We Study Billionaires - The Investor’s Podcast Network - TIP694: The Scuttlebutt Edge: From Research to Returns w/ Kyle Grieve

Starting point is 00:00:00 You're listening to TIP. One key to some of the legendary investors' most significant investments was their deep understanding of a business. Whether you look at people like Warren Buffett, Lelieu, or Philip Fisher, these guys just knew how to understand a business better than nearly anybody else out there. They used this knowledge to their advantage, finding investments that were unloved or orphaned unnecessarily. Today, I will cover a wide range of people that you can talk to to understand a business at an extremely high level.

Starting point is 00:00:32 From my research in the Scuttlebutt, I found four primary parties that you want to talk to to improve your understanding of a business. I'll cover precisely who those parties are and what you should ask them to enhance your own business acumen. Now, you might be wondering, why should I add the Scuttlebutt method when researching a stock?

Starting point is 00:00:50 After all, isn't reading public information enough to understand the business? And to answer that, I would say, yeah, you probably can learn a lot about a company via public filings, research reports, earnings calls, and earnings reports. But you will never understand a business to its full extent using these resources exclusively. If you want an edge in investing, you have to work for it. And Scuttlebutt is that edge that I think very few are willing to do,

Starting point is 00:01:15 but the ones that are willing to do it can get these very, very outsized returns. This episode has some great case studies to really hammer home how important Scuttlebutt is. You'll learn how legends like Warren Buffett and Lee Liu have used Scuttlebutt to find incredible investments. I'll also review some other case studies from others that have successfully sleuthed to business and reaped some enormous benefits. And then to finish the episode off and stay with the ethos of improved learning, I wanted to weave in how you can use your circle of competence to better understand industries or business templates to either double down on or to avoid like the plague.

Starting point is 00:01:49 Self-reflection and deep thinking are key to Warren Buffett's success, and I thought I'd share my framework as well for learning from my prior mistakes. If you're the type of person who enjoys introspective thinking, I think you're going to resonate with my framework. Now, without further ado, let's get right into this week's episode. Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Kyle Greve. Welcome to the InVestis podcast. I'm your host, Kyle Grieve.

Starting point is 00:02:36 And today I'll be covering a topic which is Scuttlebutt, which was made famous by Philip Fisher in his wonderful book, Common Stocks and on Common Profits. But I'm not going to go over just that book, which I did pretty recently. I'm actually going to focus on the theme of Scuttlebutt and look at a variety of really, really good resources that are going to help you become more proficient at deepening your own understanding of a business. Now, one of the most important parts of investing is gaining the conviction that the investing decisions that you make are correct. Now, there are many ways to build conviction. Maybe you are looking at the numbers and seeing that the business is growing at a pace that you're happy with. Or perhaps the company launched a new product and you think they've executed flawlessly

Starting point is 00:03:17 on that product launch. Or maybe you're tracking the returns on invested capital or maybe their margin expansion and you're observing that they're continuing to move in a desirable direction. Now, while there's nothing wrong with using these methods to improve your conviction, today we're going to look at an analytical method to really help improve your understanding of a business. And here's the thing, you know, everyone has access to the information that I discussed above, right? I can log on to FinChat or seeking Alpha and get these numbers pretty simply.

Starting point is 00:03:45 But the problem is, in order to be successful with investing, you need a variant perception in order to take advantage of the markets. And learning info that is not contained in the financial statements of a business is one of the best ways, I think, that you can accomplish this. So today, we're going to be discussing, like I already mentioned, Scuttlebutt. Now, many listeners of TIP will be familiar with Scuttlebutt. It's a concept I spoke about on TIP 646. Now, for those who don't know what Scuddlebut is, it's simply the process of learning about a business by accumulating information about that business by talking with people that are associated with the company.

Starting point is 00:04:18 Now, people who are associated with the company could be a variety of people. It could be the CEO. It could be lower level employees. It could be the sales department. It could be people in research and development. It could also be customers, suppliers and industry experts, et cetera. But let's circle back here to why Scuddlebut is so essential. So let's say I know a retail business pretty well.

Starting point is 00:04:36 Maybe this is a business that I've been thinking about selling. Let's call it ABC. Let's say I think the business is starting to get expensive. I have three pretty simple options. I can sell it, I can hold it, and I can buy more. Now, most investors will base which of these decisions are going to make based on things like intrinsic value of the business, the evaluation of the company, its growth rates, understanding and evaluating management based on earnings calls.

Starting point is 00:04:58 And that's all fine and daddy. But in the example above, I'm still making some sort of error. If I knew people intimately involved in the business and could ask them questions like, how was it working at ABC during the holiday season? I might get information that is much more valuable than looking at just the information that I gave in the example here. Now, let's say I ask a lower level employee that same question. And the response is something along the lines of work was swamped. Items were flying off the shelves and we couldn't replace them fast enough.

Starting point is 00:05:28 Oh, also, we were also shown a video by management that thanked the employees for record sales in North America. and e-commerce. Now, once you hear this news, you probably won't be in such a rush to sell your shares, as it means the business is continuing to improve. This is a real case study for me, and after hearing it, I knew I'd hold my shares longer, and I still do. But this is news I wouldn't have ever been able to use in my analysis if I didn't know the people in the industry or know the people who are familiar with that business. I know people like Philo Fisher would agree that Scuttlebutt is integral to the success of many great investors. So today, we're going to cover legendary investors and their scuttlebutt strategies.

Starting point is 00:06:03 We're going to look at things like how Warren got a master class in insurance, which helped him buy Geico shares. We'll look at how Lee Liu befriended a board member of Timberland to help him better understand the integrity and talent of the management team there. And I'm going to sprinkle in plenty of my own stories of scuttlebutt that I think will resonate very, very well with you. But first, a fair warning. Consider a few things first if you want to do scuttlebutt or sleuthing,

Starting point is 00:06:26 which I'm going to be using interchangeably here. So first of all, it takes a lot of time. Now, you know, I can go through a company's financial statements or official documents. It's still going to take a lot of time, right? But once you start understanding all the different layers of ScuttleBut that you can do, you can spend a lot of time on just one simple business. And, you know, if you want to talk to all the different parties that I'm going to be talking with today, I mean, you could easily make that into a full-time job, which some people do.

