How to Get Smart on a New Industry - Quickly!

Over the course of my career, I've overseen investments in a wide variety of industries, including Manufacturing, Government Services, Shipping, Specialty Finance, and Apparel. Each of these industries is unique and complex, requiring me to reach a sufficient level of expertise so I could spot emerging issues, apply skepticism to conclusions, and develop a cohesive go-forward strategy for our funds’ investments.

Through this work, I've developed a core playbook that I follow when it's time to ramp up in a new industry, the main tenets of which I'll share here.

I hope this post will serve as a helpful guide for investors and executives who find themselves faced with having to learn a new industry and don't have the luxury of dedicating years getting up the curve. While it undoubtedly takes a long time to master all the particular nuances of any segment of the economy, there are nevertheless ways to hit the 80/20 mark quickly. 

I've segmented this post into various stages of knowledge, and within those, added subsets of practices that are good to rely on when your knowledge level is at each specified stage:

·        Phase 1: Initial Learning (aka the “you know nothing” phase)

·        Phase 2: Beginning to develop a thesis (aka the “you know a little bit” phase)

·        Phase 3: Solidifying a thesis (aka the "you know enough to be dangerous" phase)

·        Phase 4: Challenging your established thesis (aka the "you know a lot but can always know more" phase)

To be clear, there is a fair amount of fluidity across the spectrum of these topics (and even experts may find themselves utilizing the practices of earlier stages), but this framework seemed like the cleanest way to lay out the path.

In addition, as a final disclaimer before we get started, I wouldn't consider any of these steps to be rocket science. Nothing here is patent-pending or really that much of a revelation, it's more of a way to organize your thoughts and an encouragement that you're on the right path.

So, with that in mind, let's get started: 

Phase 1: Initial Learning (aka the “you know nothing” phase)

Congratulations - you've just had an opportunity dropped in your lap in an industry that you know nothing about. The first thing to remember: Don't panic! The biggest mistake people make upfront is getting intimidated about how much there is to learn and how ignorant they currently are.

Remember that it's perfectly normal to start off at zero, and there's nowhere to go but up! Even better, you can't be expected to have any sort of thesis yet, so enjoy your freedom and the wide-open nature of the problem and follow where your interests take you.

(Note: In order to make this section more engaging, I figured it would be best if I picked an example industry to write about. I didn't want to "cheat" by selecting one I'm already knowledgeable in, so I picked one basically at random. Since I love a good NYC pretzel, we'll pretend for the purposes of this section that we're evaluating an investment in a company that manufactures pretzels.)

I often feel like the best way to get started on a new industry is to go to YouTube and watch a few videos of the product being manufactured. It brings the project to life and gives a lot of insight quickly and painlessly. For instance, here's a video on pretzel manufacturing I found right away:

https://m.youtube.com/watch?v=oHHBLSSctoc

This video tells me a lot about pretzel manufacturing right off the bat:

a)     Pretzel manufacturing is clearly very capital-intensive, given the significant use of robotics/automation, which is good from a barrier-to-entry standpoint and also means that it's relatively low on labor costs;

b)     The series of heating and freezing steps in the manufacturing process, coupled with the aforementioned automation, implies that energy costs will be a key variable in year-to-year profitability; and

c)     The raw materials used are fairly common/commoditized food products, which I can do more research into and better understand their cyclicality as an input.

All of that from a video that was less than 5 minutes!

The internet is another invaluable reference at this early stage, as any industry of any size undoubtedly has a lot of background info available somewhere on the web. For instance, a basic search for "pretzel industry" led me to an abstract of a report that gives some additional good top-level information:

https://www.mordorintelligence.com/industry-reports/pretzel-market

Based on your company's budget, paying for this report in its entirety may or may not be for you, but even if it's not, there are plenty of other great sources of research reports (including individual company research that you can get through your personal broker or financial advisor). Another great tip for web searches is to include the word "PDF" in your search query, as that will tend to send you to more detailed information sources.

The internet is great not only for getting summary information but also for asking questions that would otherwise be perceived as "stupid" if you asked an industry expert. Whatever your query, there's probably someone who's already answered it online.

