passion for horses.

And don't forget the 2nd most exclusive golf club in the country. (Second only to the Desmarais course near Montreal, played only by family and friends if I remember correctly.)

 

I remember watching a bio of Frank and his story is fascinating from an empire building perspective. Starting as a machinist making visor clamps for Chrysler out of his garage and winding up with this billion dollar corporation.

[Uccmal]

What I cant tell you is why I didn't buy Magna stock in 2009 and just hold it.

 

Didn't Frank play with the shares a few years ago to his benefit? Huge benefit?

 

I don't remember specifics but I remember a controversy about him gaining on the class of shares he owns around that time.

 

Now I remember why I stayed away.  He was paying himself 70 m a year, every year.  Have you ever seen their complex in Aurora.  The family has the biggest castle in Canada.

 

Yep, I drive past "Adena Meadows" about once a week. Their corporate HQ, gated community anchored by Frank's Canadian residence and Belinda's IIRC. I'm sure the son has one too. 

Adena Meadows stable for his passion for horses.

And don't forget the 2nd most exclusive golf club in the country. (Second only to the Desmarais course near Montreal, played only by family and friends if I remember correctly.)

 

I remember watching a bio of Frank and his story is fascinating from an empire building perspective. Starting as a machinist making visor clamps for Chrysler out of his garage and winding up with this billion dollar corporation.

 

His story is amazing.  I have heard that he doesn't even golf.  I worked with a guy who was high up in Magna HR, around the turn of the millennium.  You were expected to work 24/7.  He would get calls to be somewhere in the Us to play golf (er: work) the next morning.  My acquaintance quit when he had made lots of money and gotten burned out.  He enjoyed it but couldn't keep up with the boss who was 30 years older. 

[LongHaul]

How do you start learning about a specific industry? Say, auto industry. Are there any books you read about auto industry? Or it is from the related magazines to be aware on the current trends? Or it is by reading the annual reports of the companies? What is the right approach to learn about an industry? My question is about start learning. I think reading the annual report (and reading magazines to some extend) are more of a sharpening the saw, rather the starting point. If it is through books, please advise what books to read. Not just for auto industry, but for others too.

 

A few ideas - definitely read Phil Fisher if you have not.  Great book in a lot of ways.

1.  Trade magazines.

2.  Historical books on the industry.

3.  Company failures in the industry.  Why did the companies fail?  Extremely valuable info.

4.  Interviews - call people up.  Just start calling relevant people - competitors, suppliers, customers, substitutes.  Lots will talk for free. 

5.  Read all the annuals of competitors, suppliers, etc.

5. Lawsuits and anitrust proceedings can be insightful.

 

Here is the caveat though.  Until you really own the business you may still not fully understand it even if you think you do before hand.  This has happened to me a bunch of times.  I have been humbled over the years and been wrong on many businesses because key drivers may not show up for years. One can easily miss one of these but I think if you keep grinding it out and learning you can keep acquiring more wisdom.

 

 

[bookie71]

Another good source is to go to one of the "annual report" services and order all the reports available on an industry.

[netnet]

In looking back overt this thread, I noticed that no one, including me said read the annual reports of suppliers and competitors. 

 

Once you have read say 4 years of annuals for one company and 4 different companies in the industry, say 2 suppliers and 2 competitors, stop a moment to think what you have learned:  remember you need to have an explicit set of mental models of the industry. So ask your self,

• Using a Michael Porter type analysis, find out what is the competitive landscape in the industry.
  
• What are the key financial ratios in the industry include the similar and dissimilar companies, competitors and suppliers
  
• Ask yourself who makes money in the industry, why and how
  

 

Don't worry all this is accretive, nobody popped out of the womb knowing the intricacies of biotech or the oil and gas industries.

[bookie71]

Here are a couple of places you can get annual reports ( I suggest the paper copies as i am old fashioned and like to mark them up)

https://www.orderannualreports.com/060/UI/GP/home.aspx?cp_2=A620

http://www.nasdaq.com/services/annual-reports.aspx

http://www.annualreportservice.com/

Good hunting!