Starting point is 00:06:54 So just understand that while I think this is the best way to understand a business at a very, very deep level, you're only going to be able to do so much of it. You're not going to be able to do all of it and that's okay. But I think adding little bits and pieces of what I'm going to be covering today is going to be really, really helpful. So the second point here is that it works really well with a concentrated portfolio. As I just alluded to here, you know, if one business can take, you know, 40, 80, 100 hours to sleuth or to understand better, that's going to be a business that probably you want to put a lot of money behind and it's not going to be something where you're going to want to just put 1% in. And on top of that, if you're going to

Starting point is 00:07:29 just doing 1% positions, that means that you probably have a lot of position that if you want to do really, really deep research on a lot of positions, it's nearly impossible to do by yourself. And maybe you would need a team of other people to help you out with that. And then the last thing here is that it just requires doing a lot of work that very, very few others will do. And that's why it's so valuable. So if you're the type of person who likes going that extra mile and wants to get that just small little edge, I think this is going to be an area of your analysis that you should spend some time on improving on. And then finally here, you know, I just want to get this out of the way. I'm not describing anything illegal like

Starting point is 00:08:05 insider training. That's not what Scuttlebutter sleutting is. So there was a really good book that I read in prepping for this episode called Scuttlebutt investor. And so here's what the definition of Scuttlebutt was. The origin of the term is related to sailing. Water for consumption on sailing ships was typically stored in a scuttlebut, a butt or a cask, which had been scuttled by making a hole in it so the water could be withdrawn. Since sailors exchanged gossip when they gathered at the scuttlebut for a drink of water, scuttlebut become slang for gossip or rumors. It's not that far off from the modern office equivalent of water cooler talk. Now, another reason that scuttlebutt is so important is related to a wonderful Charlie Munger quote. He said, I never disagree with someone else's

Starting point is 00:08:48 opinion, unless I understand their side better than they do. Now, in my opinion, Scuttlebut will help you determine if a business would make a better short than a long. Now, I personally have never shorted a stock in my life, but I think if a company is likely to go down in price, that's probably a pretty good thing to know if I'm contemplating going long on that idea. Now, suppose you know that a business has, let's say, a 90% customer concentration, and that one customer who made up 90% was just lost. In that case, that's probably really, really good evidence that the company is likely to be worth just a lot less once that news comes out and probably for a long time into the future, maybe forever into the future.

Starting point is 00:09:25 Scuttlebutt can help you determine which types of events can build or destroy conviction. So there's a business that I loosely followed. It's microcap called Avicore Health. This business just crushed it going from about seven cents to 24 cents in less than a year. Then they announced a strategic shift away from pharmacies in Canada and that they would actually be going towards going international. And now the prices drop back down to four cents. So hypothetically speaking, if someone could chat with the people who were sending checks or who were the actual customers of Avicor from the pharmacies that were leaving, they would have learned that that relationship had been severed or funding had been cut and they probably could have

Starting point is 00:10:05 gotten out before this massive rundown. And they maybe could have understood that this business was going to lose their customer even earlier than the market actually did. So that's the kind of information that you can get from doing Scuttlebutt. Now, let's get into the meat of today's episode and talk about how we do Scuttlebut. The way I see it, there are kind of four primary parties that we want to talk to to understand the state of a business. So the first one is going to be customers. The second one is going to be employees. Number three would be suppliers and the fourth is specialists. So in his excellent book, which I'm going to be referring to a law here today, which is called the Sleuth Investor. The author, Admiral Mandelman, added a fifth party which he likes

Starting point is 00:10:39 to look at, which is plant and periphery. Now, he made a really good case as to why this is important and I think it is important, but we're not going to be covering that today because I want to focus more on the relationship aspect of talking with actual people. And while observing physical things is great and definitely helpful, it just isn't going to be something that I'm going to cover today because I think it would probably take too much time. So each of these four parties can be further broken down by quite a bit and that's what we're going to spend some more time here doing right now. So the first party here is customers.

Starting point is 00:11:09 So customers are people like end users. These are people who determine if the product should be purchased or if it should pass on for a competing product. These are the people who send the checks to the company to actually buy the product. You can look at current customers. You can look at former customers. You can look at potential customers. The next section here is employees. So employees is a place where I think a lot of people probably spend a lot of their time, although I think customers might actually be the most important.

Starting point is 00:11:38 But what makes up employees? So you got people like lower level employees, you know, people working machinery, if that's what the kind of business utilizes. You got people in sales and marketing department. You got C-sweets, you know, chief executive officer, chief financial officer, chief operating officers. You got people in research and development, people on the boards of directors. And then you can also look at current employees, former employees, and then also the employees of competitors of that business or in a specific industry. When looking at suppliers, there's kind of three main groups. you're looking at current suppliers, former suppliers, and potential suppliers.

Starting point is 00:12:13 And then when you're looking at specialists, there's a whole bunch of different people. You'd look at competitors, shareholders, other analysts, whether they're professional retail analysts, industry insiders, people who are doing the local news and maybe even chambers of commerce. Now let's start here with the most important people to speak to, which is customers. So I already mentioned here that I'm going to be using scuttlebutt and the word sleuthing kind of interchangeably. So sleuthing was very well covered by Abner Manelman in his book, The Sleuth investor. So Abner writes, in investment sleuthing, you use detection and

Starting point is 00:12:47 investigatory techniques to get exclusive physical information about companies in which you are considering investing. Little known facts about a company can give you a decisive edge when buying or selling that company's stock. So I just wanted to give you that definition. He talks a little bit about Scuttle Button. He, I believe, considers them to be pretty much the same thing as well, although I will admit that in Avner's book, he goes much more in-depth into sleuthing. So Abner says, and I agree, that you can learn just an inordinate amount about a business from understanding its customers at a very deep level. So he poses just four kind of questions to better understand a business by talking to

Starting point is 00:13:23 its customers. So the first one is, who are the customers? The second one is what exactly is being purchased? The third is what is actually being sold. And the fourth is why would the customer buy from the business in question versus a competitor? So let's break these down in a little more. detail. The first question about who the customer is is very, very essential. After all, it's the customers who are going to be sending checks to the company, which eventually shows up in the

Starting point is 00:13:47 top line as revenue. So Abner breaks down customers into three primary categories. So the first are the end users. Let's imagine that we're looking at a software company. This would be people who use the actual software, maybe as part of their daily life or as part of their job. So these are the people who might actually use the software, but they might not actually be in charge of actually buying the software, but they might obviously like the product so much that they're going to recommend that they use a specific product to the people who actually do send the checks. So these types of people, you know, if they're using a software that they can't live without, that's obviously very important because it means that the people who are sending checks probably

Starting point is 00:14:27 also know that, and it means that the checks are going to keep on coming in. That is a good segue here to the second customer, which are the decision makers. These are the people that might not actually physically write and send the checks, but they can approve if a specific product is purchased. So these two people sometimes are the same person, sometimes aren't the same person. And then the third and final type of customer are just the people that sign and send the checks. Again, they might not actually be the end user, a very, very important distinction. So the perfect customer is when the same person does all three of these functions, but that's just not always the case. I sleuthed this exact question on a business that sells software to Petroleum Engineers, and I got to speak to someone who was a customer of the business and used the product.

Starting point is 00:15:11 So if I look at it in the framework used above, the person I spoke to fulfilled probably the first and second functions of the customers. So they got to be the end user and they got to tell someone to basically send the check so that they could continue using it. But they didn't actually send the check themselves. Now, from what I learned about chatting with this person, it was pretty easy for them to get the software if they needed it. Luckily, the software is in kind of a duopoly. So the options are very limited. You got A or B. Now, the reason it's so important to understand these three customer categories is because there can be a specific relationship where a business isn't necessarily selling its product to the right person.

