The Scuttlebutt Method of Investing can be a critical component of the Investment Process. The idea behind “Scuttlebutting” is to collect important pieces of information from a variety of resources. It is an unorthodox way of gathering intel that forms a Qualitative analysis approach to deep research. Moving beyond the conventional quantitative, financial and valuation analysis and listening to the business “grapevine” to assess a company’s true potential.

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What is Scuttlebutt?

In order to understand the application of Scuttlebutt to investing, it is necessary to know its origins. By knowing how the term was coined, we can better understand how it can be used in fields such as investing, which require more than just financial comprehension to succeed.

Out of the various investment methods, the Scuttlebutt approach is one that I value greatly. Though it can be challenging to implement, it has the potential to provide an informational advantage over other investors. Information is readily available, but those who are willing to put in the effort, conduct thorough research, and ask the right questions are in a better position to take advantage of opportunities or make informed decisions.

The Scuttlebutt Method is based on the concept of gathering information from key sources, which is an unusual and valuable skill. The term was first coined by Philip Fisher in his book Common Stocks and Uncommon Profits as he outlines his investment process that almost exclusively focused on qualitative research on ideas.

Scuttlebutt is a nautical term from the 19th century that means “gossip or rumour”. On board ships, there was a barrel of water on the deck with a hole for a cup. The scuttlebutt was a drinking fountain, with “scuttle” meaning drill and “butt” meaning cask. Sailors would gather around it, gossiping, discussing rumours and hearsay. They would ask each other “What’s the Goss?”.

Imagine this as a modern-day water cooler in an office where employees gather around to chat about anything and everything. This term is a fantastic analogy for the process of deep research using unconventional methods. Implementing “Scuttlebutt” may be vastly different from Philip Fisher’s days due to technological advancement and the accessibility of information, however, the core ideology remains the same.

How does the Scuttlebutt Method work?

There are several methods used to research a company. Many investors rely on financial and quantitative analysis, which doesn’t fully reflect the long-term value or potential of a company. If we plan to hold a business for a long time, we must understand everything about that company. This includes understanding the business model, future potential, competitive landscape, value chain, and other important aspects. This will help investors make informed decisions, not only for buying but also for selling.

The Scuttlebutt Method involves gathering information from all stakeholders involved in the idea being researched. This includes engaging with sources that are directly and indirectly involved. The aim is to uncover hidden pieces of information that are often nuanced in conversation around the water cooler. The goal is not to access information that is not accessible to the public, such as insider trading. Instead, this method aims to connect the dots to shed light on investment ideas.

Investing without research is like playing stud poker and never looking at the cards.

Peter Lynch

When gathering information about a company, there are many resources beyond the company’s annual report, financial statements, media articles, or analysis reports. This information is available to everyone. Scuttlebutting, on the other hand, requires a more in-depth approach. This involves reconnaissance and some “investigative journalism” to conduct deep research. Various sources, from customers and suppliers to competitors and employees, can provide insights that are out of reach for other investors.

There are many channels that can be used to help the process. The best way to understand a business is by talking to those associated with it. Gathering firsthand information and looking for anomalies or unusual pieces of valuable information can help put the company into perspective.

Why is the Scuttlebutt Method important to private investors?

Private investors who actively invest by selecting individual stocks should implement a rigorous investment process to achieve their goal of compounding their capital. Regardless of their investment style, there is no substitute for in-depth research. Every investor must research and analyse companies before investing.

Some investors lean towards quantitative analysis, while others prefer qualitative analysis. I believe that a combination of both approaches is always a good move. Some companies require more valuation and financial statement analysis, while others require more research on industries, competitive landscape, the future, and where a particular company could fit in.

The business “grapevine” is a remarkable thing.

Philip Fisher

In large-cap companies, my focus primarily revolves around quantitative analysis. There is little information available that I can leverage, so my main goal is to buy a great compounder at a reasonable price. However, most of my investments are in smaller companies, where a stronger focus on qualitative factors is necessary. Valuation is important, but my primary focus is on the future of the business. I want to know how it has performed, where it could go, and what could hinder its trajectory. The Scuttlebutt technique is the best way to carry out this type of research.

