As an investor, there are a multitude of strategies and techniques to consider, each aiming to uncover hidden gems in the market. Among these, the scuttlebutt method, a qualitative approach championed by investment legend Phil Fisher, stands as a powerful tool for those seeking to make astute investment decisions. In this discussion, I explore the intricacies of the method and its practical applications.
Origins and philosophy of the scuttlebutt method
The scuttlebutt method is described in Fisher's book, "Common Stocks and Uncommon Profits." It is one of the most influential books on investing ever written. In it, Fisher outlines his investment philosophy, which focuses on finding undervalued companies with the potential for long-term growth.
Rooted in the art of gathering information from diverse sources, this method enables investors to delve beyond just financials and charts, painting a holistic picture of a company's potential.
Understanding the scuttlebutt method
At its core, the scuttlebutt method revolves around the art of gathering insights from various stakeholders associated with a company—customers, suppliers, employees and even competitors. This methodology transcends conventional financial analysis, aiming to capture the qualitative essence that numbers fail to convey. By engaging with those directly involved in a company's operations and interactions, investors can obtain a nuanced understanding of factors that might otherwise remain concealed.
The very term "scuttlebutt" carries a historical maritime connotation, harking back to sailors gathering around a water barrel to exchange rumors and gossip. Fisher ingeniously adapted this concept, applying it to investing as a means of collecting unofficial information about a company that is not necessarily publicly available. He believed that this information, often hidden from financial statements, holds the key to identifying companies with potential for growth and long-term value creation.
The mosaic theory
The CFA Institute calls this method the mosaic theory. The scuttlebutt method unveils a treasure trove of information, encompassing aspects like the company's products or services, its standing in the competitive arena, the proficiency of its management, its financial trajectory and its commitment to innovation. By piecing together these fragments, investors can create a comprehensive mosaic that facilitates well-rounded decision-making.
Central to Fisher's doctrine is the recognition that the scuttlebutt method is not a panacea, but rather a nuanced tool that requires careful navigation. The information procured through informal channels might be skewed or inaccurate, making cross-validation and discernment paramount. Additionally, the method can be resource-intensive, demanding substantial time and effort. Nevertheless, for those willing to undertake the journey, the scuttlebutt method can yield invaluable insights.
Buffett's perspective on the method
Warren Buffett (Trades, Portfolio) spoke about the method at the 2018 Berkshire Hathaway Inc (BRK.A, Financial) (BRK.B, Financial) meeting.
"We want to see a lot of — if we’re talking about a consumer product — we want to see how a consumer product behaves under a lot of different circumstances, and then we want to use something — actually, there was a book by Phil Fisher written around 1960 called 'Common Stocks and Uncommon Profits.' It’s one of the great books on investing. And it talks about the 'scuttlebutt method' of investing, which was quite a ways from what Ben Graham taught me in terms of figures. But it’s a very, very good book. And you can learn a lot, you know, just by going out and using some shoe leather. Now they call them channel checks now or something like that. But it’s — you can get a feel for some products, and then there are others you can’t. And then sometimes you’re wrong. But it is a good technique. It’s an important investing technique, I would say that. And Ted [Weschler] and Todd [Combs] do a lot of that. And they have people — some people that help them out on doing it, too."
Guiding principles
To harness the method effectively, a few guiding principles come into play.
First, amplify your network. Engage with a diverse range of individuals associated with the company—customers, suppliers, employees and competitors. Each perspective contributes a unique piece to the puzzle.
Second, listen attentively. Attune yourself to the voices of those you engage with, capturing both positive and negative sentiments. This qualitative data often harbors deeper insights than quantitative metrics.
Additionally, while openness is essential, skepticism is your ally. Validate the information received through multiple sources whenever possible to counterbalance potential biases.
Be sure to form your own judgments. Utilize the data as a canvas upon which you paint your own impression of the company. Independent analysis, informed by Scuttlebutt insights, is key.
Finally, leverage expertise. Engage third-party research firms proficient in conducting scuttlebutt-style investigations. Their expertise can enhance the depth and accuracy of your insights.
Practical applications
In practice, the scuttlebutt method is dynamic and adaptable.
For instance, image you are contemplating an investment in an electric car manufacturer. As part of your process, you delve into the scuttlebutt method. Conversations with car owners reveal satisfaction with the product's efficiency and design. Engaging suppliers provides insight into production practices, while employee perspectives hint at the company's workplace culture. This multi-faceted approach fleshes out the company's viability beyond financials.
As another example, say you are exploring a health care software developer. Interactions with medical professionals expose user experiences and software efficacy. Competitor viewpoints shed light on market positioning. Conversations with current investors offer insights into the investment climate. This mosaic of viewpoints guides your judgment.
Consistent trajectory of the scuttlebutt method
While each case is unique, the scuttlebutt method follows a consistent trajectory:
- Customer sentiment: Gauge customer satisfaction and perceptions of a company's products or services.
- Competitive insight: Understand the company's place in the competitive landscape, as well as its comparative strengths and weaknesses.
- Management evaluation: Assess the competency and history of the company's management team.
- Financial context: Contextualize the company's financial performance and discern its potential for future growth.
- Cultural and innovative exploration: Uncover the company's culture and dedication to innovation, both crucial elements in sustained success.
The value and limitations of the scuttlebutt method
It is important to acknowledge the scuttlebutt method is not devoid of limitations. Information collected might lack accuracy, and the method itself can be resource-intensive. However, for investors willing to navigate these challenges, it offers a pathway to unearth hidden insights, thereby enhancing the accuracy and depth of investment decisions.
In conclusion, the scuttlebutt method serves as a valuable tool in the pursuit of uncovering promising opportunities. By soliciting diverse perspectives and weaving them into a comprehensive narrative, this method widens one’s perspective from conventional financial analysis. However, the effort demands diligence, skepticism and discernment. By embracing the scuttlebutt method's principles and adapting it to specific scenarios, investors can embark on a path of informed decision-making, guided by the signals emanating from the marketplace.