Starting point is 00:15:48 So Abner has a really, really good example in his book where he discussed this fictitious company called Alpaca Systems. So this business sold customer relation management CRM software to retail stock brokers. So let's use just Avernor's framework in this case study. So who are the customers? So the customers were the retail brokers managers and the retail brokers. Second question, what exactly is each customer buying? The manager was actually buying control of the brokers. And the brokers were getting help with improving their productivity.

Starting point is 00:16:20 But as a result of using this software, they're actually losing control over their own clients. So the third question here is, what exactly is Alpaca selling? So Admir initially thought that it was productivity tools, which it really was, but it was also control over the brokers. And Alpaca, the business didn't actually realize this at the time. So the fourth question is, why would the customer buy it? And so if you look at the brokers' managers, they bought it because the software worked. And if the brokers produced at a high level, they got higher bonuses. Additionally, it gave the firm even more control over the broker's clients because they knew more about every one of their clients. But there was a problem here,

Starting point is 00:16:58 and that was that if a broker wanted to switch firms, they often needed control of their own clients. If they wanted to switch firms and weren't going to bring any clients over, well, it's not nearly as valuable to the new firm. And unfortunately, the Alpaca system didn't allow this. So even if the brokers were using the Alpaca systems, they actually weren't using it to its full capabilities. They were doing things like keeping paper records and keeping copies of their customers info at home. That way, that gave them more control. over their clients if they wanted to eventually leave their former company. So Abner wrote, while Alpaca thought it was only selling higher productivity to its product

Starting point is 00:17:33 users, it was also unknowingly helping its users' employers enslave them. This is one of the best examples I can give of a strategic mistake. And it is one I would likely never have grasped if I had not talked to the final product users directly. Certainly, no brokerage analysts would dare to write up the above in a research report. Now, once Abner learned about this part of the business, he kind of stopped sleuthing it at a deep level and he loosely followed it. But fast forward a little bit and he actually observed that Alpaca eventually did something quite brilliant. They actually fired their customers who were the brokers managers.

Starting point is 00:18:06 And instead of selling to the brokers managers, he sold directly to the brokers themselves. So they geared the software to the specific brokers and they targeted just the highest earners. This allowed the brokers to improve productivity by using the software while allowing them to keep control. over their own clients. So if they wanted to leave, the software would still work with them, even if they left to go to a different firm. Now, this is the type of information that is readily available to anyone who's willing to go and look for it, but very few people do this kind of work. It's much easier to scan for public information in a business's financial document and use things like Google or chat GPT to get questions answered. Now, while this is better than

Starting point is 00:18:46 doing nothing, it won't give you the type of informational advantage because anybody with a computer and an internet connection can have the same access as you. Let's look at another just classic example of scuttlebut that Warren Buffett did a few decades ago. This concern to business, most listeners are going to be familiar with American Express. Warren had owned American Express stock more than once, but he's used the scuttlebut techniques on both times as part of his business analysis. So we're going to go over the first time here. And this was during the salad oil scandal.

Starting point is 00:19:14 So my colleague Clay actually just went over that in some detail on TIP 682, which I'll get linked up here. So I won't go into too much depth into it, but I will say that essentially what happened was that the market assumed the salad oil scandal would be really bad for the business of American Express. But Warren, you know, he could have just read what was written in the paper, read what all other investors were reading and concluded the same thing. But he actually did his work outside of it. He did his own scuttle butt and realized that the scandal that was going on didn't actually affect America and Express's business. So let's go over that in some more detail. Since he could tell their financial health was okay from reading public documents, he then tasked himself with finding out about the customers of American Express and if they were behaving

Starting point is 00:19:56 any differently than from before the scandal had happened. He had a very simple way of doing this. He just simply went to places that accepted American Express and he hung around the cash register. He did things like ask waiters if people were still using the American Express card and he asked if the customer behavior had changed at all. Once he deemed that their behavior had not changed, he knew that American Express was an opportunity that was lying in the open for him to take advantage of, which he did to quite a high degree of success.

Starting point is 00:20:21 Now, I'll reiterate here that Scuttlebutt he did could not be gleaned from public information. If something like this happened today, it wouldn't be that hard to reach out to, you know, a family member or friends or colleagues that had an American Express card and asked them if they're still using one. I know I own one personally. If something like this happened today,

Starting point is 00:20:38 I would continue using my hammex card as long as vendors accepted it and as long as I got my bonus points. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world. many of them operating on the front lines of history.

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Starting point is 00:24:40 Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. So to finish this section off on sleuthing customers, I'll add a few customer types that you could talk to to to help you gain information. So we kind of talked about current customers, but you can also look at former and potential customers. You want to ask things that would help you determine if the company you're looking at has a product that's actually worth buying and similar to talking with current customers. The thing that's maybe even better about talking with former or potential customers is they're going to give you unique insights that current customers might not provide because they probably don't have a filter and they don't,

Starting point is 00:25:25 maybe they're not in love with that product compared to current customers so they can give you different perspectives. So from potential customers, you can just learn things like why they're doing business with the business competitor. That alone is a really, really good question to ask, because chances are they might have actually tried the product of the business that you're looking at, and they're going to be able to compare that to different competitors' products and tell you why they think one product is better than another. And sometimes you might find that the business that you're looking at has an inferior product, and that's a very, very important thing to know. Essentially, what you're trying to do is find out why they aren't a customer.

Starting point is 00:26:01 And that alone can really, really help you illuminate any of the businesses' weaknesses that it might have. So former customers can tell you a lot of things. They can tell you why they stop paying the business in question. They can tell you what's better or worse with the new business that they're working with. They can tell you about the switching costs that were involved from using one product to switching to another product. And the thing that's really good about former customers is just the,

Starting point is 00:26:27 the amount of honesty that you're probably going to get. They're probably going to think maybe about that business and not so bright of a light, which could obviously bias them in other directions. But I think it's just a good way to get a variety of different perspectives and really, really get to the truth of why a company's products are better or worse than its competitors. Or maybe they're all the same. You never know. But I think that this information is really useful because it can really help you identify potential red flags that you might not be able to identify in any other way. Now let's move on. on to what you can learn from a business as employees. This includes people from factory workers

Starting point is 00:27:01 all the way up to the CEO. These are going to be people like low level employees, you know, people involved in marketing the business or selling products to customers, executives of a variety of different executives, research and development, board of directors, current employees, former employees and even competitors employees. One of the cool things you can do when you're first starting this is just make a list, try to find current and former employees. Former employees is a little bit harder to figure out. I personally haven't really figured that out yet. But, you know, for current employees, you want things like names, find out their connections to people inside of the business or outside of the business, and just get as much detail as you can

