Finding Outstanding Investment Opportunities: The How-To Guide
Understanding what to look for in outstanding investment opportunities is great, but the next challenge is figuring out how to conduct the analysis. Let’s break down the process in simple terms, transitioning from “What” to “How.”
The Limitations of Expert Analysis
One logical yet impractical way to deeply analyze a company is to find an exceptionally skilled person who can evaluate everything from management and production to sales and profits. However, calling this approach “logical but impractical” might be an understatement; “fictional” might be more accurate.
Even if this method were possible, retail investors face several major problems:
- Lack of Skilled Analysts: It’s extremely rare to find someone with all the necessary skills. If such an individual exists, they are likely already in a high-paying job.
- Access to Information: Assuming we find such an analyst willing to work with us, the biggest hurdle is that the information needed for deep analysis is usually not publicly available. If it were, competitors could use it against the company.
So, despite seeming logical, this approach is almost impossible. Fortunately, Philip Fisher suggests an alternative: the “Scuttlebutt Method.”
The Scuttlebutt Method
According to Philip Fisher, the “Scuttlebutt Method” involves gathering information from various sources to get a clear picture of a company’s potential.
At first glance, this method might seem strange or impractical, especially given the difficulties faced by expert analysts. However, the book explains this approach in detail, making it easier to understand.
How the Scuttlebutt Method Works
You can get an idea of a company’s strengths and weaknesses by talking to people connected to the industry. Here are some sources to consider:
- Competitors: By asking intelligent questions, you can gain a detailed and accurate picture of the industry and other companies.
- Vendors and Customers: They can provide valuable insights about the company’s operations and reputation.
- Former Employees: These individuals can offer inside information about day-to-day operations and company culture. However, it’s crucial to understand why they left the company, as their feedback might be biased if they were fired for valid reasons.
Putting It All Together
Information gathered from various sources might not always paint a perfectly clear picture of the company. However, according to Philip Fisher, if the company is truly outstanding, the information from different sources will generally be sufficient to identify promising opportunities.
Key Takeaways
- Expert Analysis Limitations: Finding a highly skilled analyst is nearly impossible, and the necessary information is often not publicly available.
- Scuttlebutt Method: This method involves gathering information from various sources within the industry.
- Sources of Information: Competitors, vendors, customers, and former employees can provide valuable insights.
- Cross-Checking: Verify information from multiple sources to ensure its reliability.
- Identifying Opportunities: If a company is outstanding, the combined information will highlight promising investment opportunities.