[00:03:15] Kyle Grieve: Or maybe you’re tracking their returns on invested capital or maybe their margin expansion and you’re observing that they’re continuing to move in a desirable direction. Now, while there’s nothing wrong with using these methods to improve your conviction, today we’re going to look at an analytical method to really help improve your understanding of a business.

[00:03:32] Kyle Grieve: And here’s the thing, you know, everyone has access to the information that I discussed above, right? I can log on to FinChat or Seeking Alpha and get these numbers pretty simply. But the problem is, in order to be successful with investing, you need a variant perception in order to take advantage of the markets.

[00:03:48] Kyle Grieve: And learning info that is not contained in the financial statements of a business is one of the best ways, I think, that you can accomplish this. So today, we’re going to be discussing, like I already mentioned, Scuttlebutt. Now many listeners of TIP will be familiar with Scuttlebutt. It’s a concept I spoke about on TIP 646.

[00:04:05] Kyle Grieve: For those who don’t know what Scuttlebutt is, it’s simply the process of learning about a business by accumulating information about that business, by talking with people that are associated with the company. Now, people who are associated with the company could be a variety of people. It could be the CEO.

[00:04:19] Kyle Grieve: It could be lower level employees. It could be the sales department. It could be people in research and development. It could also be customers, suppliers and industry experts, et cetera. But let’s circle back here to why Scuttlebutt is so essential. Let’s say I know a retail business pretty well. Maybe this is a business that I’ve been thinking about selling.

[00:04:35] Kyle Grieve: Let’s call it ABC. Let’s say I think the business is starting to get expensive. I have three pretty simple options. I can sell it, I can hold it, and I can buy more. Now, most investors will base which of these decisions they’re going to make based on things like intrinsic value of the business, the evaluation of the company, its growth rates, understanding and evaluating management based on earnings calls.

[00:04:55] Kyle Grieve: And that’s all fine and dandy, but in the example above, I’m still making some sort of error if I knew people intimately involved in the business and could ask them questions like, how was it working at ABC during the holiday season? I might get information that is much more valuable than looking at just the information that I gave in the example here.

[00:05:13] Kyle Grieve: Now, let’s say I ask a lower level employee that same question and the response is something along the lines of work was swamped, items were flying off the shelves and we couldn’t replace them fast enough. Oh, also, we were also shown a video by management that thanked the employees for record sales in North America and e commerce.

[00:05:31] Kyle Grieve: Now once you hear this news, you probably won’t be in such a rush to sell your shares as it means the business is continuing to improve. This is a real case study for me. And after hearing it, I knew I’d hold my shares longer and I still do, but this is news I wouldn’t have ever been able to use in my analysis if I didn’t know the people in the industry or know the people who are familiar with that business.

[00:05:51] Kyle Grieve: I know people like Phillip Fisher would agree that Scuttlebutt is integral to the success of many great investors. So today we’re going to cover legendary investors and their Scuttlebutt strategies. We’re going to look at things like how Warren got a masterclass in insurance, which helped him buy Geico shares.

[00:06:05] Kyle Grieve: We’ll look at how Li Lu befriended a board member of Timberland to help him better understand the integrity and talent of the management team there. And I’m going to sprinkle in plenty of my own stories of Scuttlebutt that I think will resonate very, very well with you. But first, a fair warning.

[00:06:19] Kyle Grieve: Consider a few things first if you want to do Scuttlebutt or sleuthing, which I’m going to be using interchangeably here. So first of all, it takes a lot of time. Now, you know, I can go through a company’s financial statements or official documents. It’s still going to take a lot of time, right? But once you start understanding all the different layers of Scuttlebutt that you can do, you can spend a lot of time on just one simple business.

[00:06:42] Kyle Grieve: And, you know, if you want to talk to all the different parties that I’m going to be talking with today, I mean, you could easily make that into a full time job, which some people do. So just understand that while I think this is the best way to understand a business at a very, very deep level, you’re only going to be able to do so much of it.

[00:06:59] Kyle Grieve: You’re not going to be able to do all of it and that’s okay. But I think adding little bits and pieces of what I’m going to be covering today is going to be really, really helpful. So second point here is that it works really well with a concentrated portfolio. As I just alluded to here, you know, if one business can take, you know, 40, 80, 100 hours to sleuth or to understand better, that’s going to be a business that probably you want to put a lot of money behind and it’s not going to be something where you’re going to want to just put 1 percent in and on top of that, if you just put doing 1 percent positions.