Starting point is 00:27:40 on people. For lower level employees, it can be a little bit harder to find them as they're not necessarily featured on a business's website. If you look at the proxy statement or a circular of a business, they're going to tell you quite clearly who are management, who are the board directors. So those names are easy to come across. But if you are looking for, for lower level employees. Sometimes if you go to a company's website, you can see if they have an about about me section and sometimes the about me section will actually talk about lower level employees. Maybe have some quotes and these quotes are usually, I don't even know if these quotes are actually from the employees, but sometimes they share their name. So an easy way to find out these employees

Starting point is 00:28:17 is put their name into Google or put their name into LinkedIn. And that's the way that I personally have found a ton of employees. And then even if you can't find the names of employees, LinkedIn's still super helpful. So if you use the search function on LinkedIn, there's actually quite a bit of information you can find. So you can go on LinkedIn, use a search function, look at the name of the company that you're looking for. Then you go to the People tab and basically all the company's employees who are on LinkedIn

Starting point is 00:28:42 who list that business as their employer will be on there. Then you can try to reach out to them on LinkedIn. Now, I'll be honest with you from my experience, this is more of a volume game. I think with LinkedIn, a lot of people use LinkedIn for jobs. So if they already have a job, they're not necessarily going to be on there probably very often. Some people are. Some people aren't.

Starting point is 00:29:02 And so like I said, volume game, you got to just try to connect with people, shoot them a DM. And there's probably a good chance. A lot of people won't answer you. And that's okay. That's just kind of part of the Scuttle Abup process. But there are enough people that will answer you that it's, I think it's worth it. So Philip Fisher had some great strategies for ScuttleBut when it came specifically to this segment here about employees. So when Philip sought answers to questions about.

Starting point is 00:29:26 what you should look for and investment with a lot of potential. He wrote, one way that immediately suggests itself is a logical but rather impractical. This is to find someone who is sufficiently skilled in the various facets of management to examine each subdivision of a company's organization, and by detailed investigation of its executive personnel, its production, its sales organization, its research, and each of its other major functions form a worthwhile conclusion as to whether the particular company has outstanding potentialities for growth and development. Now, the problem is that getting information from key personnel can be quite difficult

Starting point is 00:30:01 because oftentimes these people are very, very successful. And part of that success means that they're probably working a lot. And they also work for very, very successful companies, which have very high expectations. So a lot of times, they're not necessarily going to be too eager to just talk to some stranger about their job. And additionally, you know, some of these people, for instance, in research and development, they're probably not going to be too interested in sharing the stuff that they're working on if there's people from competitors that are listening in or whatever,

Starting point is 00:30:29 or maybe some of them even have non-disclosure agreements where they can't talk about it. But, you know, nonetheless, Phil like to look at people in things like the research and development departments as well as salespeople. You wanted to know specifically to do with salespeople if the business had the right people inside of it to continue growing. And these are things that you can learn from not only the heads of departments, but also just from lower level people in sales as well. So things that I like to find out from sales, people are, you know, just ask them how things are going? Are they enjoying their job? Are they

Starting point is 00:30:58 disliking their job? Are they busy? You know, do they have a lot of time on their hands? Or are they swamped? Obviously, you know, that can help you understand more. If someone goes from being not so busy to super busy, well, maybe there's something interesting going on in that business. You might find out how they're incentivized. Incentivization systems are easy to find on public documentation for management, but not necessarily for employees. So I'm not going to tell you to go and ask how much money someone makes, but if you just ask them how they're incentivized as a based off of a commission or whatever, that's important information.

Starting point is 00:31:30 And if you develop some sort of relationship, I think you can probably get that kind of information. Other things that are really interesting to get is their thoughts on management. Do they like management or do they dislike management? I think that's pretty interesting to know. And if everyone dislikes management, well, that's probably a pretty big red flag. And then you can just get their general observations on the direction of the business. If you talk to a bunch of people and they're all seemingly pretty down on the business, well, that's an interesting sign. And also on the other side, if everyone's very, very happy about

Starting point is 00:31:58 the business and giddy and excited, well, that's another really, really good sign as well. And then, you know, if you're talking to people about their job and you find out that maybe a bunch of their colleagues got fired and aren't being replaced by new people, I mean, that alone is a really good signal that maybe the business is very unlikely to increase its sales anytime soon. Now, another area that Philip really placed a lot of emphasis on was research and development. He knew that a business that had the potential to be worth multiples of what it was today needed an R&D department that could continue to push the company to create new, innovative, and excellent products that also had the right salespeople in place to go out and

Starting point is 00:32:34 actually sell that product to the market. So I think you can kind of lump these two areas together to some degree. So there's this trust manufacturer that I own, and it's in the beginning stages of utilizing automation to increase its output by nearly doubling it in a very short period of time once the automation equipment's completely installed. I've had the chance to speak with management multiple times and done my best to learn more about who supplies their technology and how it's going to work once it's fully installed and operational. Now, one of the main problems this business will eventually face is that they will be able to double their capacity.

Starting point is 00:33:06 And now on the face of things, this is obviously great. A company that can double capacity with minimal incremental expenses is a very good thing. still, there's another potential area that must be addressed for this whole process to be successful, and that is that they have to have the salespeople to go out and sell that additional capacity to the market. So I got a chance to reach out to a salesperson in that business. And so I asked them a few things to understand things like how the process is going with sales. I want to know, are they busy, get a read of how things are going so that I can hopefully be directly correct. You know, are they happy with the process?

Starting point is 00:33:39 Are they unhappy, lukewarm? I want to know things like, are they adding you salespeople to the team? If they're adding, that's generally a good sign that hopefully there's additional demand for their product or that they're able to find additional customers to try and send people out to sell to. Another question would be, you know, how is the automation equipment going to impact the customers? Are there customers going to get cost savings, improved service, and things like that?

Starting point is 00:34:04 So if you have the ability to chat with current employees, a few things that you should try to learn, you know, gauge their temperature on the company. Find out if they're overworked or underworked. Find out how promotions are handed. Are they happy with them? Are they unhappy with them? Find out how they're incentivized and, you know, which KPI is they're incentivized on? Find out what they think of management.

Starting point is 00:34:24 Find out, you know, if employees are being brought into the business, who are they being brought in from? Are they, is your company sealing employees from maybe competitors? Is it a specific competitor? And then, you know, on the other hand, if employees are exiting, you should try and find out where they're getting their job, are they going to a specific competitor. These are all interesting points to improve your decision making. So in the sleuth investor, Admer says one of his favorite tools for learning information is

Starting point is 00:34:49 just having beers with employees. Now, this is a method that I haven't had the time to try out yet, but I can see how valuable it would be. If you can speak with employees when they're in more of a casual setting, you're likely to get better information than if you maybe just go to the IR office of a business that's in your local neighborhood and they're just showing you around the workplace. In that scenario, you know, you might just get people that are going to be on their best behavior, even if maybe they don't necessarily think highly of the business that you're visiting just to, you know, keep their job

Starting point is 00:35:19 and make the optics look good. But in an informal setting, you may get people to open up more. But like I said, I do realize this is a lot of work, which is why I still haven't gotten around to trying it myself. A few other people who are worth chatting with are members of the board of directors. Although they have to be very, very cautious about what they say, this is probably good, you know, that you don't want them getting in trouble, giving insider information, but they can still be pretty good source of information. A few things that you can learn from them would be, you know, what value are they bringing to the company? Are they actually doing something to provide value to that board, or are they just there to pump up the CEO and agree with everything that he says?

