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The Sleuth Investor

April 06, 2008

The Sleuth Investor, by Avner Mandelman, is easily one of the best books on the method of investing that's been written recently--and I would put it in the top ten ever written. It shows how to discover exclusive information before other investors, or even insiders, do. And it shows how to profit from knowledge obtained in this manner accordingly.

"Exclusive information," Mandelman says, "resides in three physical attributes of a company, of which people are only one." The three, in descending order of importance, are:

1. People (the company's own, it's customers, and its suppliers)

2. Product (both the company's own, including services, and those it consumes as supplies, as well as competing products)

3. Plant (factories or offices where the work is done) and Periphery (everything else that impinges on the company from the outside, or that the company impinges on, and so leaves physical traces)

How to sleuth for information from these sources? Mandelman counts off the ways, and these are numurous. But a lot of them aren't very difficult to do, or time-consuming. Most involve simply picking up the phone and talking with a lot of people.

Do you want to know more about the source of the company's revenue stream--if not the product itself? An annual report won't help you nearly as much as having the product the company sells in your hands. How is the packaging? How long did it take to get to you? How were the sales force acting? Does it work? Is it worth the price? And so on.

As for the customers--one of the most crucial factors in future earnings--Mandelman advises looking at these people as, um, people. And talking to them. Why did they buy the product, or use the service? Would they do so again and, if so, why? Have they found the salesforce to be honest? What do they think about the other options, and why wouldn't or didn't they choose those instead? Can they afford the product and are they incentivized for buying it? Who makes the buy decision and how long of a wait is that? You get the point.

In asking questions like this across the different areas noted above, a sleuth investor will obtain lots of information about a company that simply can't be found in reports submitted to investors--and certainly not in the squiggly lines that appear on a stock chart.

The content alone is important, but also important is how it is delivered. The tone of voice of an upper level or lower level employee when s/he responds to a simple question asking how things are going is real information. While maybe not actionable in and of itself, taken together with the rest of one's sleuthing it can lead to some very good opportunities (either to go short or long an equity investment). Contrast the body language, tone of voice, eye movements and so on of Alan Schwartz (BSC's chief executive) and Bill Doyle (PotashCorp's CEO) in their recent CNBC appearances. They both were telling us something, pretty clearly in fact, and while not actionable in and of itself, this was important data to focus on.

We all share information when we talk (and sometimes when we don't) by our stance, our tone, our eyes, and so on. Although Mandelman doesn't use the analogy, possibly because gambling analogies are over-used, looking at the numbers alone is like sitting at a poker table where one purposefully ignores everything but what cards are dealt, and what cards are in one's hand. While he stresses the supreme importance of buying cheaply, and falls in the value investing category, he would have us to look at our opponent(s), talk to those who played against them before, and figure out their tells. The advantage over just looking at the cards is clear. And it goes to the person who does the extra work--in the market or at the table.

In conclusion, The Sleuth Investor is a modern and in my opinion much-improved version of the classic Common Stocks, Uncommon Investments. While many will be too lazy--or too deluded with EMT nonsense--to put in the same amount of time and focus into an investment as a field operative would in a target, those who do so will be much better off.

Rating: 2.6/5 (14 votes)


Buffetteer17 premium member - 9 years ago
When I'm researching a company, I will usually buy one of their products. I bought a Tempur Pedic pillow, a Garmin GPS device, and an Apple iPod, for example. Sometimes this isn't very practical. Where would I put an aluminum coal rail car from American Freightcar (RAIL)? They're kind of expensive, too.
Cm1750 - 9 years ago    Report SPAM
While the sleuth approach often works, I really think it somewhat overrated. Remember the Janus commercials where they would brag that their analysts would climb into a hole to check out cable wiring to better understand a company? That didn't prevent them from overpaying for questionable business models.

I read where Warren said he rarely talks to managements before he buys a company/stock - he thought the financial results (ROE, margins, FCF) told a more convincing story than management ever could.
Danielw - 9 years ago    Report SPAM

I don't remember the Janus commercials--always enjoyed reading a book more than watching television.

In any case, the failure of one firm to live up to their marketing isn't really a knock on investing in a way that looks at the company as it is, apart from financial statements. It just means that they either weren't good at doing it, or didn't pay attention to rule number one.

To the Buffett comment: I agree that financial results can tell a lot more about the current state (and history) of a company than management could. But not always--and again it is not an either-or scenario. (Nor, I should mention, does the sleuth investing method limit itself to talking with management alone, especially without having looked at all the financials and reports first.)

Buffett and Munger actually look at non-financial aspects of a company a lot more than others. They want to know what kind of person they're partnering with to make money--they want industrious people, with ambition and most importantly integrity. They look at what motivates a person, and what sort of compensation structures the business uses. And so on.

Also, since they are almost religious about staying within their circle of competence, their many years of experience reading company reports, news on the industry, talking with management teams, and seeing cycles first-hand (to name a few) allows them to see much more "in the financials" than the person just starting out. But that's certainly not all they're looking at--in fact, in control investments particularly it's probably fair to say that the financials take second place to their judgement about what kind of people those running the concern are.

Commodity - 9 years ago    Report SPAM
I will read it and get rich.

Best to read Moody,s stock book 12 times

like WEB did and find undiscovered value gems.
Danielw - 9 years ago    Report SPAM


Reading a lot in order to discover cheap stocks, such as Buffett did and does, is the starting point of finding a stock to sleuth.

The point of the book, though, is that finding a cheap stock based on numbers is not enough. Part of this is due to the fact that what the numbers are is not as important as what they mean. The other part is that you want to find companies that are worth owning long-term.

That is the contribution that Munger made to Buffett's investment style and method, changing it from looking at cigar butt investments to true gems. The only way to know what is a cheap, three puff investment and a "franchise" is, as the book and Munger pointed out, to do some good research on the stock--looking at its management, its customers, its competitors and so on.

This book shows how to do that, moreso than any other I've read. Common Stocks and Uncommon Profits was good. The Detective and the Investor added a bit to that. But this one goes into good detail as to how to actually sleuth, or gather scuttlebutt.

It can't be done on a lot of stocks, given the time involved in actually learning a business in detail, and it does require more work than many amateur and even professional investors like to do, but it is a method that pays off well. That's why I've recommended it here.

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