Thread by @ValueEducator

The importance of doing #Scuttlebutt in Micro Cap Investing!!
While #microcaps offer the opportunity for market-beating returns📈, #investing in them with incomplete info can be very risky. But with information so scarce in microcaps, where can investors find this information?

•The process of data gathering for micro caps can be very different from large caps. While there is lots of publicly available information for large caps, public disclosures are very few for micro cap companies. Investing with partial or no information can be very dangerous for

micro caps as these stocks have low liquidity and it can be difficult to exit these stocks when the thesis goes wrong.
•So what can investors do to make prudent decisions when investing in micro caps. The answer is scuttlebutt. Scuttlebutt is a term first used by Phil Fisher

in his book - Common Stocks Uncommon Profits.
•Scuttlebutt is an informal method of collecting information about a company that is not known to the market. It is a way to evaluate the intangibles that contribute to the success of the company which are not

visible in the financial statements.
•This doesn’t have to be insider information. There is plenty of information that can be learnt just from going out and talking to people in the industry. Warren Buffett put it best in the 2018 Berkshire Hathaway Annual Shareholder’s Meeting-

“You can learn a lot, just by going out and using some shoe leather.”
•Scuttlebutt can be done by talking to various stakeholders such as:
1. Employees and former employees
We can get a lot of important information about the company, its operations and the industry by talking

to employees and former employees of the company. Talking to them also gives you important insights about the culture of the company and the morale, which can be a good indicator of success over the long term. Apart from this, you can also try to visit the plants of the company

to understand the operations of the company.

2. Suppliers
By talking to the suppliers, we can gauge if vendors prefer selling to one company over another due to more favorable terms. This can give the company an advantage over competitors

in procuring raw materials during times of shortages.

3. Distributors
By talking to the distributors, we can get a better picture of what is happening on the ground. Do the customers prefer the products of one company over another and why? Do the suppliers

prefer to sell the product of one company over another and why? This information is crucial to understand the competitive position of the company.

4. Customers
By talking to customers, we can get a better picture of the brand power of the company.

We can understand the switching costs for the customer and what drives their buying decisions. A good practice can also be to visit stores of the company to understand footfall and customer service.

5. Competitors
There is a lot of insight to be gained by talking to the company’s competitors as well. Phil Fisher in his book said - “Go to five companies in an industry, ask each of them intelligent questions about the strength and weakness of the other four,

and nine times out of ten a surprisingly detailed and accurate picture of all five will emerge"

6. Analyst and Industry Experts
It is also a good idea to talk to industry experts and analysts who are covering the same industry to get additional insights into the companies you are studying.

•When talking to the various stakeholders, it is important to ask the right questions. Therefore, it is better to complete your study of the business, its financial statements and the industry. This way you are better equipped to understand the nuances from the

people educated on the topic. And when you can speak their language, you will find that people love to talk about their work and their industry.
•To make non-linear returns in the market, we need to have information that the market does not. This is more true in the universe of

micro caps as the consequences of knowing less than the market can be severe. Liquidity can dry up quickly in micro caps making it hard to exit positions when the thesis goes wrong.

•This kind of information is hard to gather and can often be unreliable or inaccurate. So it is very important to be able to verify the information and eliminate noise.

•Getting started with scuttlebutt can also be challenging because one needs to rely on personal connections and relationships. It is also a very time consuming process and investors must be willing to invest a great deal of time to get this info.

•If you cannot do the process yourself, it would be better to join a community of investors who undertake scuttlebutt and share their learnings. Forums like ValuePickr are a great example of this where investors routinely share their learnings from on-ground research.

You can also join the Micro Cap Club where we routinely share notes on all the scuttlebutt undertaken by us:
bit.ly/3zYY8OS