Channel Checking

Channel Checking is the investment world’s version of old-fashioned detective work. Imagine you’re thinking about buying a company that makes a popular new energy drink. Instead of just reading the company’s glossy annual reports and listening to the CEO’s polished presentations, you hit the streets. You talk to grocery store managers about how well the drink is selling compared to its rivals. You chat with the aluminum can suppliers to see if orders are ramping up or slowing down. You might even find former employees on LinkedIn to ask about company morale. This on-the-ground research, conducted by talking to people within a company’s supply chain or distribution channel, is the essence of channel checking. It's a powerful Due Diligence technique that allows investors to get a real-time, unfiltered view of a business's health, often revealing insights long before they show up in official financial statements.

For a value investor, channel checking is more than just a neat trick; it's a fundamental tool for gaining an edge. Companies are naturally optimistic about their own prospects. Channel checking is your personal fact-checking machine. It allows you to verify (or debunk) management's claims and get a feel for the business that you simply can't get from a spreadsheet. Think of it as an early warning system. Are customers suddenly complaining about quality? Are distributors cutting back on orders? These are red flags that might not appear in quarterly earnings for months. Conversely, if you hear from multiple sources that a new product is flying off the shelves, you might have uncovered a hidden gem before the rest of the market catches on. This practice helps you build genuine conviction in an investment, grounding your decision in real-world evidence rather than just abstract numbers.

Effective channel checking is part art, part science. It's about asking the right questions to the right people and knowing how to interpret their answers.

First, identify the key players who interact with the company. Your goal is to get a 360-degree view. Sources can include:

• Customers: The ultimate arbiters of a product's success. Are they happy? Are they repeat buyers? For business-to-business (B2B) companies, this could mean talking to their corporate clients.
• Suppliers: They have a direct view of the company’s production levels. Are they receiving larger or smaller orders for raw materials?
• Distributors & Retailers: These partners are on the front lines of sales. They know what’s selling, what’s sitting in inventory, and what competitors are doing.
• Competitors: Talking to a rival's sales staff at a trade show can be incredibly revealing.
• Former Employees: They can provide invaluable insights into company culture, strategy, and operational effectiveness.

Avoid simple “yes” or “no” questions. Your goal is to start a conversation. Good questions are open-ended:

• Instead of “Is the new product selling well?” ask, “How is the new product selling compared to the old one, and compared to competitor X?”
• Instead of “Do you like working with Company Y?” ask, “What is it like being a supplier for Company Y? How have their orders changed over the last six months?”
• Always ask, “Who else do you think would be smart for me to talk to about this?”

A single conversation is just an anecdote. The real power comes from piecing together multiple viewpoints. If a store manager in Ohio, a supplier in Texas, and a former executive in California are all telling you a similar story, you're likely onto a genuine trend. Cross-reference what you hear with the company's financial reports. If the CEO claims sales are booming but your channel checks suggest otherwise, you know something is wrong.

Channel checking is the modern name for a classic value investing technique called Scuttlebutt, a term popularized by the legendary investor Philip Fisher. In his book “Common Stocks and Uncommon Profits,” Fisher argued that investors should actively “scuttle” about, gathering bits of information from a wide network of sources. This method is central to building a deep understanding of a company's competitive advantages and long-term prospects. It is a core part of the Qualitative Analysis that separates great investors from good ones.

While incredibly powerful, channel checking comes with serious risks and ethical considerations that you must respect.

Remember that you are gathering opinions, not statistical facts. A single disgruntled employee or an overly optimistic salesperson can skew your perception. Always seek out a variety of sources to get a balanced picture and avoid making a decision based on a single data point.

This is the most critical risk. There is a bright, clear line between diligent research and committing a crime. Your goal is to gather information that is not public, but also not material and nonpublic.

• Material Nonpublic Information (MNPI) is specific, non-public information that a reasonable investor would consider important in making an investment decision (e.g., “We are about to miss our earnings target by 50%” or “We are secretly planning to be acquired by Google next Tuesday.”).
• Soliciting or acting on MNPI is illegal Insider Trading.
• To stay safe, never ask for specific financial figures, unannounced partnerships, or other confidential corporate secrets. Keep your questions focused on general business trends, product quality, and industry sentiment. If someone starts offering you information that feels like it crosses a line, politely end the conversation.