Scuttlebutt's Tips for Investment Pitches
Writing your first investment pitch can be really intimidating, especially when you know you are going up against people who have been training for this their whole lives. (And I’m only half joking when I say that.)
I would know: I didn’t even apply to WITG as a freshman and then got rejected in my junior year.
But somehow, by the time I graduated, I was the SSG PM and was already working close to full-time at a fund.
That is to say: you do not have some innate trait that makes you able to write great investment pitches. This is a skill, like any other, and you can learn it with time, practice, and some good tips.
The point of this article is to do 2 things:
Give you some useful pointers on how to crush your WITG pitch;
Get you to use my product, give me useful feedback on it, and, once you have a sweet investing job, convince your boss to sign up for a pricey subscription!
So, without further ado, here are my tips for pitching.
The Pitch is Not Actually the Point
Huh? Isn’t the whole point to have a great pitch.
No. Absolutely not.
The point of a pitch - in the context of applying to a club or winning a competition - is to convince somebody that you are smart.
Nobody expects you to come in and actually deliver alpha. Some of you aren’t even legal adults yet!
The WITG leaders want to spot people who, one day, are going to be thoughtful investors. People who will add to the community, figure out how this game is played, teach younger students, and so forth.
Don’t act like you are the second coming of Warren Buffett: be honest about the things you don’t know, while also highlighting the things that make you special.
Here’s an example: I was once pitching a hedge fund founder who was called “the most feared man in corporate America.” I showed up in jeans and a polo after redoing my entire deck at 4am the night before.
I whipped through why I thought this investment could make sense, and then paused before moving to the next section.
“This is the shittiest part of my deck", I announced.
Why would I do that? I don’t know - maybe it was 19-year-old hubris. But guess what? He gave me a job and I spent three years working for him.
As later told me, the thing that made me special was that raw honesty: he could tell immediately that I was never going to lie, pretend to know something I didn’t, or cover up some uncomfortable facts about the investment opportunity.
The thing is, that’s exactly what you want in an analyst!
As you’ll learn, investment funds often are structured such that people have an incentive to lie (and especially to lie to themselves.)
For example, I’ve seen deals where some guy in his mid-30s will get paid millions of dollars if the deal closes, but has no incentive to actually make a good deal.
So, if you’re running a fund, you need to find people that are wired for honesty: even if your incentive is to pretend some investment is really great, you should have a little internal compass reminding you that truth matters.
Every boss I’ve had has come to value that honesty, even when I tell them things that are hard to hear.
So, remember: the pitch is not the point. Your goal is to convince someone that you are great.
Is This New, or Just New to Me?
Ok, thanks, but how about giving me some actual tips on the pitch itself? Let’s do that.
The top PM at a household name investment fund once said something that stuck with me forever:
Is this new, or just new to me?
When you are getting started, almost every fact about every company is new to you.
"Wow, Costco has a ton of leverage with its suppliers, so it is able to get incredible deals for consumers, which brings in lots of customers, which gives it leverage with suppliers! That’s so cool! No wonder Charlie Munger loves this stock!”
All of the above is true, of course, but it is also universally known among serious investors. You are unlikely to find opportunities when you only know things that everybody else knows.
For those that are new to this, this is because stock prices reflect the opinions of other investors. If those investors know that Costco is a great company, they are going to bid up the price for the stock to a point that it is no longer a bargain.
Remember, the whole point of investing is to get more value than you pay for. You can’t do that when everybody else knows the value just as well as you do: why would they sell it to you cheap?
It’s thus very useful to always ask yourself: what do I know that other people don’t?
Your pitch should very clearly explain this. If your interviewer leaves and has no idea what your unique thesis was, you’ve lost the game. The ideal structure is something like:
XYZ Corp is a really good business because it has competitive advantages A, B, and C.
But, thanks to (a quirk of accounting / some recent bad news / a complicated reporting structure / etc.), nobody realizes how great it is.
If you do the math, the stock is probably worth $X, and you can buy it today for 50% of X.
Once people realize that (the bad news is overblown / the reporting changes / etc.), the stock is going to climb to fair value, and we’ll make a lot of money.
The biggest risk is blah blah blah, but here’s some data about why that maybe is a bit overrated. Still, we might want to hedge by doing such and such.
Get it? No? Here’s a real example, from a company that made me a lot of money a few years ago.
