The dictionary defines scuttlebutt as talk or stories about someone that may not be true or in simple terms – gossip. Derived from sailors who would gather to share the latest gossip at sea, scuttlebutt has a more positive connotation in the investment community.
Scuttlebutt was popularized by one of the investment greats – Philip Fisher in his 1950’s book Common Stocks and Uncommon Profits, one of the top five books recommended by Valueinvestasia.com for investors!
In an updated publication of the book, Warren Buffett, one of Fisher’s most well known followers commented that “I am an eager reader of whatever Phil has to say and I recommend him to you”. I don’t think we need much convincing after that LOL.
Philip Fisher’s 15 Points to Investing
In his book, Fisher has a 15 point check-list to finding great long term companies. For today, I will present to you only eight out of the 15 points, so you might be interested to read up on his other seven points 🙂
1. Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
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. Does the company have 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?
A company that satisfies all of the 15 points to the T may only come once in a blue moon but if a particular company ticks most of the boxes, it may be worth to dig deeper! For example, for point no.5, a company might not have such a high profit margin if they are in the early years or if you are aware of any structural change that would correct its currently low profit margin, it would still be a worthwhile opportunity.
What Is Scuttlebutt Investing?
Basically Scuttlebutt-ing entails finding out about anything and everything from anyone that’s relevant to an industry. The 15 points checklist is open to all, but what’s crucial is the information we use to come to our conclusion – “Your decisions are only as good as your information”.
Say for instance, you want to find out about Raffles Medical Group Ltd (SGX:R01).
How Would You Go About scuttlebutting A Company Like Raffles Medical?
You can work your way throughout the entire value chain starting from the end of the value chain – their products. Something that doesn’t pass even the consumer stage is unlikely to be a great company. As a patient at the consumer level, you can personally experience their service, preferably for non-life threatening conditions like a health-check up!
You might start by comparing your personal experience on their services to other healthcare providers. As we all know our personal experience may be rather biased, hence we should definitely solicit the experiences from other consumers and cross-reference their experiences relative to those at other healthcare providers. In the event that consumers are willing to pay a premium for your product, the company can be said to have some form of pricing power and have to be doing something right! At the end of the day, you need someone to buy your stuff in order to make money!
Study The Firm Itself
Next you can move up the value chain to do some internal study on the firm after studying their financial data. We are looking to more qualitative indicators, such as the general attitude of the staffs – maybe a friend of a friend may be working there and you might be able to get some feedback on their culture – is their management driven and if it flows over to the entire firm? Are the employees happy at the firm? Loyalty and integrity go a long way. If the top is shady, odds would be that the bottom ain’t any better.
Check Out Their Upstream
Moving higher up the value chain, you can also try researching on their suppliers to check if they have supplier power and how they treat their suppliers.
Ask Their Competitors!
Lastly, a very understated yet effective method would simply be having a chat with their competitors! To put it simply, if you ask a few of their key competitors to rate who is at the top of the industry other than themselves and if that same company keeps popping up, we would think that it’s more than a coincidence. When a competitor acknowledges their competence, it’s definitely a reason to look into that company.
Value In Action
When it’s all said and done, investing is simple but it ain’t easy. And that’s what makes investing fun and in the scuttlebutt your way to wealth 😀
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All views and opinions articulated in the article were expressed in Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Mun Hong does not own any shares in the companies mentioned above.
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