FFL "Scuttlebutt" Screen: Towards Customer-Centric Investing

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Introduction and background

"Scuttlebutt investing" is the concept of using primary research, typically through first-hand experience as a customer and user of a given company's products and services, to inform one's decision to invest in said company.

The term “scuttlebutt” itself is typically used to refer to rumour or gossip.

The origins of the word date back to the early 19^th century, denoting the water butt on the deck of a ship to provide drinking water to sailors. Sailors would gather around the water butt, in the process conversing with one another and exchanging gossip and ideas.

The evolution of the term into the context of investing was popularised by Phil Fisher, the US investor and author of the book Common Stocks and Uncommon Profits.

Outlining the concept of Scuttlebutt in Chapter Three of his now-canonised 1957 book, Fisher maintained that one of the most rational methods for investing in potential high-returning companies was to gather information about said companies from a variety of often non-traditional but trustworthy sources.

Fisher goes on to describe that rather than reading traditional investment publications, journals, and even company filings to find original investment ideas, one of the most powerful ways of finding interesting companies to invest in is by talking to competitors, vendors, customers, former employees, and industry experts.

Commenting on Fisher’s scuttlebutt method in his 1998 Annual Meeting, Warren Buffett observed:

“I believe that as you're acquiring knowledge about industries in general [and] companies specifically, there really isn't anything like first doing some reading about them and then getting out and talking to competitors, customers, suppliers, ex-employees, current employees... you will learn a lot".

My experience – towards a customer-centric model of investing

During the last decade of my investing career, using a scuttlebutt investment framework has been particularly powerful. In many instances, buying the shares of those companies that have continued to command my spending dollars as a customer whilst selling (short) those companies where I have stopped being a customer has allowed me to generate attractive investment returns.

Hence, for example:

• I bought Microsoft shares partly because I am a regular user and happy customer of Microsoft-owned LinkedIn. I find the platform, as well as several other Microsoft products, to be essential tools in building a professional network and building a business.
• Similarly, Google shares have performed well for me as an investor at the same time as Search, Google Drive, YouTube, and Google Cloud have become powerful parts of my day-to-day as a consumer.

The framework has also worked in reverse, helping me to avoid a series of bad investments:

• I bought Match Group, owner of Tinder, in my early dating days on the basis that Match was a fantastic business that would revolutionise social interaction. I later sold Match when videos started to appear online of how users could effectively manipulate the algorithms to artificially inflate their number of successful matches. The shares subsequently began a multi-year decline.
• Similarly, for Metro Bank, the difficulty I experienced trying to open a bank account as a customer, as well as the experience of walking into a store to overhear prospective clients turned away for no apparent reason apart from poor client onboarding procedures, convinced me to avoid investing in the company's capital structure in 2022 and 2023. The bank subsequently underwent an extensive restructuring in late 2023, with significant losses incurred by certain equity and bondholders.

Ultimately, the Scuttlebutt methodology is about resisting the urge to be an armchair investor. Instead, investors should talk to as many of the company's stakeholders as possible while also experiencing the products/services directly and in real-time as customers.

Chances are, if you continue to plunge your hard-earned cash into a given business and tolerate said business raising its prices, you could be looking at a high-quality business with pricing power and a moat.

Key takeaways – the financials Scuttlebutt screen

The team at Fighting Financials has today published on our first-hand experience Scuttlebutt screen for financial services. In building this screen, we’ve asked ourselves:

• what are the financial services companies that we use most frequently as customers that also have publicly traded equity securities outstanding?
• What does our willingness to part with our spending dollars on these companies say about their competitive positioning and their ability to create successful moats?

We've overlayed this screen and primary research with our more traditional secondary source analysis to identify a new financials equity investment idea that we think have multi-year compounding potential. Elsewhere, this approach has helped us to build conviction in another existing equity recommendation which screens well as a customer-centric business.

As usual, Fighting Financials clients wishing to explore these recommendations in greater depth can click here to access our full research reports and archive of work on these names. Premium clients can also contact the FFL team directly to discuss our analysis and how we view these recommendations in the context of our overall portfolio.

Meanwhile, for new and prospective clients interested in gaining access to our full investment research service, please click here or contact us at info@fightingfinancials.com for an initial confidential discussion.

Until then,

Your FFL Team