Originally a nautical term, Philip Fisher first coined scuttlebutt’s usage in the investment industry to characterize the fastidious process of gathering qualitative information from a company’s customers, suppliers, managers, similar businesses, and even direct competitors to better assess its investment potential.
And while many investors—especially those with short investment horizons—do not engage in these activities, as long-term investors we believe scuttlebutt helps provides us with an edge. We make a concerted effort to engage in scuttlebutt to gain more substantive insights about a prospective company and then weigh the impact of that information against our investment thesis.
Our approach to scuttlebutt varies depending on the business model we’re evaluating. For example, while it is often helpful to talk to a company’s customer base to understand what drives their buying decisions, we may get even greater insights speaking to competitors. But regardless of our source, the key is that they are independent from the company we are evaluating.
Corroborating what we hear from a prospective company’s management teams not only reduces risk, it can also unveil new ideas and opportunities. Plus, it’s another tool in our arsenal to help sift through market noise, which we sometimes liken to a funhouse mirror—where the image is often stretched and distorted. Talking directly with the right people improves your odds of getting the true picture.