The “Professional Strangers” of Due Diligence

A previous posting asked the question “How do we know (what we think we know)?”  It probed the issues involved in “mapping the landscape of our understanding,” in part by referencing the legendary fact-checking regimen at the New Yorker.

Learning from others

A New Yorker fact checker might spend a couple of weeks or so investigating and verifying a story, becoming an expert of sorts for a short period of time on a topic they probably knew little about beforehand.  Invariably they talk to people that they don’t know to determine the accuracy of some aspect of the story.

But relying on the statements of others — who have their own agendas and faulty memories — can be dicey, to say the least.  Talking to Strangers, a 2019 book by Malcolm Gladwell, includes a range of real-world examples that illustrate how poorly we judge the behaviors and intentions of people we don’t know — and how easily we can misunderstand, misconstrue, or be led astray.

There are obvious implications for due diligence in that regard, including the need to design an approach to the process that acknowledges the pitfalls inherent in relying on what you are told, as well as the need to modify tactics as warranted, depending on the quality of the interaction as it unfolds.  If an exchange is long on narrative and short on transparency (as many are), that is important in and of itself and the “information” received should be discounted.

While there is no doubt that more investment knowledge and experience are positive attributes for an analyst, they are muted by the ineffective structuring of due diligence encounters and poor interviewing skills.  Because of the leverage those non-investment capabilities can provide, they should be at the core of a due diligence analyst’s development program, but are often not addressed at all.

In his book, Gladwell offers a variety of situations that point out how we can go wrong in our interpretations of others.  One consequential example:

The people who were right about Hitler were those who knew the least about him personally.  The people who were wrong about Hitler were the ones who had talked with him for hours.

While, according to Gladwell, “we believe that the information gathered from a personal interaction is uniquely valuable,” it instead may be uniquely misleading.  The quality of the information conveyed is dependent on the motives of the narrator and the willingness of the listener to accept the story at face value (or actively — and creatively — poke holes in it).

Professional strangers

To step back and think about this a bit more, a visit to your local library might turn up a 1980 book — that probably hasn’t been checked out in years — The Professional Stranger by Michael Agar.  (Or you may find the 1996 second edition; quotes below are from the first.)

It is subtitled “An Informal Introduction to Ethnography.”  The professional strangers in the title are ethnographers, who describe the activities and culture of a group of people through interviews and close observation, in the process creating “a social relationship within which an exchange of information occurs.”

You can see the similarities to the due diligence process.  However, while the goal is the same, the differences are stark.  Ethnographers take months or years to study the composition and dynamics of a group, sometimes embedding within it.  Most people doing due diligence have very little time allocated to onsite visits and meet with a select group of people, interacting with them in a controlled environment.

Those are very different kinds of experiences.

For those doing due diligence, exposure to the precepts of ethnography should lead to a more realistic weighting of the narratives offered by an organization; a reluctance to make bold statements about the organization’s culture to others; and a desire to find ways to bridge the gulf between the thickness of the actual cultural atmosphere and the thin impression of it that results from standard due diligence practice.

Granted, there is much in a book like Agar’s that might not be of interest, including details about the specific groups he analyzed (villages in India and Austria, as well as the lives of drug addicts, both on the streets and in a hospital/prison).  But as with other works on ethnography, there are plenty of insights that come from seeing how a professional stranger goes about deciphering a social milieu.

Consider this quote from the book:

Most groups have official or unofficial stranger-handlers to deal with outsiders.  Such stranger-handlers are natural public relations experts.  They can find out what the outsider is after and quickly improvise some information that satisfies him without representing anything potentially harmful to the group.

The social groups that Agar studied were considerably less formal than a modern investment organization, where there are designated stranger-handlers and many other employees are steeped in the official narrative.  That puts a premium on conducting a due diligence visit in ways that deviate from the standard routine in order to get beyond the narrative and into the realm of discovery.  (That’s a key part of the Advanced Due Diligence and Manager Selection course.)

A few pertinent observations from the book:

~ The goal is to understand the group from the perspective of those involved, but the perspective of an outsider is important too.  However, a rush to judgment based upon your own views can inhibit the ability to see the culture as it really is.

~ Along those lines, “learning the language and learning the culture are far from independent tasks.”  There might not be a language barrier in the classic sense, but every organization has its own internal language that differs from the way it presents itself externally.  Picking up on that is hard but rewarding.

~ There’s a difference between “when a person is willing to give you information and when they are trying to give you something to get rid of you.”  (Or give you something that they want to give you instead of what you want.)

~ Good interviewing skills make all the difference, but there is no formula.  Structured interviews can be good in some situations, but are often too limiting, as opportunities for discovery aren’t capitalized upon because of the need to complete the list.  Conversely, you can realize after the fact that a free-form interview got very far afield and some core questions were left unasked.

~ You want to find out “the way that group members interpret the flow of events in their lives.”  Hearing how they see things as individuals can reveal much about an organization.

~ Even early in the process, at the top of the information funnel, “you are already bouncing between learning and checking what you have learned.”

~ When it comes to research into the group, “no one knows how much is enough.”  And, “If you’re going to learn a complex pattern, you need a lot of time.”

Risks

In 2005, James Montier wrote a seminal report, “Seven Sins of Fund Management.”  While it concerned investors making decisions about companies, his third sin applies equally to any kind of due diligence:

The insistence of spending hours meeting company managements strikes us as bizarre from a psychological standpoint.  We aren’t good at looking for information that will prove us to be wrong.  So most of the time, these meetings are likely to be mutual love ins.  Our ability to spot deception is also very poor, so we won’t even spot who is lying.

That is the biggest risk when doing onsite due diligence.  Just being there may give you a sense, to reference Gladwell’s book again, that you have “uniquely valuable information” when you do not.

That sense can be reinforced by prior exposure from a distance.  Let’s say the person being interviewed is an investor of some renown, whom you have followed for years.  You are at risk of already having a parasocial relationship with them, in which you feel a strong connection and think that you have an understanding of who they are.  That can color everything that happens in an interview and your interpretation of it — and lead to an unwillingness to come to a negative conclusion.

While the theme of this posting revolves around understanding “strangers,” there are also risks that can develop over time.  As trust builds up, due diligence can get less diligent — even downright sloppy — so that detrimental changes are overlooked rather than triggering a reassessment.

Keeping these risks front of mind and frequently discussing them is essential.  Otherwise you are better off not doing onsite due diligence at all.

 

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