Starting point is 00:35:58 You may want to find out how they came about that board seat. You know, was it because they went to college with the CEO or someone else on the board or maybe another executive? Or was it because they've been in the industry for 30 years and they've done incredibly well with other businesses? You should look at the track record of board members. Do they have a long track record of success or failure with some of the other businesses that maybe they've either managed or been a board member of? And then another one here that I think is really important is what are they doing for income? Is this board seat their primary source of income? Because if they're only getting income from being on boards of a few companies, that's very important because that means that they're probably

Starting point is 00:36:38 not going to go out of their way to make things difficult if they see that things aren't being managed properly. And really, the point of the board is they're employed for the shareholders, not the CEO. But if you have someone who really needs to keep their board seat, chances are they're more likely to be leaning towards agreeing with the CEO to not make their job get into any Jeopardy. So another great lesson that I've learned from talking with employees was one of Buffett's most famous investments, which was Geico. So Buffett learned about Geico when he was still a student of Benjamin Graham's at Columbia University. So he was in the library one day and he realized that

Starting point is 00:37:18 Benjamin Graham was the chairman of Geico. So I think this was just like a week later. He ended up making the trek to Washington on a weekend. And he got to the Geico HQ, but was disappointed to learn that the doors were locked. The location was closed for business. Luckily, there was a janitor who was working in there and let Buffett in. And so the janitor brought Warren to Lorimer Davidson and who was the only person who was working in that day. And he actually spent four hours answering just endless questions from a young and curious

Starting point is 00:37:48 Warren Buffett about Geico and just the insurance business in general. Warren said this one event changed his life. Now, this story has many interesting implications. It shows that you need the drive to go and do things that. 99.99% of investors just won't do, like travel on a weekend to a company's headquarters. You need to be curious about the business and come prepared with questions to show people that you really understand them to some degree. And you also need a bit of luck. If the janitor was on a break or didn't want to be bothered, he may never have let Warren in and maybe Warren would

Starting point is 00:38:19 have just passed on that business if he didn't have the drive to go and give the headquarters another visit. Now, let's transition here and discuss another critical area of a business's operations, which is its suppliers. This is an area. that Philip Fisher didn't spend too much time on in common stocks and uncommon profits. So we're going to look at two other books, The Sleuth Investor and Scuttlebutt investor for some ideas on why and how we should look at suppliers to kind of better understand that relationship between a company and its suppliers. Before that, I recently listened to a great podcast where Monich Pabrya was discussing win-win business relationships. Part of the reason for Charlie's love affair with Costco was that

Starting point is 00:38:56 the business was in this win-win relationship. Suppliers won, just like shareholders and customers. This is a pretty rare relationship to find. That's not to say that you must have these types of relationships to find successful investments, but it doesn't hurt to find out more about the relationship that a company has with its suppliers. So here's what Moni said about win-lose relationships between a business and its suppliers. There are many business models which you could call win-lose. For example, there's a company that stretches out the payments they have to make to their suppliers. Maybe they take 60 or 90 days to pay their suppliers and they use the float to improve their financials. Well, that works well for the company, but not so well for the suppliers.

Starting point is 00:39:35 So that's kind of an example of a win-lose business. Now, businesses can still succeed with these win-lose relationships, but like I said before, it's important to understand this relationship in a little more detail. There are multiple ways to look at how you can use information from suppliers to improve your decision-making. In the sleuth investor, Abner points out that you can go to the supply chain to understand the volumes and the prices of what's being supplied, and what kind of volume of supplier is offering a business. Another strategy Abner likes is getting to understand potential suppliers. If a company could be boosted by having close relationships with better suppliers,

Starting point is 00:40:10 they could see a significant boost in their value. Abner has a bunch of strategies that take a lot of work but can be highly valuable to anyone who wants to put the effort in. Now, one great story from Abner's book was about a sleuth he met who he called Michelle. Michelle had a PhD in mathematical finance, and she was hired by a Canadian subsidiary of this U.S. bank that had started an index fund. She told Advert that she'd made about $90,000 in the market in a very, very quick period of time using some of the interesting sleuthing techniques that she was lucky to be exposed to.

Starting point is 00:40:37 Let's get into some of the details of how Michelle sleuth and made this windfall. So across from Michelle's desk was the office of an investment bank, which Adler refers to as the bank of industry. Now, there are only two primary outcomes that would happen. Either the debt would be restructured, which was very good for the company and a stock price, or the bankers would force the company to pay, which tend to be unfavorable for the business and its stock price. So it's easy to understand why.

Starting point is 00:40:59 You know, if a business has its interest payments cut, that means its pre-tax income goes up and earnings will probably show a bump. If a company must pay increased interest expense, pre-tax income decreases, and earnings will suffer. So Michelle had observed that there was an ad agency that she watched where the business borrowed about $10 million from this bank. And unfortunately, what happened was the company lost a key customer. Now, the bank of industry in order to recoup its debt, wanted the business to slash costs, basically fire people in order to raise money to service the debt.

Starting point is 00:41:35 But the businesses, executives and key personnel threatened to quit en masse if the business started doing this. Now, this was a horrible proposition to the bank because for this business, employees and executives were not easy replaceable. and if they left, the company would likely be next to useless. So the bank relented and once the debt was restructured, the share price increased by 50% in a very, very short period of time. Now, knowing this case study, Michelle dreamt of being a fly on the wall in one of these

Starting point is 00:42:02 meetings. Now, obviously, there was no way for her to arrange this and taking advantage of it would be illegal anyway, but there were other ways for her to sleuth legally, which she ended up doing. So she was just a keen observer of people. And most of the time, the bankers were very cool, calm and collected while the business executives who were coming in to talk to their bankers were more nervous when they were walking in, while the business's executives were nervous walking in. But on one occasion, she observed the complete

Starting point is 00:42:27 opposite. The executives look calm entering the office while the bankers actually looked nervous. After the meeting it ended, she observed the nature of the bankers and the executives. And once again, the bankers looked ejected while the executives were high-fiving each other as they left the building. Now, during this process, she really wanted to know who this company was. And so she just looked at them and tried to find a logo or something on that would identify who they were and ended up seeing a logo on one of the shirts of one of the people that had been part of the meeting who worked for the business. So after that, she looked at their annual report and found the names and pictures of the executives, which she then used to verify their identity. It was indeed the company. Abner refers to it here as film X. It was similar to the ad agency case study I spoke about where cost cunning wasn't in the cards.