[00:07:28] Kyle Grieve: That means that you probably have a lot of position that if you want to do really, really deep research on a lot of positions, it’s nearly impossible to do by yourself. And maybe you would need a team of other people to help you out with that. And the last thing here is that it just requires doing a lot of work that very, very few others will do.

[00:07:45] Kyle Grieve: And that’s why it’s so valuable. So if you’re the type of person who likes going that extra mile and wants to get that just small little edge, I think this is going to be an area of your analysis that you should spend some time on improving on. And then finally here, you know, I just want to get this out of the way.

[00:08:00] Kyle Grieve: I’m not describing anything illegal, like insider training. That’s not what scuttlebutt or sleuthing is. So there was a really good book that I read in prepping for this episode called Scuttlebutt Investor. And so here’s what the definition of scuttlebutt was. The origin of the term is related to sailing water for consumption on sailing ships was typically stored in a scuttlebutt, a butt or a cask, which had been scuttled by making a hole in it so the water could be withdrawn.

[00:08:25] Kyle Grieve: Since sailors exchanged gossip when they gathered at the Scuttlebutt for a drink of water, Scuttlebutt became slang for gossip or rumors. It’s not that far off from the modern office equivalent of water cooler talk. Now, another reason that Scuttlebutt is so important is related to a wonderful Charlie Munger quote.

[00:08:42] Kyle Grieve: He said, I never disagree with someone else’s opinion unless I understand their side better than they do. Now, in my opinion, Scuttlebutt will help you determine if a business would make a better short than a long. Now, I personally have never shorted a stock in my life, but I think if a company is likely to go down in price, that’s probably a pretty good thing to know if I’m contemplating going long on that idea.

[00:09:02] Kyle Grieve: Now, suppose you know that a business has, let’s say, a 90 percent customer concentration. And that one customer who made up 90% was just lost in that case. That’s probably really, really good evidence that the company is likely to be worth just a lot less. Once that news comes out and probably for a long time into the future, maybe forever into the future, scuttlebutt can help you determine, you know, which types of events can build or destroy conviction.

[00:09:27] Kyle Grieve: So there’s a business that I loosely followed. It’s a micro cap called Africorp Health. This business just crushed it going from about 7 cents to 24 cents in less than a year. Then they announced a strategic shift away from pharmacies in Canada, and that they would actually be going towards going international.

[00:09:44] Kyle Grieve: And now the price has dropped back down to 4 cents. So, hypothetically speaking, if someone could chat with the people who were sending checks or who were the actual customers of Africorp, from the pharmacies that were, were leaving, they would have learned that that relationship had been severed or funding had been cut and they probably could have gotten out before this massive rundown.

[00:10:03] Kyle Grieve: And they, they maybe could have understood that this business was going to lose their customer even earlier than the market actually did. So that’s the kind of information that you can get from doing Scuttlebutt. Now let’s get into the meat of today’s episode and talk about how we do Scuttlebutt. The way I see it, there are kind of four primary parties that we want to talk to, to understand the state of a business.

[00:10:22] Kyle Grieve: The first one is going to be customers. The second one’s going to be employees. Number three would be suppliers. And the fourth is specialists. So in his excellent book, which I’m going to be referring to a lot here today, which is called The Sleuth Investor, the author, Avner Mandelman added a fifth party, which he likes to look at, which is plant and periphery.

[00:10:38] Kyle Grieve: Now, he made a really good case as to why this is important and I think it is important, but we’re not going to be covering that today because I want to focus more on the relationship aspect of talking with actual people. And while observing physical things is, is great and definitely helpful, it just isn’t going to be something that I’m going to cover today because I think it would probably take too much time.

[00:10:56] Kyle Grieve: So each of these four parties can be further broken down by quite a bit. And that’s what we’re going to spend some more time here doing right now. So the first party here is customers. So customers are people like end users. These are people who determine if the product should be purchased or if it should passed on for a competing product.

[00:11:15] Kyle Grieve: These are the people who send the checks to the company to actually buy the product. You can look at current customers. You can look at former customers. You can look at potential customers. The next section here is employees. So employees is a place where I think a lot of people probably spend a lot of their time.

