The Questions That Matter

And the questions that dont.

Basic questions are good questions. They matter. We learn from them.
Yet people often apologize foror
dont botherasking

them. Whats more, we malign basic questions as
dumb or stupid. Inquiries so simple, its a waste of time to contemplate them. Thats prompted the popular
defense of the basic question, which is the aphorism Theres no such thing as a stupid question.
But there are stupid questions, or at least questions that dont matter. These are questions people ask when
there is little chance that they will learn something from the answer. They include leading questions,
preening questions, and statements disguised as questions. And while they can sound harmless, they
prevent us from obtaining a better understanding of the world around us.
I asked those questions
Back when I was a junior equity analyst, I asked more than my fair share of questions that didnt matter. I
would dial in to a companys quarterly conference call and enter the Q&A queue intent on asking the most
detailed, nit-picky question I could. Something along the lines of: I noticed your cash conversion cycle has
slowed by a few days sequentially. Could you walk me through what that says about the current demand
environment and whether you project any weakness going forward?
That looks and sounds like an intelligent question. But why did I ask it? The answer, to the extent there is
one, would be immaterial to my analysis. A 10-year discounted cash flow model with a terminal growth rate
or
any other model for that matteris
not sensitive to such a short-term input.
Instead, I asked it to justify my presence on the call. I asked it to demonstrate publicly just how quickly and
completely I had dissected the companys financial filings. And I asked it to prove how hard I was working.
I did not ask it expecting to glean an insight that would lead to a better investing outcome.
Learn from the best
I didnt set out to ask questions that didnt matter, so where did I pick up the habit? From peers. From
listening to other analysts. Asking those kinds of questions is a best practice in the financial industry.
Complex, detailed, and fundamentally meaningless questions show off ones apparent knowledge, obfuscate
truths around keeping investing simple and low-cost, and enhance job security.
Whats amusing is that companies not only entertain these questions, but answer them. Heres an example
from Bank of Americas first quarter 2016 call:

I was wondering about on the net interest income side if you could talk a little bit about, Paul, what kind
of outlook we should think about for the core net interest income And you do get a day count help
modest in the second quarter from the first 2, right? Doesnt that help?
Its a leap year. So I think its normally down 2, but now its down 1 or flat, yes.
The implication here that one extra day could have a meaningful impact on the long-term value of a bank
with more than $2 trillion of assets is ludicrous. If your investing thesis hinges on some kind of leap-year
effect, you are doing it wrong. But it was a sharp catch, and the question is asked and answered straightfaced on both sides.
The maestro
Fortunately, there are a few CEOs who see through this malarkey. One is Steve Wynn, head of an
eponymous hotel and casino company. On his companys third quarter 2012 call, for example, Wynn was
asked by an analyst to expound on how stable the economic situation in Macau would be over the next few
months. His response was that he didnt know because thats not a question we ever deal with except
during a call like this.
On the second quarter 2013 call, that same analyst followed up with a question about go-forward 90-day
market share. But Wynn exposes the farce of it all in his answer:
Its hard to give youto
quantify this. I know we try all the time, but to tell you the truth, Robin, its sort
of a waste of time for all of usIts the kind of super detail that seems to matter on these kinds of calls, but
really amounts to nothing in the long run.
Like my question about the cash conversion cycle, the answer to a question about market share over the
next 90 days is not material to any rational analysis of Wynns long-term prospects. Wynn at that time was
a company with an enterprise value of more than $20 billion and revenues of more than $5 billion and
plans to open a massive new resort in Macau in just a few years time.
But the analyst sounded on top of thingssmart

and observant with a keen eye for detail.
Questions that arent questions
Back in college I had a professor who cut off any question that began with the phrase Dont you think,
explaining that no real question could begin with that phrase. Rather, he said, lazy studentsall
of us,
reallyuse

this construct to disguise preconceived notions as questions . Whats more, these notions were
usually ill-informed and a waste of time since we were barely more than teenagers.
He was right.
I tracked the number and merit of Dont you think questions in my classes with less vigilant professors.
Their occurrence was frequent and their quality poor. The repeat offenders were government classes where
partisans pushed their own views as Dont you think questions. But Dont you think questions are
dangerous everywhere because they are fueled by bias. Since bias is what you think before you consider
evidence, bias is also a good way to lose money investing in stocks.
The best questions
This line of thinking crystallized for me when I read a a Wall Street Journal A-Hed about a 15-year-old
Bank of America shareholder. This girl is a remarkable investor. What sets her apart from most of the rest
of us is that she attends the banks annual meetings and votes her proxies. Whats more, she asks questions
of management. Good questions. Tough questions. Short questions.
For example, at the last go round The WSJ reported that given the mic she asked simply, What is the bank
doing to raise the share price?

