Whitney Tilson's article Friday waxed rhapsodic about the advantage of what investing legend Philip Fisher called "scuttlebutt," which simply enough is information that you work to gain privately that gives you insight into a company and its prospects.
I can attest to the power of scuttlebutt -- it is time-consuming and requires a great deal of fortitude and the willingness to ask questions. I can also attest to two other things: that someone like Whitney Tilson, who manages millions of dollars, or I, who has the ability to put my thoughts before an audience of investors who number in the millions, has a much higher level of access to management than does the average investor. If you're holding 100 shares of CKE Restaurants
If you think about it, that's not such a bad thing. I mean, sure, you'd like to pick up the horn and yak with Warren Buffett about his capital allocation, but if everyone did this it wouldn't actually be a very good use of a CEO's time. Apropos of absolutely nothing, this is exactly the same way I feel about the potential for cell phones to be used on planes. Sure, I'd love to be able to use my phone on a plane; I just don't want anyone else to be able to, since sure enough I'd end up sitting next to some volume-unregulated slobberknocker who would spend the entire flight howling into his phone. And his ring tone would be "We Built This City."
Ahem. Anyway, the reality is that people with wide influence or big investment accounts get more access to executives. If Buffett calls American Express
This doesn't mean that you should just lump the thought of ever gathering scuttlebutt; in fact, far from it. Just because Ken Chenault won't talk to you doesn't mean that you have no chance. Chance favors the prepared mind, and scuttlebutt, as Philip Fisher might say, is everywhere. For example, pay attention to when Whitney states that he was "trembling with greed" over CKE -- it wasn't when he spoke with management. Rather, it was only after he had called a bunch of folks on the front lines, and they told him from their narrow view that the strategy was working. You don't think that someone running a franchise will speak with you just because you're a small investor? Phooey. The only thing these folks would be more willing to talk about than their businesses is their children.
You don't need upper-level access to generate scuttlebutt. In fact, Fisher himself very rarely talked directly with management, so sure was he that its message would be spun to make itself look good. In fact, with these following strategies, you'll have almost as much access to scuttlebutt as the big boys.
1. Talk to suppliers/customers
This doesn't have to be done on a high level. In 1998, I spent several hours with a clothing distributor in the Midwest who mentioned having some big trouble with getting apparel from Hartmarx
2. Talk to employees
We all knew three months ago that Delta Air Lines was teetering on the edge of bankruptcy as fuel prices spiked and it was engaged in a grueling fight with its pilot union. At one point, the company stated bluntly that it would file for Chapter 11 bankruptcy protection if it could not come to an agreement on a wage reduction for Delta pilots. Naturally, Delta's stock tanked, as did its bonds, as investors assumed that there would be a default. But as I talked to Delta pilots, they mainly said the exact same thing: If their union could come to an agreement with management, they were going to vote to accept it. Rather than opting to buy the common stock, I honed in on a class of subordinated debt, Delta Airlines 8.125%
3. Focus on smaller companies
Great, so the CEO of General Electric won't sit down and speak with you. If I were an investor in GE, I wouldn't want him to: That's not a good use of Jeffrey Immelt's time, nor is it particularly good time spent for most of top management at the company. But work your way down to smaller companies, and there's a much larger possibility that the decision makers in the company would be willing to devote some of their time to you. Not only that, but whereas someone in lighting at GE couldn't possibly know what's going on in power generation or reinsurance at the company, any employee at a smaller company has the potential to be able to provide company-wide conditions. A salesperson at Quadramed
4. Keep your eyes open
You know the saying about chance favoring the prepared mind, right? There are few things in life as sure as your not getting answers on any questions you fail to ask. Rex Moore told me in the end of 2003 that things were going better at 7-Eleven
Scuttlebutt doesn't necessarily get passed back and forth between scions of industry in smoky rooms. In fact, after Regulation FD came to pass, such private information became illegal if it wasn't already public. But it always bears remembering that financial statements are representations of their companies' performance -- they do not tell the whole story. If a company is changing course, it is as likely that it's manifesting itself out in real life well before it shows up in a 10-K or 10-Q.
It just never hurts to ask someone "How's business?" You might hear something extremely useful.
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