Scuttlebutt

Scuttlebutt is the art of investment research through old-fashioned detective work. The term originates from the naval slang for a water cask (a “scuttled butt”) where sailors would gather to gossip and trade stories. In the investment world, it was popularized by the legendary investor Philip Fisher in his classic book, “Common Stocks and Uncommon Profits”. The core idea is to move beyond official company documents like the annual report and instead gather information from a wide network of human sources. It involves talking to customers, suppliers, competitors, former employees, and industry experts to build a qualitative, on-the-ground understanding of a company. For a value investing practitioner, scuttlebutt isn't about finding hot stock tips; it's about verifying the story behind the numbers and gaining a deep insight into a company's competitive advantage (or lack thereof), the quality of its management quality, and its long-term prospects.

Financial statements tell you where a company has been. Scuttlebutt helps you understand where it's going. While any investor can download a quarterly report, very few take the time to investigate the reality behind the figures. This investigative work can provide a significant “information edge.” Think of it this way: a company's report might boast about rising sales, but scuttlebutt can reveal why. Are sales rising because customers genuinely love the product and are switching from competitors? Or are they rising because of a temporary, deep-discount promotion that is destroying the brand's long-term value? Scuttlebutt helps you answer the crucial questions that numbers alone cannot:

• Does the company have a strong culture that attracts and retains top talent?
• Is management truly respected by its employees and business partners?
• Are customers loyal, or are they one price increase away from leaving?
• Do competitors secretly fear this company's innovation and efficiency?

Answers to these questions are the building blocks for assessing a company's moat and forming a conviction that goes far beyond a spreadsheet.

Philip Fisher, a major influence on Warren Buffett, laid out a systematic approach to scuttlebutt. It’s about asking the right questions to the right people to assemble a complete picture of the business.

Your goal is to get a 360-degree view of the company. Fisher recommended speaking with a variety of sources:

• Customers: They are the ultimate arbiters of a company's success. Why do they buy the product? What do they think of the service? What are the alternatives they've considered?
• Suppliers: They have a unique view of the company's operational efficiency and financial health. Does the company pay its bills on time? Are they easy to work with? How do their orders compare to others in the industry?
• Competitors: This can be tricky, but often revealing. What does the competition admire or fear about the company? Where do they see its weaknesses? Even hearing “no comment” can be telling.
• Former Employees: An invaluable source for understanding company culture, morale, and the true character of senior management. Why did they leave? Was it a great place to work?
• Trade Associations & Academics: These experts can provide a big-picture view of the entire industry, helping you understand the major trends and challenges a company faces.

The goal is to have “intelligent, probing conversations.” Your questions should be open-ended and designed to understand the business, not to ask for stock advice. Focus on areas like:

• Business Strengths: What does the company do better than anyone else?
• Management Integrity: Is the leadership team known for being honest and straightforward?
• Sales & Marketing: How effective and ethical is the sales organization?
• Industry Outlook: What are the long-term opportunities and threats for this industry?

You don't have to be a high-powered analyst with a Rolodex of CEOs to do scuttlebutt today. The internet provides a wealth of resources for the everyday investor:

• Professional Networks: Websites like LinkedIn are perfect for identifying former employees or industry experts.
• Employee Reviews: Sites like Glassdoor can offer clues about company culture, though individual reviews should be read with healthy skepticism.
• Online Communities: Platforms like Reddit or specialized industry forums can be goldmines of candid conversations among customers and employees. Searching for a product name can reveal passionate fans or frustrated users.
• Customer Reviews: E-commerce and review sites (Amazon, Trustpilot) provide direct feedback on product quality and customer service. Look for patterns in the praise and complaints.

After your research, your findings should help you answer these key value investing questions:

1. Does the scuttlebutt confirm or deny the existence of a durable moat?
2. Does it provide real-world evidence of honest and competent management?
3. Does it reveal a healthy company culture that fosters long-term success?
4. Does it uncover significant risks not highlighted in official reports?
5. Does it give you a qualitative “feel” for the business that you can't get from a screen?

Scuttlebutt is a powerful tool, but it comes with two important warnings. First, beware of bias. A single disgruntled former employee or a single rave review from a super-fan is just one data point. The power of scuttlebutt comes from building a mosaic theory—piecing together many small, varied bits of information to form a complete and nuanced picture. Second, and most importantly, never seek or trade on material, non-public information. This is illegal insider trading. The goal of scuttlebutt is to connect publicly available dots that others have missed and to gain qualitative insights, not to obtain illegal secrets. Stick to questions about culture, product quality, and industry trends, not “What will next quarter's earnings be?”