On the evening of February 2, 2018 the Columbia Student Investment Management Association hosted a stock pitch competition for 2nd year MBA students at the Penn Club in New York City. Paul Johnson was the MC for the event and I was one of the judges.
Over time I have become much more sensitive to verbal and non-verbal cues when evaluating a stock pitch. One type of unconscious verbal cue is a “weak modal verb”. You might ask, “What is a weak modal verb and why should I care?”
Modal verbs are used to express if we believe if something is possible, probable or certain. There are strong modal verbs and weak modal verbs. Weaker modal verbs are qualifiers and include words like appear, could, depending, may, might, possible, sometimes, can, should and ought to. Stronger modal verbs include will, clearly, definitely, must, unequivocally and must. (more complete lists can be found at this website at the University of Notre Dame.
During a pitch, there is a lot of unconscious processing going on, both in the mind of the presenter and the audience. During the competition on Friday night, students sometimes used weak modal verbs unconsciously. When the audience hears these qualifiers they will unconsciously think less of the pitch. How can one avoid using these words? Do the work! If you don’t know certain facts, you will unconsciously use weak modals. Conversely, if you know the answer you will unconsciously use strong modals.
What if the portfolio manager asks a question and you don’t know the answer? Should you try to flub it? NO! The correct answer is “I don’t know but I’ll get back to you with an answer.” The problem is that if you don’t know the answer and try to flub it, you will unconsciously start your sentence by saying something like, “Well, I think that…” or “…this should…” or something else to that effect. When the portfolio manager hears this, they will unconsciously know that you don’t know the answer and trying to “wing it” which will seriously undermine your credibility.
But what might be even worse is not directly answering a question. This will just serve to frustrate your audience. At the competition, a student pitched a stock as a short which we will call Acme Inc. (we will also anonymize the industry). The student’s main thesis was that foreign competition would enter Acme’s market and drive down earnings. He asserted that the investment community was oblivious to this. His presentation actually started out strong:
A lot of the market has underestimated the impact of [foreign] companies entering the market and posing a huge threat because they have a lower cost of capital which allows them to undercut [Acme Inc] by offering lower [rates].
I see asymmetric upside and downside, I have 47% downside in the base case and 90% in the best case.
This is a stock where there is a really big divergence between what the investment community understands and what the industry understands. And I think the reason for that is that it is very difficult to get information on these [foreign] companies and whilst the growth has been very rapid over the last two years, because of the nature of these companies and contracts it does take a while for that to drop through to the financials.
The student did not use any weak modal verbs and his statements were declaratory. For example, he states, “A lot of the market has underestimated the impact of [foreign] companies entering the market and posing a huge threat…” There was no ambiguity, he did not say, I think or I believe a lot of the market has underestimated… He did not use a qualifier, this makes the statement very powerful.
Another powerful statement: “This is a stock where there is a really big divergence between what the investment community understands and what the industry understands.” Again, a powerful nonambiguous statement. However he does say, “…And I think the reason for that is that it is very difficult to get information on…” Here he says “I think”. Does he think or does he know? The student was probably not consciously aware he used this qualifier and the audience did not consciously realize it but there was unconscious processing going on with both the student and the audience.
The problem with the Q&A was that the student was asked a direct question by one of the judges but did not adequately answer it. As you can see from the exchange below, while there were no weak modal verbs used, the question was not answered. And when the student gave answers, his speech was tentative with pauses and phrases like, “Yeah… Uhm… So I, I guess…” The student was using this language unconsciously and the judge would unconsciously pick up from the verbal and non-verbal cues that the student did not know the answer to his question. Here is the exchange:
I am trying to wrap my head around cause and effect. The assertion you are making is that the [foreign companies] are coming into the market and they are going to cause [Acme Inc.’s] earnings to decline. You are showing a lot of anecdotal evidence, but I’m not really seeing any effect and I start out with the premise that the market is efficient, so I guess what concerns me is that the sell-side analysts aren’t talking about it and the company isn’t talking about it so maybe there isn’t a threat. What I’m looking for… …what would convince me, is to see some kind of effect because the [foreign companies] have taken a lot of share according to your chart so why isn’t there any effect on [Acme’s] earnings? Again, I’m not convinced of the cause/effect relationship.
Yeah… Uhm… So I, I guess there are two things I would say. In terms of the [rates], there has been an effect, uhm, the [rate] has fallen from about 13 percent to 11 ½ percent, Uhm, that’s not a perfect, uh explanation because there is a mix change… In terms of the earnings…
Notice here how the student is tentative both verbally “I guess” and non-verbally – the pauses – and admits it is “…not a perfect explanation…” The judge then asked the same question again.
But you didn’t tie that back to the cause being the [foreign companies]. [Rates] have fallen, I’m not convinced that the cause is the [foreign companies] and I’m looking for that evidence for your thesis to hold.
In terms of… So they don’t say that this was caused by the [foreign companies]. Uhm, they have a variety of explanations.
Again, a non-answer. So the judge asks the question yet again:
But you’re saying its caused by the [foreign companies]… …
I’m looking for evidence of that.
In terms of numerical evidence, the way that I am trying to do it is by looking at specific types of [assets] where there have been falls in [rates] and then spoken to people who value those [assets] and they are saying that it is caused by the increased competition. So that’s how I tried to get the numerical…
But in this response there is no answer so the judge asks a fourth time:
But how has that impacted [Acme’s] earnings? Again…
Well, in the end, it impacts it through the lease rates…
Again, the response did not answer the question. Rather than asking a fifth time, the judge realized that he wasn’t going to get an answer, so he gave up.
The student’s main thesis was that increased foreign competition would drive earnings down in the future. But in the last several years, there had already been a significant market share shift. Why didn’t this change impact earnings? And if the increased competition hadn’t impacted earnings in the past, why should it impact earnings in the future? Absent this evidence, how can the judge have any confidence that the increased foreign competition will impact future earning?
In Chapter 11 and 12 of our book, Pitch the Perfect Investment, we discuss how to construct the content of the message and different verbal and non-verbal signals that can trip you up. For example, on page 392 we write:
Your choice of words will be extremely important. Stay away from claims that convey little information.
For instance, analysts often use phrases such as “dominant market share” in a pitch, which is like empty calories as there is no nutritional value in the comment. Does the company have a 12% or 90% share of the market? Is the company’s market position stable over time? If the company doesn’t have a competitive advantage, does its market share even matter? Perhaps most important, is the information already reflected in the stock price?
Also, be careful not to overuse qualifiers, which are also known as weasel words or weasel phrases, such as may, might, could, should, appears, possibly, I believe, I feel, it is widely believed, it is often said, many are of the opinion, and so on, because the words allow the presenter to weasel out of their argument when challenged. Paul S. and Paul J. would bring a galvanized bucket with large nuts (the kind that screws onto a bolt to class when students gave pitches and every time a student would use a weasel word or phrase, the professor would drop a nut in the bucket, making an obnoxious noise that startled everyone. Over time, the students got the point.
We cannot stress how important it is to be aware of words you might use unconsciously as well as unconscious body language. It is also critical to answer questions directly and admit if you don’t know the answer. Honing these skills will help you craft the perfect pitch.