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Start for freeWhat is Scuttlebutt?
Scuttlebutt is the process of learning about a business by accumulating information from people associated with the company, including employees, customers, suppliers, and industry experts. This technique, popularized by legendary investor Philip Fisher, can provide valuable insights that aren't available in financial statements or other public information.
Why is Scuttlebutt Important?
Scuttlebutt allows investors to gain a variant perception and informational edge over the market. While everyone has access to financial statements and public filings, few investors take the time to speak directly with people involved in or knowledgeable about a business. This extra effort can lead to deeper understanding and conviction in investment decisions.
Some key benefits of scuttlebutt include:
- Identifying potential issues or opportunities before they become public knowledge
- Understanding the true competitive position and moat of a business
- Gauging the quality of management and company culture
- Uncovering industry trends and dynamics
- Building conviction to hold through short-term volatility
Key Sources for Scuttlebutt
There are four main groups to focus on when conducting scuttlebutt research:
1. Customers
Customers provide critical insights into a company's products, competitive position, and future prospects. Key customer types to speak with include:
- Current customers
- Former customers
- Potential customers
Some key questions to ask customers:
- Why do you use this product/service?
- How does it compare to competitors?
- What would make you switch to a competitor?
- Are you satisfied with pricing/value?
- How critical is this product/service to your operations?
2. Employees
Employees at all levels can provide valuable information about a company's operations, culture, and trajectory. Key employee types include:
- Lower-level employees
- Sales and marketing staff
- Executives (CEO, CFO, etc.)
- R&D personnel
- Board members
- Former employees
Some key questions for employees:
- How would you describe the company culture?
- What do you think of management?
- Are you hiring or laying off staff?
- How is morale?
- What are the biggest challenges facing the company?
3. Suppliers
Suppliers can provide insights into a company's operations, growth, and bargaining power. Key supplier types:
- Current suppliers
- Former suppliers
- Potential suppliers
Questions for suppliers:
- How big of a customer is the company?
- Are they easy to work with?
- Do they pay on time?
- Are their orders growing?
- How does their volume compare to competitors?
4. Specialists
Industry specialists can provide broader context and competitive insights. Key specialist types:
- Competitors
- Industry analysts
- Trade associations
- Regulators
- Journalists covering the industry
Questions for specialists:
- Who are the industry leaders?
- What are the key trends shaping the industry?
- How does this company compare to peers?
- What are the biggest risks/opportunities?
Scuttlebutt Techniques
Here are some proven techniques for gathering valuable scuttlebutt:
Build a Network
Develop relationships with people in relevant industries. Attend conferences, join professional associations, and connect on LinkedIn. The larger your network, the easier it becomes to find knowledgeable sources.
Use LinkedIn
LinkedIn is an invaluable tool for identifying and contacting potential sources. Search for employees of target companies and reach out politely to request informational interviews.
Attend Industry Events
Trade shows and conferences are great opportunities to speak with employees, customers, and competitors in a casual setting. Come prepared with questions but keep conversations natural.
Visit Locations
For retail or location-based businesses, visiting stores/facilities can provide insights into traffic, operations, and customer experience. Speak with staff and observe interactions.
Monitor Online Forums
Industry message boards, Reddit, and other online communities can be sources of insider information and sentiment. Take what you read with a grain of salt, but look for recurring themes.
Follow Local News
Local newspapers and TV stations in areas where a company has major operations may have more detailed coverage and sources.
Leverage Your Own Experience
If you're a customer of the business, reflect on your own experiences and observations. What do you like or dislike? How does it compare to alternatives?
Ethical Considerations
While scuttlebutt can provide valuable insights, it's critical to conduct research ethically and legally. Some key guidelines:
- Never misrepresent yourself or your intentions
- Don't ask for or use material non-public information
- Respect confidentiality and don't pressure sources
- Be aware of and follow any applicable regulations
- Use common sense and err on the side of caution
Analyzing Scuttlebutt
Gathering information is only half the battle - you also need to analyze it effectively:
- Look for patterns and themes across multiple sources
- Consider potential biases of your sources
- Distinguish between facts, opinions, and rumors
- Use scuttlebutt to generate questions for further research
- Compare scuttlebutt insights to public information and your own analysis
- Be willing to change your views based on new information
Journaling and Self-Reflection
Keeping a journal of your scuttlebutt research and investment decisions can be incredibly valuable:
- Record key insights and how they influenced your thinking
- Note predictions and check back on accuracy
- Analyze mistakes to refine your process
- Identify patterns in successful and unsuccessful investments
- Clarify your circle of competence
Key Takeaways
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Customers provide crucial insights into product quality, competitive position, and future prospects. Speak with current, former, and potential customers.
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Employees at all levels can illuminate company culture, management quality, and operational strengths/weaknesses. Former employees may be more candid.
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Suppliers can provide early signals on a company's growth trajectory and bargaining power. Look for suppliers with long-term, positive relationships.
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Industry specialists like competitors, analysts, and journalists can provide valuable context and highlight potential risks or opportunities.
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Journaling your scuttlebutt research and investment decisions helps refine your process and clarify your circle of competence over time.
Mastering the art of scuttlebutt takes time and effort, but can provide a significant edge in your investment process. By systematically gathering intelligence from diverse sources, you can develop deeper conviction in your best ideas and avoid potential pitfalls. Remember to always conduct your research ethically and combine scuttlebutt with rigorous fundamental analysis for best results.
Article created from: https://www.youtube.com/watch?v=HHD1udLjY5M