[Guest Schwab711]

You also should do some 'primary' research. As Philip Fisher says in his investment classic Uncommon Profits ask around and find out the 'scuttlebutt'. 

 

Yeah, sure. Go talk to CEOs. Cause they really gonna chat with every value investor doing scuttlebutt. Good luck.

 

It might be a great practice for someone who wants to build up confidence in cold calling and maybe build up their rolodex (haha). But I think that for a huge percentage of individual investors this is not realistic.

 

Of course it is not realistic for a huge percentage of individual investor, but that is why people are on this forum to begin with, to separate themselves from the pack.

 

Obviously, you are not going to get to talk to many CEO, just as obviously you are not Warren Buffett.  This after all is a quote from WEB, the gist remains: talk to knowledgeable people in the industry, go down the corporate ladder and even talk to former employees. Buffett started talking to the janitor at GEICO,  who led him to the future CEO.  (By the way as an MBA student, I did in fact cold call CEO's of listed companies, including Intel and National Semi,  and one of my friends walked up to and talked to the head of Citi and one of the bigger insurance companies. So it is doable.)  And if you go to industry conferences and annual meetings, you should be able to ask a lot of questions.

 

Here's the funny thing about calling CEO's.  Everyone assumes that everyone else is calling, but my experience is that's not true.  There are many of these guys sitting in an office waiting for the phone to ring. 

 

In larger companies you're going to have better luck getting questions answered by IR.  But small companies will direct your call to the CFO or CEO.  If you have intelligent questions, know the industry some and aren't a complete idiot you'll probably have a nice conversation.

 

For all the introverts out there here's a tip my dad gave me regarding cold calling (he was in sales most of his career).  People LOVE to talk about themselves.  All you need to do is ask intelligent questions to get people talking about things they like or are passionate about.

 

So ask things like:

"can you walk me through what makes your business unique?"

"Why would a potential client choose you over a competitor?"

"If you could start this business from scratch what would you do differently?"

"Where do you see opportunity?"

 

Simple questions like that.

 

Be respectful, ask great questions and get out of the way.  You'll be able to learn a lot.  I've learned a LOT more in conversations with others about how industries work compared to reading primers.  An hour on the phone is more valuable to me than reading some giant 80 page primer that I'll forget most of.

 

I actually took Oddball's advice in 2010 or 11' when he mentioned something similar about preparing some questions, call up the company (confidence helps!), and just ask for the CEO/CFO. I thought I was going to be laughed at or scolded but I've really only had 1 bad experience. It's seriously as simple as that and NO ONE DOES IT! I've talked to a lot of owners who were able to provide insight or help me understand the nuances of their financials that I otherwise would have mis-understood forever. It's also a great method of finding new investment ideas depending on if the CEO mentions the best supplier or best distributor. To some degree I really think it helps the CEO understand the small shareholders' POV since the questions you ask gives them an idea of what is important to the retail investors on the forums. Some executives are jerks but I've had 1 buy me lunch and talk to me for 3 hours so give them the opportunity to surprise you.

 

I also really like hard-copy annual reports and I'm always ordering more from the links bookie posted. I've built up quite the library of older reports. You never know what little fact in some obscure AR will be useful in understanding a completely unrelated business. Not everyone needs paper copies but just read ARs and write out the business model or industry value chain (a lot of times I just pick at random).

 

An example of the importance of reading and preparation is to consider CLB just this past week. It was hanging between $100-$110 for a few weeks and then dropped nearly 10% overnight to ~$90. There were a lot of reasons to be concerned but it momentarily hit 11x operating earnings (Just below the magical Buffett # and in the trough of the business cycle nonetheless). If you had done research and were prepared to pull-the-trigger you were able to take advantage of this momentary decline. The price is now back to ~$110 and the screaming buy is gone. Sometimes you only get a couple of hours or minutes to take advantage of low prices so you have to be ready for when the time comes.