When Warren Buffett (Trades, Portfolio) doubled Berkshire Hathaway's (BRK.A, Financial)(BRK.B, Financial) stake in Apple (AAPL, Financial) in 2017, he said it was a result of using the “scuttlebutt” method. During the summers, he takes his great-grandchildren and their friends to Dairy Queen for ice cream. And, Buffett being Buffett, he noticed the kids were so busy with their iPhones they hardly talked to him. That scuttlebutt helped him decide on an even bigger commitment to Apple.
Buffett got the scuttlebutt idea from Philip Fisher’s 1958 book, “Common Stocks and Uncommon Profits and Other Writings.” As elaborated in chapter two, Fisher began by referring to it as part of his discovery process for finding outstanding stocks. But the book’s emphasis soon changes to due diligence.
He starts by offering the ideal due diligence process: Hiring a highly skilled manager who knows about business and investing, give him or her full access to every department of the companies he or she investigates and then receive a detailed report about the pros and cons of the company. Obviously, that is not going to happen for us “average” investors.
So instead, he recommends the scuttlebutt method, which he said should serve investors very well. At the same time, he recognizes average investors will balk, saying they do not have access to such information. Still, Fisher thinks that understanding how the scuttlebutt process works should help them understand the companies they are investigating.
It will be helpful to anyone using a professional advisor because understanding the process will help them evaluate the work of the advisor. In addition, investors who understand what can be accomplished may occasionally, serendipitously, surprise themselves with what they can add to the advisor’s work.
Fisher argued that the business grapevine can provide an accurate snapshot of a company’s strengths and weaknesses. This would come from listening to what’s being said about the company by multiple stakeholders, including competitors, vendors and customers. He also recommended the executives of trade associations and former employees (after making allowance for potential bias).
All in all, scuttlebutt really means any information outside of the standard channels that might provide a fuller or more accurate picture of a company’s prospects. This is especially true of information that helps make sense of the hard data.
Like most other average investors, I would argue that since I am not a fund manager or a professional investor, I would not have the same access to inside (but not insider) information. As an average investor in the Internet age, however, I may have more access to information than I had assumed.
Provoked by the ideas in the scuttlebutt chapter, I asked myself how much I could learn about a company given my access to what is sometimes called “The Information Superhighway.” The following is a partial list of scuttlebutt sources available to investors with an Internet connection:
GuruFocus
Starting at home, this website is a vast repository of information about stocks and the professional investors who buy and sell them. There are literally thousands of articles available; you can find them by doing a search on many pages of the site.
You also can use a search engine, entering a term such as “gurufocus general motors (GE)” (without the quotation marks). I like using search engines for GuruFocus searches since more information appears for each result, allowing me to select more quickly.
And don’t forget the GuruFocus forums: one each for general discussion, investment ideas, Buffett and books. They are available by clicking on the Forum heading in the blue menu ribbon at the top of most pages.
Want a steady flow of information about a specific company or any subject under the sun? Several services monitor a wide range of web sources and collect articles on designated subjects.
For example, I use the free Google Alerts for each of my holdings and once a week receive an emailed list made up of titles and a few dozen words of description. Here’s an example:
I don’t spend a lot of time reading the specifics in the articles in the alert. Instead, I’m watching for warning signs such as short seller interest or news that the company is slipping in some fundamental way.
Sometimes it’s necessary to tweak the alerts to avoid too few or too many responses. There are also settings that allow you to adjust how often you receive them and so on.
Peter Lynch
One legendary investor, Peter Lynch, took scuttlebutt investing to new heights. In his book,
“One Up On Wall Street: How to Use What You Already Know to Make Money in the Market,” he explained how he had used everyday tidbits of information to find some of his greatest successes. And, as the subtitle implies, he believed any observant investor could do the same.
Two of his most prominent investing successes were L’eggs pantyhose and La Quinta hotels, which is now part of Wyndham (WYND, Financial). He did not find L’eggs himself; instead, they were found by his wife when she shopped at a supermarket. There were several factors that Lynch liked about the product, including the fact it was the first female hosiery to be sold in a mass-marketing outlet. Previously, they were sold only in retail shops women visited once every six weeks on average; now they were being sold in retail stores that women visited twice a week, providing L’eggs with 12 times as many opportunities to make a sale. Not surprisingly, sales volumes of L’eggs rose dramatically and made the company’s shareholders a lot of money.
Lynch discovered La Quinta when talking to another hotel company; it was able to offer the same rooms as Holiday Inns, but for 30% less. The new chain had decided to focus on business travelers and, as a result, had eliminated wedding areas, conference rooms and restaurants, all of which added costs but not necessarily profits.
These are just examples of scuttlebutt sources. There are obviously many more, including the loved and hated social media. In any case, scuttlebutt remains alive and well. Fisher codified what many were already doing and made it an essential part of many investing analyses.
(This article is one in a series of chapter-by-chapter digests. To read more, and digests of other important investing books, go to this page.)
Disclosure: I do not own shares in any company listed, and do not expect to buy any in the next 72 hours.
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