This approach allows me to develop a higher conviction in the companies I want to own or already own. It enables me to remain stable when the market is unpredictable and to sell when certain signs start to show, which means I can sell before others. This may not seem important, but when dealing with stocks that lack liquidity, the buy-and-sell spread can be drastic.

Having an informational edge is a cornerstone of my own investment process. If investors have no edge, then it becomes hard to generate Alpha and can lead to sub-par returns.

The 4 Cornerstone areas of Scuttlebutting.

People talking is the basis of the concept. The modern-day water cooler is truly a powerful way to gather intel. In addition to this, other investors are willing to share information and engage. This openness is very helpful in a two-way flow of information.

Those who have the patience and the time to collect information from a variety of resources and piece it all together can make better-informed decisions with fantastic financial results. It is like an investigation, stringing together all the evidence, facts, and gossip to find “Who did it?”. The four areas are:

1. Customers and Consumers that interact with the business.

2. Competitive Landscape including current and future threats.

3. Value and Supply chains that allow the business to operate.

4. The Employees (past and present) and workplace culture.

The Scuttlebutt Method refers to a process of gathering as much information about a company by talking and engaging with the above stakeholders. The above list involves people, and it’s in people that we can discover a crucial piece of information by sifting through the gossip and rumours.

Methods used to Scuttlebutt for information.

The Scuttlebutt method involves analysing the grassroots level of a business to gain insights. This research can be conducted online, through phone calls or by other means. The focus is on qualitative factors. Traditionally carried out with a “boots to the pavement” style approach. However in today’s digital age, there are many ways it can be carried out.

By gathering information in this manner, we can understand why certain companies are performing better than others, look to the future and identify potential contenders or threats. The value chain is an essential aspect of this method, which can reveal hidden opportunities for investment ideas.

To me, Scuttlebutt is all about innovatively conducting in-depth investigative research. It is vital to avoid information bias and not act on every single piece of information gathered. Reading between the lines is crucial, and we must only act on the information that may contribute to the end performance of a company.

Methods requiring psychical involvement.

These methods can be acted on if you can physically go out and conduct this research in person. It can also be done by engaging in phone calls and emailing stakeholders directly (which requires some extra work). Some of these methods are just not feasible for most private investors.

Method	Why?
Visiting Stores, showrooms, and retail outlets.	To understand the product firsthand, to see how the products move. Watching customers engage with it, what are they saying? How are employees selling it? What do they say about the product? Do they use it? Do they recommend another better product or competitor?
Talk with Wholesalers or Distributors	Some products and services are sold through distribution channels and wholesalers. What do they say about the product? Why have they chosen to sell and promote it? Is there another product they find better? What are the pros and cons in their eyes?
Site visit to the factories and company facilities.	Where are the products made, or the services delivered from? What staff are hanging around that you can ask a few questions? Does the place present well? Organised? Safe? Clean? Can you assess the culture?
Customer interaction and consumers.	Customers the end users of a product or service will usually always tell you about a bad or good experience. Ask them what they think of the business and its products. Would they switch to another one? Conduct consumer research.
Purchase the product or service yourself.	Testing out the product and service yourself is a very helpful way to get a greater understanding behind why something is growing or perhaps shrinking. Is it superior or inferior?
Find the Value Chain and reach out.	Reach out to stakeholders of the value chain. How do they stack up? Is the company a good client?

Other Methods used to conduct deep research digitally.

To help private investors conduct Scuttlebutt without having to physically go out and fly to places, I’ve outlined several techniques I’ve used to gather intel on companies.