Starting point is 00:43:10 So given the behavior of the bankers and the executives, it was quite clear. to Michelle that the executives had just gotten a win in terms of their financial health. So she ended up buying shares and made about $90,000 over two days after the news of the restriction had been announced to the public. Now, here's an excellent summary of the experience. Michelle was not an employee of the bank of industry nor an employee of Filmex, not of their lawyers or accountants or anyone else defined by law as the company's insider. She had not bribed anyone nor stolen any information.

Starting point is 00:43:39 She had merely observed some physical events that took place off of Filmex's premises, in a public hallway. Yet she could say with an extremely high certainty that the business of industry was about to cut Filmex's debt and that Philmex's stock would in all likelihood soar as a result. Now, as the story of what illustrates, a business's supplier doesn't have to be the supplier in the traditional sense. It could be bankers as well. It's up to you to kind of think outside the box and use your opportunity set and skill set to find ways of observing things that are happening around you and things that you can use to your own advantage. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers

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Starting point is 00:47:31 advertisement. All right, back to the show. If you happen to find current suppliers, there's a few things that you're going to want to find out. And these are things like, you know, how big of a customer is the company for the supplier? If the supplier is the only supplier of a particular material to the company in question, how easy it would be for a company to find an alternative supplier. And you should just get an idea of what the supplier thinks of the company that they supply

Starting point is 00:47:55 to. Do they like them or do they speak about them in negative terms? A few themes here that you want to dig into is just how critical. a supplier is to your business. If your business can't run without one supplier, that information is very, very key. If something were to happen to that supplier, then your business would essentially be done if the supplier could no longer supply the business. This is why having a business with multiple suppliers is good and a good thing to know. It protects you if something goes wrong with one supplier. It's good to have, you know, another couple suppliers on hand that you can

Starting point is 00:48:25 use just in case something like that happens. Additionally, it also allows the business to negotiate rates between suppliers to find the best possible deal for the company. Also, if a supplier is the sole supplier of a key piece to many different businesses, you might run into just a great investing opportunity. There might be one supplier who's key to a whole bunch of different companies that require it for their business to run. ASML, I think, is a really good example here. I'm by no means a semiconductor specialist, but I know that that business supplies

Starting point is 00:48:55 many semiconductor businesses, the machinery that's needed to manufacture their widgets, and for that reason, ASML has made an exceptional investment, compounding at 26% per atom over the last decade. Now, just like former employees, speaking with former suppliers, can be a great source of information, as you're likely to get to the truth quickly. It also helps identify any potential weaknesses the business might have. You know, you should probe into why the business relationship was severed, what the former supplier thinks of management, the history of payments, whether they were on time or late, negotiating leverage between the supplier and the company, etc. If you find out the supplier,

Starting point is 00:49:29 because it was constantly being squeezed by the business, that's a red flag. And that might signal that there's other suppliers that may end up doing the same thing in the future. Now, let's look at specialists or people who aren't intimately involved in a business sense, but can be invaluable in learning more about the business. They're often very willing to chat and share their knowledge. The most important people to talk to in this segment, I think, are the business's competitors. Let's say you speak with five businesses that are competing with the business that you're researching, and they all identify the business that you're looking at as the business that they fear the most. In that case, that's a very, very good indicator that you've identified the leader

Starting point is 00:50:04 in that industry or niche. If, on the other hand, all your Scuttlebot identifies a different business as the one that scares everyone else the most, well, maybe that means you're looking at the wrong business. Now, here's some questions that you can ask to understand competitors and their dynamics concerning the business that you're doing ScuttleBot. Which competitors scare you the most and why? Which competitors scare you the least? And why? Who are your suppliers? What are the biggest hurdles to success in the industry today? And what are you doing to overcome them?

Starting point is 00:50:32 Are you hiring employees or firing employees? And if the competition is firing employees, who are they going to? And if they're hiring new ones, where are they coming from? Now, arguably the lowest hanging fruit in the specialist category are analysts themselves. You can often get your hands on analyst reports. Buffett is famously said that he doesn't rely on other analysts to do his decision-making for him, and I completely agree with that. But if you find other thoughtful analysts, they might know things you don't.

Starting point is 00:50:58 They can help guide or connect you with maybe people worth learning more from. Or they can just offer their opinion, which might be highly valuable on specific matters in the business, that maybe you're just a little unfamiliar with. Now, usually when reading an analyst report, I enjoy learning about their particular perspective. They might have looked at a business differently than I have. And knowing this can be helpful in the Scuttleville process. Since they have already announced to the world that they are researching the business, they're more likely to contact you if you have further questions.

Starting point is 00:51:27 But at the end of the day, Buffett is correct and you should never rent conviction from others on an idea. If you do this, you will lose money or you're going to make egregious mistakes during downturns. Now, similar to analysts are shareholders who are a very good source of information. Some of them might have already done a ton of scuttle butt themselves and can help share information with you or guide you in the right direction. I can't tell you how vital this can be, especially when you're first learning about a new business that maybe you haven't spent too much time on. It can be hard to understand what makes a company fire on all cylinders when you first start researching it. However, current shareholders will have their

Starting point is 00:52:00 hypothesis that they will share with you. So you can just go out and see if their hypothesis is correct or not and make your own. A few other areas I like looking at are industry insiders. You can find these people easily through Google. If you're researching a well-known company, you can often find news articles about it. And these articles themselves can be helpful on their own, but it's actually the lists of the people that are referenced in articles that I personally find most interesting. You can see who was quoted and you can reach out to them as well as the original author and see what kind of information you can get. There's a small cap that I'm looking at right now and I found an interesting article on bankruptcy in Canada. This has led me to contact the author

Starting point is 00:52:36 and some of the bankruptcy lawyers in the industry that were mentioned in his article. I've been lucky enough to connect with the author who provided me with some very, very interesting information as well as some other resources. And from looking at some of the people he quoted in his article, I actually landed a call with a lawyer who specializes in that area. Now, one of my favorite high profile scott techniques is from Leelieu, who my co-host, Clay, spoke about in depth on TIP 636. Leelieu gave an excellent case study about the importance of acting like a journalist when looking at a stock.

Starting point is 00:53:06 One quote stuck out to me from his presentation, which was, you got to have a very active, very curious mind and you can't be satisfied with bogus answers. He added, most people who have built businesses also have a big personality, have a history that you can go audit, and leaves a trail of evidence of what kind of person they are and what they have done, how they deal with different situations. Lelu mentions that as part of his scuttlebutt into Timberland, he went and spent a few weeks in the neighborhood where the family who owned the business lived. He mentioned things like going to their church and talking with their friends, their colleagues,

Starting point is 00:53:40 and their neighbors. He would also ask what the manager did for the community and what people thought of him. He also mentions trying to learn about family dynamics, educational history, and their history and philanthropy. Additionally, he actually found out that the son of the CEO was on a board and Lelu managed to actually get on that board. He eventually became friends with the son and with that relationship understood the business at an even deeper level.

