Phil Ordway on Understanding Industry Structure

Shai Dardashti, managing director of The Manual of Ideas, recently caught up with the MOI Global Instructor Phil Ordway – managing principal of Anabatic Investment Partners – for another exclusive conversation on value investing. The discussion focused on understanding the dynamics and business models of various industries as a way of facilitating idea generation. Topics include: How does a value investor identify potentially rewarding niche segments to pursue? How does one go deep on a particular industry?

Prior to Anabatic, Phil was a partner at Chicago Fundamental Investment Partners and holds an MBA from Kellogg. Phil will go deep on U.S. community banks, examining the industry structure and highlighting two case studies, one featuring a century-old community bank that has completed several acquisitions and may be a merger candidate itself, and another featuring a well-known large-cap bank.

The following transcript has been edited for space and clarity.

MOI Global: How do you look at industries and how do you build an instructive mosaic?

Phil Ordway: I have to understand the broader industry if I’m going to understand a company. If I’m going to look at a bank, I have to understand banking, and then I have to understand the banks the one I am interested in, is competing against. Whether it is a manufacturing company, a brand — it doesn’t matter. It has to be an industry I can understand.

One of the best analogies ever made about investing is that it is a little like journalism, and you are assigning yourself the story of, “What is this company worth?” If you were to go about it that way, you would at some point, probably in the middle of the process, go about calling, meeting, and interviewing all the people who are somehow connected to that company in the industry and figure out what their opinions are and what their experiences with the company have been like and how they have interacted. It informs a lot. It informs me by giving me reasons not to move forward. Everyone has a bias in this process, and I try to distance myself from the people who are going to be uniformly optimistic about the company.

The way I have gotten better at it… the experiences I have had taught me to say “no” more quickly. That’s a huge skill for any investor to have — to be able to quickly run through some filters about what makes for a good company and what makes for a good opportunity. As soon as you come up against those stumbling blocks, you have an automatic kill switch.

To revert to a basic industry everybody probably understands — banking. As soon as you start going into a local market with community banks and find out that Bank XYZ is the wild, reckless cowboy lender in the market that is willing to stretch on terms, stretch on price to show loan growth, that is an automatic kill. As soon as you find out there is something about the culture that is a little bit too aggressive, that is an automatic kill. Things like that are invaluable.

MOI: How do you try to size up culture?

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