• Employee Reviews: Finding out what employees are saying on (Glassdoor, LinkedIn, Indeed, and SEEK) and how they rate a business can help shine a light on management, workplace culture, and employee relations.
• Forums & Private Chat rooms: Chat rooms if carefully vetted can provide a tremendous amount of research and “Scuttlebutt” about a company, competitors, and information others have gathered from “Investigative Journalism”.
• Study Industry Trends: Understanding an industry, the trends and the sector’s future can help see how the business will fit long-term. Is it being innovative to meet these evolving trends?
• Product and Service Reviews: Find out what people are saying (Amazon or Google). Customer feedback is important. What are the consumers talking about, what is a concern or positive?
• Watch interviews from Management: Do you want to back this CEO or team? Do they look like a team capable of delivering the company’s strategy?
• Google Trends: Track keywords, what are people searching for, and how does that relate to your company? Is it a trending product growing, or declining? Does it reveal competitors are more searched?
• Annual Report: Look at listed competitors, and research them. Why are they are threat? Could they jeopardise the future of this company?
• Networking: Connect online or via phone with industry professionals, and other private investors, reach out to analysts to ask questions and gather insights.
• Value Chain and Supply Chain: Email them, reach out and ask them who they are supplying. Where do they see the industry, the business going? Often they will talk of a notable competitor.
• Finding Unlisted Competitors: Screening and building an industry map of competitors.

Philip Fisher’s 15 Question Checklist when Scuttlebutting.

Philip Fisher implemented a 15-point checklist in his book, Common Stocks and Uncommon Profits. These questions formed his investment process and can be used to conduct thorough Scuttlebutting on Ideas. I think it is a great way to look at companies in an unconventional approach.

Whilst not all of these questions relate to Scuttlebutt it does give direction to the areas that an investor can focus on when researching using the above techniques.

1. Does the company have products or services with sufficient future market potential?
2. Is management determined to continue to develop new products or processes?
3. How effective are the company’s research and development efforts in relation to its size?
4. Does the company have an above-average sales organization?
5. Is the company generating a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personnel relations?
8. Does the company have outstanding executive relations?
9. Is there depth to its management?
10. How good are the company’s cost analysis and accounting controls?
11. Are there other aspects of the business, somewhat peculiar to the industry involved?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future, will the growth of the company require sufficient equity financing?
14. Does the management talk freely to investors about its affairs?
15. Does the company have a management of unquestionable integrity?

Alternative ideas when “Deep Researching”

There are a few alternative ideas that I have used to research and verify a company’s growth and determine how it stacks up. I learned these methods from other investors. During discussions with management or stakeholders, they ask the below question to help focus on the right direction.

“What metric can I use to determine how to measure performance?”

By asking this question, I have been able to scuttlebutt by researching various areas that are accessible yet not well thought of until someone mentions them first. For example, when looking at a company that was expanding into the US market and exporting its products, I was able to focus on publicly available exporting records to see that the export size, volume, and shipping prices were growing exponentially, indicating strong growth and sales.

The reason why the export records became the focus was that someone in the value chain continued to refer to exporting and supply chain system expansion.

By watching this, it was easy to track how the company was progressing without waiting for the annual report or earnings updates. I was able to see more volume, more product moving, and faster delivery turnaround times, showing how the product was taking to the market.

Another time I used a similar method was to gauge the public tendering process for an engineering firm. Watching how many tenders it was applying for and successfully being awarded, I was able to watch the pipeline of work slowly expand. I also gathered intel on all the companies it was competing against. This highlighted why the company I wanted to buy was far superior to its peers.

These are just ideas on what deep research entails and how scuttlebutting can lead to important pieces of information.

In Summary…

This is a brief outline of what the Scuttlebutt method can do for private investors. It is hard to gain an edge over institutions, analysts, and fund managers who have the resources to physically go out and sit in the offices of the management team.

This is simply not accessible to most investors. This is why I value the Scuttlebutt approach. I can still go into stores, look at products and services, and see how others interact with them. It is possible to talk with competitors, email contacts within the supply chain or use investigative techniques to uncover valuable insights into a company or industry.

Researching industry trends and using the abundance of available resources is where you can create an edge. A lot of investors simply don’t put in the work to conduct deep research on investment ideas. I believe that studying the annual report properly, reading all the media articles, and earnings updates, and studying the filings, and the analyst reports can form a key part of Scuttlebutting.

How many investors read these and study the resources? Most accomplished private investors I know start the annual report backwards. They don’t care for the glossy covers and headline messages. They go straight for core information.

To me, the idea of implementing Scuttlbutting is not about just any one method. It is an idea. The idea of deep research and looking at a range of resources to analyse a business.