For instance, while watching the videos on pretzel manufacturing, I began to ask myself how pretzels got their distinct shape? Searching about it sent me along to this article, which gave me the explanation (summary: they were designed by monks in the middle ages to encourage children to pray with their arms folded):

https://www.history.com/news/the-pretzel-a-twisted-history

In addition, reading this article also made me aware of some other important facts, including the significant regional concentration of the industry (i.e., 80% of U.S. pretzels are made in Pennsylvania).

Now that you know how the product is made and have some VERY general background on it, it's probably good to reach out to a few trusted people who know the market. The best place to start is by asking colleagues at your company.

If you work at a medium- or large-sized company, there is almost undoubtedly somebody or some group of people that have spent some amount of time in that sector or one adjacent to it. Start asking around a bit and also just casually mention to people in the hallways or in the kitchen/breakroom that you're spending time on the industry and looking for help.

Of course, this presupposes that you work at a company where people work together and are willing and excited to help you. If not, I'd first recommend quitting your job and finding someplace to work with a healthy corporate culture.

It's also good to speak to ANYONE at this stage whom you know well and who is somewhat close to the industry, and this is not a time to be picky. If you have a cousin who used to work shifts at a convenience store or an uncle that ran concessions at a stadium, either one might offer up some interesting tidbits about pretzels that you didn't think of.

Even people who are just very enthusiastic snackers can be a great source of information too. Remember, at this stage, all information is useful.

Phase 1 Key Takeaways:

·        Utilize the power of the internet for fact-finding and understanding how the industry is being discussed

·        Find industry documents to uncover important history and statistics

·        Talk to trusted people in the industry or who are familiar with the market

Let’s move forward!

Phase 2: Beginning to develop a thesis (aka the “you know a little bit” phase)

At this point, you've learned a thing or two and are ready to start developing the underpinnings of a thesis about the industry, in terms of its strengths, opportunities, and risks. 

I find it helpful at this stage to start creating some sort of summary document that acts as the backbone of what you're learning. If you're ultimately planning on presenting your findings to your boss, it's great to get that document going in draft form now as it'll be a helpful way to organize your thoughts, identify gaps in your knowledge base, etc.

You should decide which format is best suited for you and your organization, though obviously PowerPoint and Word (or their open-source equivalents) are probably the most common and are easy to use. 

Another integral activity for this step is beginning to "follow the money". By that, I mean diving into the weeds to understand which companies in the sector are generating high profitability/cash flow margins, and then comparing them to those that aren't and developing a thesis that explains why.

This is usually a helpful way to gauge which companies within an industry have leverage over others, either as a result of a capital advantage, operational excellence, intellectual property, or something else entirely. Profitability is also a lot less subject to artificial or technical whims than revenue growth or market valuations.

Dialogue with experts becomes a much more important pillar of your education at this stage, so it's important to start creeping out of your comfort zone when it comes to speaking to people who might be experts on the sector.

Research analysts, industry executives, and people with a history investing or providing financing into these sectors are all useful, and best not approached until this point now that you have the easy questions out of the way.

While people will undoubtedly cut you some slack when you have your first discussions with them when you're getting up to speed, they'd rather you not ask them questions that you could have easily found answers to with a little bit of desktop research.

Best to save their time and attention for the higher-level thoughts and questions of this phase.

A few points to keep in mind during such discussions:

·        I find it useful to stagger discussions with industry experts over time as you'll find your areas of concern evolve as you learn more about an industry. Start with those people that are the easiest to talk to (i.e.., if you're their client, or they owe you a favor, or they're just flat-out personable) and save the more difficult ones for further along.

·        When speaking to these experts, make sure you give a 2-minute overview to kick the discussion off that explains why you're interested in the industry and why the person speaking to you could be helpful. It's important to demonstrate an enthusiasm for your project while you're doing this, as people tend to be much more open and thoughtful when they have a sense of what you're trying to do and that you're excited about it.

To that end, there's nothing wrong with letting people know that you're just getting your feet wet and don't have all the answers. In fact, it's preferred to do that rather than to try to bluff your way through these types of discussions.

Make it clear what you don't know and speak up when you hear a word or expression you're not familiar with, and also remember to research those ideas further after your discussion. I try hard to not let an acronym go by without either clarifying what it means or writing it down to figure out later.