[00:11:31] Kyle Grieve: Although customers might actually be the most important, but what makes up employees? So you got people like lower level employees, you know, people working machinery. If that’s what the kind of business utilizes, you got people in sales and marketing department, you got C suites, you know, chief executive officer, chief financial officer, chief operating officers, you got people in research and development, people on the boards of directors, and then you can also look at current employees, former employees, and then also the employees of competitors of that business or in a specific industry.

[00:12:04] Kyle Grieve: When looking at suppliers, there’s kind of three main groups. You’re looking at current suppliers, former suppliers, and potential suppliers. And then when you’re looking at specialists, there’s a whole bunch of different people you’d look at competitors, shareholders, other analysts, whether they’re professional retail analysts, industry insiders, people who are doing the local news and maybe even chambers of commerce.

[00:12:24] Kyle Grieve: Now, let’s start here with the most important people to speak to, which is customers. So I already mentioned here that I’m going to be using scuttlebutt and the word sleuthing kind of interchangeably. So sleuthing was very well covered in by Avner Madelman in his book, The Sleuth Investor. So Avner writes, in investment sleuthing, you use detection and investigatory techniques to get exclusive physical information about companies in which you are considering investing.

[00:12:50] Kyle Grieve: Little known facts about a company can give you a decisive edge when buying or selling that company’s stock. So I just wanted to give you that definition. He talks a little bit about Scuttlebutt and he, I believe, considers them to be pretty much the same thing as well. Although I will admit that in Avner’s book, he goes much more in depth into sleuthing.

[00:13:08] Kyle Grieve: So Avner says, and I agree that you can learn just an inordinate amount about a business from understanding its customers at a very deep level. So he poses just four kind of questions to better understand a business by talking to its customers. So the first one is, who are the customers? The second one is, what exactly is being purchased?

[00:13:25] Kyle Grieve: The third is, what is actually being sold? And the fourth is, why would the customer buy from the business in question versus a competitor? So let’s break these down in a little more detail. The first question about who the customer is, is very, very essential. After all, it’s the customers who are going to be sending checks to the company, which eventually shows up in the top line as revenue.

[00:13:45] Kyle Grieve: So Avner breaks down customers into three primary categories. So the first are the end users. Let’s imagine that we’re looking at a software company. This would be people who use the actual software maybe as part of their daily life or as part of their job. So these are the people who might actually use the software, but they might not actually be in charge of actually buying the software.

[00:14:08] Kyle Grieve: But they might, you know, obviously like the product so much that they’re going to recommend that they use a specific product to the people who actually do send the checks. So these types of people, you know, if they’re using a software that they can’t live without, that’s obviously very, very important because it means that the people who are sending checks probably also know that, and it means that the checks are going to keep on coming in.

[00:14:27] Kyle Grieve: That is a good segue here to the second customer, which are the decision makers. These are the people that might not actually physically write and send the checks, but they can approve if a specific product is purchased. So these two people sometimes are the same person, sometimes aren’t the same person.

[00:14:42] Kyle Grieve: And then the third and final type of customer are just the people that sign and send the checks. Again, they might not actually be the end user. A very, very important distinction. So the perfect customer is when the same person does all three of these functions, but that’s just not always the case. I sleuthed this exact question on a business that sells software to petroleum engineers and I got to speak to someone who was a customer of the business and used the product.

[00:15:08] Kyle Grieve: So, if I look at it in the framework used above, the person I spoke to fulfilled probably the first and second functions of the customers. So, they got to be the end user and they got to tell someone to basically send the check so that they could continue using it. But they didn’t actually send the check themselves.

[00:15:25] Kyle Grieve: Now, from what I learned about chatting with this person, it was pretty easy for them to get the software if they needed it. Luckily, the software is in kind of a duopoly, so the options are very limited. You got A or B. Now, the reason it’s so important to understand these three customer categories is because there can be a specific relationship where a business isn’t necessarily selling its product to the right person.

[00:15:45] Kyle Grieve: So Avner has a really, really good example in his book where he discussed this fictitious company called Alpaca Systems. So this business sold customer relation management, CRM software to retail stockbrokers. So let’s use just Avner’s framework in this case study. So who are the customers? So the customers were the retail brokers managers and the retail brokers.

[00:16:07] Kyle Grieve: Second question, what exactly is each customer buying? The manager was actually buying control of the brokers. And the brokers were getting help with improving their productivity. But as a result of using this software, they’re actually losing control over their own clients. So the third question here is what exactly is Alpaca selling?