Is that a naive question? Is it a stupid question? Lets be honest: most of us professionals would not ask that
question. On the one hand, that may be because its curt and confrontational, and we might be looking to
curry some kind of favor or investment banking relationship with the company. On the other hand, perhaps
we consider ourselves too enlightened to think that a stock price can accurately reflect the underlying value
of a business. But whether you believe in the efficient market or not, the fact is that stock prices reflect
business values some 99% of the time. So its a good question. If a management team is creating value, the
stocksetting

aside times of dislocation and overreactionshould

mostly rise.
Bank of Americas calls with professional analysts, however, are full of far less material questions. In
addition to the leap year inquiry referenced above, here are some more gems from BofAs first quarter 2016
call.
Ill focus my question on expenses, and then Ill get back in the queue, but I think outside of incentive comp
expenses generally were better than I was expecting, and how much of that is the Simplify and Improve?
And how much more do you think there is to do on some of these core expenses, I guess, number one?
This question doesnt matter for a few reasons. First, since this analyst opens by forfeiting his right to a
follow-up, bank management can pretty much say whatever they want and go unchallenged. Second, he
invites them to celebrate their own branded cost savings programs. Third, he tells them the answer he
wants to hear: that more savings are on the way.
And in terms of March, what can youjust

any color on what got better, what felt better, which areas of
the businesscould

you help on that?
This question doesnt matter because the analyst is basically asking the bank why it was so awesome over a
one month time period. Management may answer, but the answer is unlikely to be accurate unless they
explain that it was due to chance.
Maybe just one ticky-tack question on the FDIC charge. It wasnt clear. Is that an annual expense? Or is
that going to be quarterly at $100 million
The analyst here is self-aware and admits this is a meaningless question before asking it, but plows ahead
anyway. There is nothing significant about a $100 million expense given the banks $2 trillion balance
sheet.
Questions, like most things, are subject to the Pareto principle: 10% of what you ask will get you 90% or
more of what you need to know. The rest is self-indulgence.
The problem with self-indulgence
If the purpose of a question is to learn something you didnt know or extract informationsometimes

reluctantlyfrom

an interlocutor, then the more details you include in your question, the more substance
you give your counter-party to repeat back to you. For example, I used to go on the road quite a bit in my
investment analysis work to meet company management teams. At the beginning I used to ask questions
like As value-oriented, business-focused investors, we put a lot of importance on sustainable free cash
flows and rapid inventory turns that keep cash unencumbered. Can you talk about what you all do or dont
do to operate your business with these metrics in mind?
As you can imagine, every time I asked a question like this, I learned that the company managed to free
cash flow, that aggressive inventory management was a focus at all levels, and that the current stock price
probably didnt reflect the underlying long-term value of the business. They told me what I wanted to hear
because I had told them what I wanted to hear.
Now here are the questions I began to ask as I gained experience
Hows business?

 Really?
Could you expand on that?
Why?
It was through a simple line of questioning like this that I learned a lot. For example, I learned that a
certain Singaporean fast food chain was propping up its profit margins amid rising food costs by secretly
shrinking portionsand

that they thought this was a brilliant solution to their problem.
But as a business-focused long-term investor, I was horrified. Not only were they risking their brand if
customers caught on to the deception, but it wasnt a sustainable approach. Should food costs continue to
rise, the company couldnt keep shrinking portions. What they needed was what they didnt havepricing

power.
It was an insight that changed how I analyzed and valued the company. But had I asked Dont you think
portion-shrinking is devious and unsustainable?, they would have agreed with me. Not only would I not
have learned anything, I would have left with a distorted view of reality.
Be basic
We learn more when we ask basic questions. Those are the questions that matter. Theyre short, simple, and
meant to extract information. But whether it s because theyre perceived as stupid or discourteous, basic
questions can be difficult to ask. Just take a look at the preamble an analyst recently put in front of the basic
question of Whats your business model? to Solar City CEO Lyndon Rive:
First one, Lyndon, a high-level question. So looking at it over the last couple of years, theres been a lot of
moving parts. You guys want to retain assets. Now the focus is shifting a little, you are willing to sell
maybe for price discovery of whatever it is, so you changed focus from growth to cost reduction. So my
big picture first question is, what exactly is the business model of Solar City? And I have a couple of
follow-ups.
Its a basic, important question. Why didnt he ask it without all of those qualifiers? Its one part that asking
questions like this is hard and uncomfortable. Its another part that analysts who ask tough questions arent
allowed to participate in future conference calls. And its a third part that contributing to the theater of the
stock market pays better than being a reality check.
So its left to a 15-year-old girl from North Carolina to ask the questions that mattershe

wants to learn
somethingwhile

the rest of us, for one reason or another, ask the questions that dont.