Language and acronyms are very important cues used by industry insiders that, among other things, help them figure out who's a fellow insider and who isn't.

Phase 2 Key Takeaways:

·        Document and start building your knowledge base of the industry

·        Follow the money and find out where leverage exists

·        When ready, reach out to key research analysts and industry experts

Now that we have momentum, let’s continue the education process.

Phase 3: Solidifying a thesis (aka the "you know enough to be dangerous" phase)

As the nickname implies, this is potentially the most treacherous phase of your education, as it's the one where you're finally starting to feel secure in your industry knowledge, and are therefore highly reluctant to allow for data points that conflict with the early viewpoint that you've developed. 

It's probably time to flesh out that summary document you started in the past phase and screen a draft among some colleagues whose opinions you trust before ultimately presenting it to your boss. It can be really helpful to get a "clean read" on your views from someone with no background on that particular industry, as they're more likely to bring fresh perspectives or point out things that seem out of line with your thesis.

I find doing a few single-company "deep-dives" at this point to be useful in vetting your assumptions. Pick a company or two in your industry that is publicly traded and therefore have significant financial information (i.e., annual/quarterly reports, investor day presentations, earnings call transcripts, etc.) available on their websites or with the SEC (https://www.sec.gov).

Now, walk through their performance over the past several years and see if they performed in ways that you would have expected. If not, try to understand why and see if that changes your thesis at all. Also, if the company has been public for a long period of time, pull the annual reports from the years of the past economic recession.

Economic downturns can be VERY instructive times to examine who in the industry has real power and who doesn't. They also help you understand cyclicality and the vulnerability of the business for the next period of market distress.

If you've been following the advice of this post so far, then by now you've built out a network of people with industry knowledge based on the points above. It's important to continue this effort, and therefore get as many viewpoints on topics as possible, so that you can hear out various perspectives and track recurring comments.

At the conclusion of your meetings, do some brainstorming with people on potential introductions they can make for you based on what you discussed, and (of course) offer up any for them that you think they might find worthwhile.

Also, when you meet people at this stage, it's important to spend more time listening than talking, as you don't want to "herd" people into your perspective and potentially miss some thoughts on the industry that you hadn't taken in yet.

It's sometimes good to even play devil’s advocate to your own conclusions and see where that goes with people.

Phase 3 Key Takeaways:

·        Get initial feedback by presenting to a neutral 3rd party

·        Validate your knowledge by reviewing 1-2 publicly traded companies

·        Spend more time listening instead of talking to ensure you don’t miss critical insights

And now, our final phase!

Phase 4: Challenging your established thesis (aka the "you know a lot but can always know more" phase)

A more generous post would declare this as the time when you're "finished" and now are an expert on your new industry, but the truth is, that's never the case. Learning curves are permanently steep and there's always more to comprehend. Nevertheless, it's probably time to start making decisions based on what you've learned, either through investments or other activities.

As you turn your theories about an industry into action, you'll undoubtedly run into various difficulties along the way. It's important not to be dissuaded by such setbacks, as they're a necessary part of continuing to learn. Make sure to do frequent postmortems after things go wrong and to develop a thorough understanding so you can avoid (or at least expect) similar mistakes down the road.

It's also important to remember that no industry is static. New technologies, political trends, and shifts in societal behavior can all greatly change the value proposition inherent in any company or investment.

It's necessary to maintain a broad perspective and try to spot these trends in advance so that you can play offense, instead of defense, when they come.

Phase 3 Key Takeaways:

·        Understand this is only the beginning of your industry education

·        Put your theories into play by taking action

·        Keep your eyes and ears open for industry trends and technologies

Conclusion

I hope this primer serves as a helpful tool for organizing your thoughts when you need to become sharp on a new market. Even more, I hope that it will encourage people to start doing research on new markets they were afraid to learn about before.

All industries benefit from the fresh perspectives of newcomers, and the cross-pollination of thoughts and concepts across the economy leads to an overall benefit to all of us. Especially those of us who love pretzels.

To view more great pieces by Apollo Influencers visit: https://www.apollo.com/media