A Modern Approach to Phil Fisher’s Scuttlebutt Investing

In the fast-paced world of money movers and shakers, nothing often dictates investors’ decision-making as much as the phrase “quality over quantity” does.

Generally speaking, quality over quantity would often describe a way of life, being imitated by the ordinary person when trying to decide where to eat, what car brand to buy, or to find a solution for mundane everyday needs.

However, for investors, these three words could be the difference between making a risky investment, costing them months’ worth of performance, or helping to generate substantial returns and taking their portfolios to new heights of success.

The Scuttlebutt Method: A Timeless Classic for Investors

Long before the digital and information age, where investors had to rely on intuition, and brokers were still pushing pink slip stocks over the phone with catchy sales pitches, investors were seemingly restricted to the amount of information they had on a company or specific stock.

Although not many investment strategies have managed to stand the test of time and survive countless stock-market-related crashes and economic downturns quite like that of the Scuttlebutt Method, introduced in the 1950s by the American investors and author, Phil Fisher in his book, Common Stock and Uncommon Profits.

Simply, the Scuttlebutt Method refers to a process of gathering as much information about a company by talking with members or employees associated with the company.

Originally, Fisher proposed a list of 15 questions, each unique and relating to the various financial facets of a business. Fisher suggested that seasoned professionals and would-be investors look at other things such as product potential, commitment to innovation, sales and profits, research, development, labor relations, and equity dilution of a selected company.

These facets could allow investment managers to generate better-than-expected returns on a smaller number of highly attractive equity investments throughout the long term. For smaller investment firms, however, the challenge lies in generating quality data to support their decisions, or to help evaluate potential equity investments.

“Investigating in a company’s e-commerce businesses segment can help build a more qualitative thesis for investors,” shares Mohannad ALRashoudi, chairman of MR Capital which he founded back in 2011, and now Portfolio Manager of Exacta Focused ETI Fund.

Exacta Focused ETI Fund is an international investment fund that focuses on investments in small high-quality companies.

“SimilarWeb and AppFigures deliver quantitative insights into e-commerce performance, website engagement, and app metrics. This data offers a robust picture of a company’s online effectiveness, user satisfaction, and overall reputation, aiding investors in making well-rounded decisions about a company’s potential for enduring success,” says ALRashoudi.

These strategic efforts not only play an important role throughout ordinary trading periods, – when markets are stable and investors can generate substantial returns – but over the long term, these efforts provide them with the ability to apply asymmetric strategies during riskier periods and help to preserve their capital during market declines.

A Modern Approach to Scuttlebutt

The information age has presented the average investor or curious trader with a treasure trove of insight into a company’s culture, labor relations, business affairs, and perhaps some trade secrets.

EDGAR Indexes

The Securities and Exchange Commission (SEC) website and archives should be the first place a would-be or novice investor should be looking for any information regarding a public company.

The Electronic Data Gathering, Analysis, and Retrieval or EDGAR Index is an internal database system operated by the SEC. This data system collects and performs automated validation and indexing of companies. These include companies that are required by law to file specific forms and information regarding their financial statements and any business operations.

EDGAR Indexes provides investors a clear and concise look at the physical dealings of a company, potential financial risks, and other obligatory filings that could help shed more light on a company’s long-term stability.

And what’s more, the index provides information on public entities trading and operating in the U.S. with records dating back as early as the 1990’s

SEC 10-K Filing

A 10-K filing is a mandatory document completed and submitted by any U.S. public company. The 10-K dossier will contain various information on a company’s quarterly performance, including financial reporting, business operations, competitors, risks, challenges, and management overview, among other things.

While the 10-K document is more worth than its weight in gold, any investor hoping to learn more about reading and understanding the various complexities of the dossier should tap into resources made publicly available either by the company or SEC.

Public Register’s Annual Reports

Next would be to review a company’s annual reports, usually made public to investors each quarter, either or after a financial earnings call.

More than this, the public register is an online portal that will provide investors free access to any public company financial records that trade on the New York Stock Exchange (NYSE), NASDAQNDAQ, Over The Counter (OTC), AMEX, or Toronto Stock Exchange (TSX).

Investor Relations Information Network (IRIN)

An Investor Relations Information Network or IRIN is an amalgamation of a company’s financial records. Usually, IRINs can be found anywhere online, or through a specific company, asset manager, financial broker, or hedge fund manager. These portals provide investors the opportunity to connect with other like-minded professionals to tap into new ways of approaching specific problems and find solutions that can aid their long-term strategies.

Research Portals & Merchant Archives

Understanding current affairs and economic trends plays an integral part in any company’s forward-looking success. More than this, the scuttlebutt method emphasizes using available research regarding the economy and industry-related trends as a way to better understand the success trajectory of a business. Platforms including the Brooking Institution, the Pew Research Center, McKinsey and Company, or Yahoo Finance can be of value.

There are plenty of merchant archives, often published by other public entities and organizations including the Library of Congress Research Guides, the New York Public Library, Harvard Business School, Cornell University, and Penn University Archives, among others.

People Tracker

The Forbes.com People Tracker is a dedicated portal that allows any user to search for an individual and uncover their corporate affiliations. This is a useful way for investors to learn more about a company’s director, or when a company appoints a new CEO, and a person is curious about their experience and history with the company or in the industry. In recent years, shrewd investors have been using flight trackers to see where executives of major companies are flying and whether that could indicate upcoming M&A announcements.

Glassdoor and LinkedIn

Fisher highlights the importance of employee and labor relations in a company, claiming that the desirability of a company and turnover rate are some of the most important elements investors often overlook when scouting for new stocks or investment opportunities.

Platforms such as Glassdoor and LinkedIn allow investors, prospective employees, and curious individuals an inside look at a company’s corporate culture.

Reviews published on websites such as Glassdoor are completely anonymous. Previous staffers often provide a sneak peek of what it would be like to work at the company, including a review of the CEO, their managers, or any other executive leader they may have worked with.

Everyone’s approach to the scuttlebutt method is different. According to Victor Cunningham, the Lead Portfolio Manager of the Third Avenue Management Small-Cap Value Fund using the scuttlebutt method requires investors and fund managers to have a mosaic-inspired approach when investigating companies.

“The Small-Cap Team’s approach is to always start with SEC filings to build our own narrative. Inevitably, gaps in our analysis arise. We then try to fill those gaps by networking with former employees and competitors. Those conversations often help us understand the culture and critical issues better than what we can learn directly from management. Finally, we then cross-reference those conversations with management.”, says Victor.

Victor goes on to say, “comparing the publicly available information to conversations with outsiders and management allows us to develop an independent thesis that’s differentiated from the consensus view.”

Public reviews

Usually, companies will try to respond to comments and questions, as a way to protect and uphold their online reputation. Using these insights, investors can learn more about the type of customer service a business provides consumers, and how frequently active they might be in responding to specific queries.

Final words

Given the nature of the information age, having the ability to access all of this information to form an analysis of a company or its stock still requires investors to lean on their personal experience and intuition.

While tradition seems to triumph over more modern strategies, finding a forward-looking strategy that encourages growth and long-term success provides any investor with the upside potential to grow their earnings, and increase their wealth. Although, there is some truth to be shared in the amount of quality information an investor has about a company, and the quantifying moment they are able to put these strategies to work.

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