The ScuttleBug Approach

How does one get a more accurate picture of the strength and weakness of a company?

Both Mary Buffett and P. Fisher talks about the scuttlebutt approach.

• Fisher : 'It is amazing what an accurate picture of the relative points of strength and weakness of each company in an industry can be obtained from a representative cross-section of the opinions of those who in one way or another are concerned with any particular company'.
  
  This is an investigative technique in which the prospective investor calls the competition and customers of a business and asks them about the company in question.
  
  Accordingly Buffett actually gets on the phone and calls the competition and asks them what they think of a particular company. All one would need to do is to spend some time in the library reading and make a few phone calls. Don't be shy. After all, it is your money, and if you are not willing to do at least a little work on your investment decisions, then it probably wouldn't be your money for very long. (M.Buffett, chapter 18, Buffettology)
  
  According to Fisher, the business 'grapevine' is a remarkable thing. And most people, particularly if they feel sure there is no danger of their being quoted, like to talk about the field of work in which they are engaged in and will talk rather freely about their competitors. Go to five companies in a industry, ask each of them intelligent questions about the points of strength and weakness of the other four, and nine of ten a surprisingly detailed and accurate picture of all five will emerge.

Here are some of my views.

The scuttlebutt approach ultimately gives us only the impression of a company's business. It's a perception which is not backed by any financial facts.

For example, a visit to any market would tell us that eggs sells like hot cakes in any market. But is eggs a good business to be in?

Now if we don't take a look at the financial data of the company itself, we would never know the true profitability of the business. For example, a look at any of the poultry financial data would only show that they are managed in a poor manner. Capex is spend way beyond what the earnings can actually bring in.

These stuff can't be known via scuttle butting alone.

However, on the other hand, if a company reports great set of earnings and let's assume that for example, company ABC claims that their products is generating million in sales. However if an investigative scuttlebutt approach gives one a totally different impression because the visits to ABC stores paints a totally different picture, a business that's rather quiet and worse still the stores salesperson compounds the issue more by issuing conflicting views by stating that business has been rather poor. So in this instance, the scuttlebutt contradicts ABC financial data. And if this is the case, shouldn't one have doubts over the company's financial data?

Speaking to employees is a good scuttlebutt approach but it has its limitations because the integrity of the employee is in doubt too! This is because all kind of folks exist and if we are not lucky, we could run into a big talker who gives us nothing but distorted information! Or what the possibility that the employee we talked to has a personal vendetta against the company? And what about the position of the employee? Is it safe to assume the higher the position in the management level, the more accurate the information we will get?

So for me, the danger of scuttle butting is the accuracy of our scuttlebutt itself. Just how accurate is our info? And not forgetting our own ability to decipher the info accurately ourselves.

In conclusion, I do agree that the scuttlebutt is a good exercise to do but it should not be abused, for it has its limitations. Meaning to say, I reckon that one should not base their investment decisions solely on scuttle butting.