And don’t take a side - make a rational, impartial judgement of the company based on all the facts - good and bad. Talk to the biggest cheerleaders of the company but also talk to those that don’t view the company as favorably. Talk to people on the other side of the issue and try to understand why what they are saying makes sense or doesn’t make sense. However, it’s important to also do the opposite – look for and analyze information that disproves your hypothesis. In other words, we do a bunch of research, form a hypothesis and then look for people and things to confirm that hypothesis. The other trouble with conducting a bunch of research (scuttlebutt and otherwise) upfront is that this vested time can often lead to some level of confirmation bias. It’s only by first doing this level of more empirical fact finding, can one decide if the company is worth digging into more, the right people to talk to, formulate the right questions to ask and how to interpret and analyze that information. It requires reading the 10-K, financial statements, presentations and doing a high level of due diligence and then and only then talking to people with an educated mindset on the topic. Practicing the method well requires a marriage of both the anecdotal and the empirical. The common criticism of the scuttlebutt method is that it’s highly anecdotal and this is partially true but anyone that is merely talking to some people and then buying the stock is guilty of scuttlebutt malpractice. Here is my six point plan for effectively practicing scuttlebutt: And you become a researcher or anthropologist no matter what you’re doing. Eventually, practicing scuttlebutt becomes a natural part of you and it becomes tough to segregate research from life. It involves completely immersing yourself in a subject or industry or company for some length of time to play out every scenario and run down every question until you become a master on it. I’m probably going out on a limb here but practicing the scuttlebutt method well is like method acting. When the market is selling off indiscriminately, that extra layer of research and due diligence provides conviction in a position that can’t be had from secondary research alone. Primary research is important because doing the legwork and kicking the tires yourself provides a higher level of confidence and conviction. Why do they continue to use the company’s products/services? What would motivate them to switch to a competitor? How difficult would it be for them to switch to the competition.Ģ) It is a form of primary research as compared to secondary research like reading financial statements and other company materials. Current and former customers can also be an extremely valuable source for assessing a company’s moat and potential switching costs. Former employees and current employees can provide valuable insights about employee morale and sentiment. In my opinion, scuttlebutt research is important for two key reasons:ġ) It provides deeper insights into a company that can’t often be had through just reading. This is, of course, above and beyond all the financial statement reading and standard due diligence that a prospective investor is expected to do. It refers to a method of conducting due diligence about a company and its investment merits by talking to all kinds of people related to it like customers, vendors, trade associations, competitors and employees (former and current). It’s not that far off from the more modern office equivalent – “watercooler talk”.Īs it relates to investing, the Scuttlebutt Method was coined by Phil Fisher in his seminal book "Common Stocks and Uncommon Profits" (See Recommended Reading). Since sailors exchanged gossip when they gathered at the scuttled butt for a drink of water, scuttlebutt became slang for gossip or rumors. Water for consumption on sailing ships was typically stored in a scuttled butt - a butt (cask) which had been scuttled by making a hole in it so the water could be withdrawn. The origin of the term is related to sailing. Scuttlebutt is a term that generally refers to rumors or gossip. However, I thought it was due time to dig a bit into what scuttlebutt investing involves and why I am so passionate about it. You might have thought that this would have been my first post ever - explaining the Scuttlebutt Method but alas so much to write about and so little time. Scuttlebutt Investor is an homage to the great Phil Fisher – an early GARP (Growth At a Reasonable Price) investor before GARP was even a thing. The first question I usually get when I tell someone the name of my blog is: where did you come up with such a dumb name? And I get it – “Scuttlebutt” isn’t the sexiest name for a website or blog but it is an idea that has resonated with me over the years and to which I am forever indebted.
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