In 1960, Warren Buffett read a book that changed his investment mentality forever.
The book was called “Common Stocks and Uncommon Profits,” and it was written by Phil Fisher in 1958.
In the book, Fisher described what he called the scuttlebutt method for finding investments.
This method was the process of discovering as much about a company and its products as possible. To do this, Fisher recommended interviewing competitors as well as listening to rumours on the business “grapevine.”
He believed this detailed and rigorous approach for analyzing companies would uncover the market’s best stocks. Buffett has followed Fisher’s scuttlebutt style for decades. It has helped him build the fortune and reputation he has today.
Buffett used Fisher’s scuttlebutt approach to evaluate American Express in the 1960s. This was an excellent study of the scuttlebutt method in action.
At Berkshire Hathaway’s 1998 annual meeting of shareholders, Buffett described how his scuttlebutt research helped him gain confidence in the American Express brand and competitive moat:
“I did that with American Express back in the ’60s, and essentially the scuttlebutt approach so reinforced my feeling about it that I kept buying more and more and more as I went along.
And if you talk to a bunch of people in an industry and you ask them what competitor do they fear the most, and why they fear them, and all of that sort of thing…. you’re gonna learn a lot about it.
“You’ll probably know more about the industry than most of the people in it when you get through because you’ll bring an independent perspective to it, and you’ll be listening to everything everyone says rather than coming in and with these preconceived notions and just sort of listening to your own truths after a while.
I was using the scuttlebutt approach when I talked to Frank Olson [about American Express]. I couldn’t have talked to a better guy than Frank Olson running Hertz Corporation, lots of experience at United Airlines and consumer marketing guy by nature. I mean he understands business. And when I asked him how strong the American Express card was and what were the strengths and the weaknesses of it, and who was coming along after it, and so on, I mean he could give me an answer in five minutes that that would be better than I could accomplish in hours and weeks of roaming around and doing other things.
So you can learn from people…you just keep asking questions.”Warren Buffett — Berkshire Hathaway’s 1998 annual meeting of shareholders
This approach isn’t easy. It requires a constant desire to know more about companies, sectors and industries. That requires a genuine interest in business, which is far more important than a desire to make money in the stock market.
Still, while the scuttlebutt method may be timeconsuming, when employed successfully, it can be tremendously profitable, as Buffett has proven over the past six decades.