Starting point is 00:54:05 I love this story because it's proof that the further down the rabbit hole that you go, the better the picture of reality that you'll get. But, you know, I also have to admit that doing this is nearly impossible for the average person who can't spend, you know, weeks away from their job. It may not have the means or even the inclination to put themselves up for weeks at a time. In theory, it's great. You will 100% learn a lot about a person doing this, but in reality, I'm not sure even the top hedge fund managers worldwide are going to employ the strategy if they're managing billions of dollars. Maybe they could get someone like an analyst to get their boots on the ground and learn more about the managers

Starting point is 00:54:38 that way. Now, with this thought, I want to move on to discuss some of the ways that you can use this information on Scuttle, but to make better decisions without necessarily having to leave your home for weeks at a time and spending thousands of dollars on travel costs. For those who can, well, congrats, but I think you're probably in the minority. I think what it really comes down to is building relationships. Someone like Warren Buffett has just a massive network of people who really truly want to help him. And I think these are people that he could get some very high quality information just by picking

Starting point is 00:55:09 up the phone and asking if they know someone in an industry or someone who maybe used to work in an industry that he's trying to learn more about. Now, I won't say that anybody can build as extensive a network as Warren Buffett. I know I can't, but I think I can guarantee that you can connect with some very, very fascinating people if you put yourself out there and meet people, send emails to management or investor relations and socialize with people on things like Twitter and LinkedIn. I wrote something up on Twitter about the trust manufacturer and had a follower of mine or a reader of that tweet tell me that he used their product before as a customer. That opened up a wonderful conversation, direct messages, where I used some of the questions

Starting point is 00:55:47 I listed earlier in the episode to learn more about why they went with that company and his thoughts on his experience working with them. So even if you don't want to go full sleuth, I think many great points are here to help you get an informational advantage. Bill Miller says there's three advantages that investors can get, which is analytical, informational, and psychological. While I agree with Bill that the psychological edge is probably the easiest to get, but might be the hardest to portray in reality, anybody can get an informational edge if they're willing to speak to the right people and learn more about a business. Most investors base 100% of their decision making on accessible information, things like annual reports, quarterly reports,

Starting point is 00:56:26 earnings releases, the Q&As, use items, and quantitative information that you can get on the internet. Now, like I've already kind of drilled this into you, I hope, by now, you know, the problem is that everyone has access to this information. So it's really hard to actually get a variant perception. But if you talk to the right people around a business, you can get information that maybe these massive investors or billion dollar hedge fund managers don't have access to or aren't willing to put the work in to get access to. And this is the kind of information that can keep you invested in a company when maybe

Starting point is 00:56:57 hedge funds are dumping it. If you know the long term fundamentals of the business are still in great shape, and but investors are dumping due to maybe some short-term headwind, you can take advantage of this by buying more shares. But this exact scenario depends on your conviction about an idea. And finding hard-to-find physical information will be one underutilized way to build conviction that very few will try and find. So if you do this on a few businesses, you can do incredibly well on just a few ideas

Starting point is 00:57:23 which can help propel you for many, many years. Now that you have a good idea of how to do Scuttlebutt on a business, I want to share some interesting findings about how to continue improving your circle of competence. I think Scuttlebutt and Circle of Competence are very closely related. Warren and Charlie have discussed at length how to understand the boundaries of your circle of competence, but there is an area I don't believe they've mentioned enough that I think has been integral to their improvement, but also my own improvement as an investor, as well as other investors that we've had on the show, such as John Huber.

Starting point is 00:57:53 And this is how to utilize journaling and self-reflection to become a better investor. Warren and Charlie have primarily stayed away from using words like journaling, meditation, or self-reflection, but I can only assume that during their thinking time, they're probably doing a lot of self-reflection. They're also so intelligent that they don't necessarily need to record their thoughts in a journal. However, for an average person like myself, it helps a lot to record some of my thoughts and experiences in a journal so that I can more easily reflect on them in the future. I've learned to value journaling so much because of some of my learnings from a wonderful interview the folks from journalytic did with John Huber.

Starting point is 00:58:25 In that chat, John said that one of the most significant use cases of his journaling was going back and looking at his mistakes. Since watching this, I've tried to journal more about my mistakes and get to the essence of why I made these mistakes. This alone has been very, very powerful for helping me improve. But there's another area of improvement that relates directly to the circle of competence. God and Bay had a great definition of what the circle of competence is. When you are unsure and doubtful about what you want to do, do not do it. That's it. Now, the way that I've weave this into my journaling is to look at some of my previous failures,

Starting point is 00:58:58 which identify what I'm maybe unsure or doubtful about. Now, one of the failures that I've been reflecting on is probably going to go against the grain for many of the value investors that listen to this show. Many value investors like investments whose value comes from a business's assets. For instance, you might buy a company where the assets of a business are worth $2 billion, while the company is only trading for a billion or $500 million. I've looked at a few of my previous investments and determined that I have either made very little or lost money whenever I attempt to do this exact same thing.

Starting point is 00:59:27 So from this, I can gain a new insight into where my circle of competence is strong or weak. And since my track record in this area is not good, I can assume that I'm weak. Reflecting on this, I found that a new principle was established. And so here's how I have it written in my journal. When looking at a business that is attractive primarily because it's value below with some of the parts, do not bother with the business. Instead, focus on the business from a future earnings power perspective. The sum of the parts can be seen as downside protection, but not as a reason to purchase.

Starting point is 00:59:56 I think NRP is a good example of this where I care mostly about earnings power, but the assets provide a decent floor if something were to happen to the earnings stream. Now, this is a principle that I've naturally gravitated towards over the last few years, but I think it's been worth reflecting on to ensure that I'm not making, hopefully, money losing decisions in the future. Another interesting lesson here is to track your decision-making as often as possible. You want data points that you can use in the future to help. you understand where your strength and weaknesses lie. An app that I'd highly recommend is

Starting point is 01:00:26 journalytic, which offers you just a ton of data for free. They are also very eager to improve their platform to make it more and more valuable for its users. On a recent trip to New York, I was chatting about predictions with members of the rich or wiser, happier masterclass at a dinner. Part of journalytic allows you to make predictions with an established due date. Humorously, I made a prediction back in September of 2024, and that was that the share price of Dino Polskosk was unlikely to move due to a lack of new store openings. So I was alerted by the app at the end of 2024 about three months later. And when I checked the share price, I realized it had already appreciated by about 33%. So we all had a good laugh. But, you know, really, this tells me a few things.