The New Home Company ($NWHM) is a pretty crappy business. It is a commodity homebuilder that is in perfect competition and makes very ordinary returns on capital. Normally, I wouldn’t even look at a company like this, except for one key fact: it’s absolutely dirt cheap.
NWHM has a total market cap of ~$40M, but if you actually take a look, they have $114M in cash and $350M in real estate inventory. They’ve got a bunch of debt (total liabilities of $342M), but still, the net asset value is something like 5x the current market price.
This thing is cheap because (1) the stock got crushed during COVID, (2) it is a tiny company, so nobody is paying attention to it, and (3) the company cannot buy back its own stock thanks to some covenants on the debt. Since the company itself cannot correct the mispricing, and nobody else is looking at this thing, I have an opportunity.
The big fear is that if housing prices are down ~15% or so, the leverage is big enough to totally wipe out the equity. Some people think COVID is going to cause a recession and blow up housing values, but this doesn’t make sense to me. It’s spring of 2021, the stock market has already bounced back, and if anything, people are demanding MORE single family homes as they escape cities.
Also, if you look closely, New Home’s housing assets are all in pretty great locations that would benefit from remote work. Just as importantly, if you check out the price-to-income ratios in those markets, they look totally fine: no signs of bubbles.
So, I think the only real risk here is really overblown. I can make 3-5x my money on the upside, and I think that upside is pretty darn likely. Plus, the housing price indices are going to come out soon, and people are going to realize that housing prices are fine, so the stock should trade higher. If it doesn’t, then management will be selling homes, paying down debt, and eventually repurchasing stock. I might have to wait a bit longer, but that’s fine when there is 5x upside.
What ended up happening? I sold most of my stock a few months later up 50% or so. That’s great!
Well, not really: Apollo bought the whole company a few months after that for 3x what I’d paid. RIP.
Do Something Impressive
I’ve seen a trend in pitch competitions towards the winners not necessarily being the ones with the most compelling pitch, but the ones who did the most work or found the most interesting and hard-to-get data point.
Some examples include:
Driving to every convenience store in the Philly suburbs and asking how much of different types of tobacco they sold;
Measuring the size of wrecked car lots on Google Maps, to see which competitor had better economies of scale;
Calling the sales team for a bunch of different software companies, posing as a customer, and finding out the price differences.
Now, it’s my turn to pitch you: I’ve created a tool that is built to help you do something impressive.
Using Scuttlebutt to Do Something Impressive
In just a few minutes, Scuttlebutt can help you can find in-depth breakdowns of why customers prefer one product to another, see how users would react to a price hike, and so on.
Here’s a great example: you may have heard that recently, Lululemon stock has gotten crushed, in part because they released a new legging that is, shall we say, quite unflattering.
The news of this broke through a sell-side research piece, in which an analyst detailed some of the negative responses from consumers. The stock was hammered over the next few days and Lululemon decided to pull the new product from shelves.
But here’s the thing: you could have found all of that customer commentary three weeks earlier if you’d used Scuttlebutt. Here are some of the highlights:
“I do not think that the front or back seams are the most flattering - for anyone. Such a weird deep u/v seam in the front that looks like it will make everyone appear to have a pooch.”
“[The Breezethrough leggings] make people's butts look really long.”
“I don't like it. It's not you, it's the design. It looks awful.”
“I don't like these at all - I don't feel like they flatter any type of body - the extreme dip and slight off-centeredness of the back view is throwing me off”
Isn’t that kind of crazy? You wouldn’t think that this kind of edge is still available today, but it is.
The reason is actually fairly simple: analysts are human. They can’t possibly keep up with the 300 million petabytes of data generated on the internet every single day. They have to deal with their boss yelling at them, their spouse yelling at them, and… well, you get it.
Scuttlebutt is meant to solve this problem by making it very easy to find the juiciest tidbits. It combs a bunch of different internet forums and indexes the pieces that would be helpful for investors. Hopefully it’s useful to you in researching your pitches!
The product is still very much in development, so expect some rough edges. Plus, it’s free for you guys, so you can’t complain too much :)
I’d love any feedback you have - you can reach me (Andrew Castle) at acastle@scuttlebuttresearch.com or 802-793-4939.
I’m also happy to review any of your pitches and help you get better - especially if you’ve used some scuttlebutt in them. Just email your pitch and I’ll try to get back to you ASAP, assuming that I don’t get inundated with hundreds of them.