Starting point is 01:01:04 A, I stink at making predictions. B, at least being wrong resulted in making money, which is great because I think it's usually the opposite way. And C, I should probably not bother making predictions in the future. Or if I do, I should heavily reduce the certainty that I'm going to be correct. Now, not only can journaling help you avoid mistakes, but it also illuminates your strengths. And if you continue investing in what you're strongest at, you tilt the odds in your favor that you will continue making these successful investments. If you can continue doubling down on your strengths while avoiding weaknesses, you should have a lot more success than investing. If you journal or even think deeply about mistakes, you're going to gain pretty significant

Starting point is 01:01:41 insights into what you are doing that works and doesn't work. Additionally, you'll be able to save even more time as you learn what new ideas can go into the two hard pile at a much quicker pace. Or if you identify a weakness in your thinking, if you have time to learn more, now you know certain areas you can learn about to maybe turn a weakness into a strength. To finish today's episode, I just want to go over five of my biggest takeaways that I think listeners can hopefully utilize to improve their scuttlebot and decision making. So when discussing customers here, Learning for customers is just crucial to learning about a business. You can take the Peter Lynch approach and research businesses that you're already a customer

Starting point is 01:02:17 of. Lynch gave the example of going to the shopping mall and learning more about a business that way. You can talk with family, friends, colleagues to see which products they can't live without. You will understand the product and what makes it great if you are the customer. You will know why you use it versus a competitor. You'll appreciate the switching costs involved with using a different product. You'll know if the product keeps you as a captive customer and if you are annoyed or happy to pay more over time.

Starting point is 01:02:40 For instance, I see the prices of streaming services continue to increase while I think the service isn't getting any better. Amazon hasn't really increased prices, but now it shows ads every time I watch it. Netflix continues raising its ad-free prices or allows you just to go with ads but at a reduced price. And Disney seems to be just increasing its prices, but not showing hats. So, you know, I know personally that I like Netflix's library the most and the pain from having to pay more hasn't forced me to cancel yet.

Starting point is 01:03:09 But if you think in this light about the product of a business you're researching, you're going to learn some very valuable information. The second point here is just on sleuthing employees. So if you're talking with the CEO and they say that part of the reason the business has had so much success is because of the culture. You're only going to really know this if you start talking with people that are intimately involved with the business. A CEO can, of course, say a culture is good. And then when you talk to people, find out that the culture is horrible or there is no culture. and that's very important information because culture is very, very important, especially if you're a long-term investor. And the only way that you're going to find this out is from talking with employees or you're going to find out when it's too late and the share prices is probably going to go down on you.

Starting point is 01:03:50 So you can also just learn a lot about actual management from talking with employees. They can help you understand if a management is well liked and effective. If everyone dislikes management, that's a pretty red red flag and that means that you should probably find out why. And if maybe there's a suitable replacement who might be even better than the current manager. Another good thing about talking with employees is getting an update on the business. I luckily know a few CEOs of companies that I own and they've been invaluable to me when I have questions to ask or want an update or maybe there's a gray area that I want to understand better.

Starting point is 01:04:20 If you go to events where CEOs go, you know, trade shows for something or something like that, I don't think it's too tough to establish some rapport with them where they're more likely to answer your questions in the future. So a third one here on suppliers, you know, for me personally, I'm a long-term investor. So, you know, sleuting for events that are only going to make a difference to the share price for a quarter or two or, you know, even a couple days, it just doesn't interest me very much. So the part about suppliers that interests me the most is finding out how they're involved in a business's supply chain I'm looking at. You know, if I know a supplier likes working with a company and wants to keep their business and has great relationships, that's very, very valuable. And it shows that hopefully this business will continue being supplied by their suppliers for a long period of time.

Starting point is 01:05:01 You know, for any investor, whether you're looking at a manufacturer or a tech business, there's usually a supplier angle. And, you know, I think learning more about that relationship can be very helpful in learning more about how just the business works. The other interesting part about suppliers is that finding out who they are can be pretty difficult at times. Some public companies might say explicitly in their documentation, but I think some of them also like to keep it a secret so as to not tip off any competition. Now, if that's the case, if they don't want to talk about it openly, it definitely requires some more work and innovation to find out. who the suppliers are, you might have to reach out to management or employees to find out if they'll share it with you, or you can look at other competitors or industry insiders and try to get to suppliers that way. So the fourth area here is just talking to specialists. I love talking with

Starting point is 01:05:47 specialists. I think it's a great source, but one thing that you really have to watch out for is bias. You know, if you speak to someone who owns a stock, you're likely to hear very cheery news from other bulls about that company. In this sense, you know, Talking to someone who's short can actually be more helpful. You'll learn why they think the business will likely decrease in value or price. And then it's up to you to analyze if their evidence is more compelling than the evidence for the Bulls. If it's more convincing, then your current beliefs, you know that maybe you don't need to continue researching stock. Or maybe if you own it, then maybe you should sell it.

Starting point is 01:06:21 So, you know, just realize here we talk about this a lot. I talk about this lot. Everyone has biases. And it can be very helpful to determine what that bias is. before you talk to a specialist on a business because, you know, if you talk to someone and it's their biggest position, it's very likely that they're going to be thinking quite highly of it. So just understand that, you know, if you can find specialists that maybe have no vested interest in the business, that can be helpful because they don't have a financial bias.

Starting point is 01:06:49 And hopefully that means that maybe some of the information you might get might be not distort it. So the last one here is about my framework for learning for mistakes. I wanted to just quickly discuss a general framework that I've used. use for learning from my own investing mistakes that I think will be very, very helpful. So I have kind of this four-step process and I'll expand the example that I just used a few minutes ago here. So the first one is looking where your most significant losses are. So for me, I also look at businesses where perhaps the investment didn't lose money, but my thought process on it ended up being kind of wrong. So a good example of that is heritage growth properties where I made

Starting point is 01:07:27 money on the investment, but I didn't see it as a successful investment because the thesis just didn't really play out as I thought. So the second part here is identify similar thought patterns. You know, some of my least successful investments have been when the primary driver of the investment, like I just said, was doing this sum of the parts calculation. I'd see very clearly that the sum of the parts was much higher than the share price and then buy it, hoping that gap would close. Now, I've had kind of about four investments in this area and three of them I lost money. So, and a pretty significant amount. So that was definitely an interesting learning point.

Starting point is 01:08:00 The third point here is to try to find similarities in why I made the mistake. So I think the similarities here are pretty self-evident. It's just looking at businesses where the sum of the parts is higher than the stock price. I know that this is a thought pattern that has attracted me in the past and it's Detroit Capital. So if I'm looking at newer investments, I can use that to my advantage. So that leads to the fourth point here, which is avoid these patterns as part of your analysis. So now that I'm aware of this thought pattern, I know that if someone pitches me an idea or if I'm reading about an idea and the primary reason for this idea being attractive

Starting point is 01:08:32 is some of the parts, well, it immediately goes into the too hard pile and I will immediately take a pass. So that's all I have for you today. If you want to interact with me on Twitter, please follow me at Irrational, M.R. KTS or on LinkedIn under Kyle Grief. If you enjoy my episodes, please feel free to let me know how I can make your listening experience even better. Thanks for tuning in. Bye for now.

Starting point is 01:08:54 Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting. Thank you.

We Study Billionaires - The Investor’s Podcast Network - TIP694: The Scuttlebutt Edge: From Research to Returns w/ Kyle Grieve

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