[00:16:26] Kyle Grieve: So Avner initially thought that it was productivity tools, which it really was, but it was also control over the brokers and Alpaca, the business didn’t actually realize this at the time. So the fourth question is why would the customer buy it? And so if you look at the brokers managers, they bought it because the software worked.

[00:16:44] Kyle Grieve: And if the brokers produce at a high level, they got higher bonuses. Additionally, it gave the firm even more control over the broker’s clients because they knew more about every one of their clients. But there was a problem here. And that was that if a broker wanted to switch firms, they often needed control of their own clients.

[00:17:00] Kyle Grieve: If they wanted to switch firms and weren’t going to bring any clients over, well, it’s not nearly as valuable to the new firm. And unfortunately the Alpaca System didn’t allow this. So even if the brokers were using the Alpaca Systems, they actually weren’t using it to its full capabilities. They were doing things like keeping paper records and keeping copies of their customers info at home.

[00:17:19] Kyle Grieve: That way that gave them more control over their clients if they wanted to eventually leave their former company. So Avner wrote, while Alpaca thought it was only selling higher productivity to its product users, it was also unknowingly helping its users employers enslave them. This is one of the best examples I can give of a strategic mistake.

[00:17:38] Kyle Grieve: And it is one I would likely never have grasped if I had not talked to the final product users directly. Certainly, no brokerage analyst would dare to write up the above in a research report. Now, once Avner learned about this part of the business, he kind of stopped sleuthing it at a deep level and he loosely followed it.

[00:17:54] Kyle Grieve: But fast forward a little bit and he actually observed that Alpaca eventually did something quite brilliant. They actually fired their customers who are the broker’s managers. And instead of selling to the broker’s managers, he sold directly to the brokers themselves. So they geared the software to the specific brokers and they targeted just the highest earners.

[00:18:12] Kyle Grieve: This allowed the brokers to improve productivity by using the software while allowing them to keep control over their own clients. So if they wanted to leave the head, the software would still work with them, even if they left to go to a different firm. Now, this is the type of information that is readily available to anyone who’s willing to go and look for it.

[00:18:30] Kyle Grieve: But very few people do this kind of work. It’s much easier to scan for public information in a business’s financial document and use things like Google or chat GPT to get questions answered. Now while this is better than doing nothing, it won’t give you the type of informational advantage because anybody with a computer and an internet connection can have the same access as you.

[00:18:50] Kyle Grieve: Let’s look at another just classic example of scuttlebutt that Warren Buffett did a few decades ago. This concerned a business most listeners are going to be familiar with, American Express. Warren had owned American Express stock more than once, but he’s used the scuttlebutt techniques on both times as part of his business analysis.

[00:19:06] Kyle Grieve: So we’re going to go over the first time here, and this was during the Salad Oil Scandal. So my colleague Clay actually just went over that in some detail on TIP 682, which I’ll get linked up here. So I won’t go into too much depth into it, but I will say that essentially what happened was that the market assumed the salad oil scandal would be really bad for the business of American Express.

[00:19:26] Kyle Grieve: But Warren, you know, he could have just read what was written in the paper, read what all other investors were reading and concluded the same thing, but he actually did his work outside of it. He did his own scuttlebutt and realized that the scandal that was going on didn’t actually affect American Express’s business.

[00:19:43] Kyle Grieve: So let’s go over that in some more detail. Since he could tell their financial health was okay from reading public documents, he then tasked himself with finding out about the customers of American Express and if they were behaving any differently from before the scandal had happened. He had a very simple way of doing this.

[00:19:58] Kyle Grieve: He just simply went to places that accepted American Express and he hung around the cash register. He did things like ask waiters if people were still using the American Express card and he asked if the customer behavior had changed at all. Once he deemed that their behavior had not changed, he knew that American Express was an opportunity that was lying in the open for him to take advantage of, which he did to quite a high degree of success.

[00:20:18] Kyle Grieve: Now, I’ll reiterate here that Scuttlebutt he did could not be gleaned from public information. If something like this happened today, it wouldn’t be that hard to reach out to, you know, a family member or friends or colleagues that had an American Express card and ask them if they’re still using one. I know I own one personally.

[00:20:33] Kyle Grieve: If something like this happened today. I would continue using my Amex card as long as vendors accepted it and as long as I got my bonuses points. So to finish this section off on soothing customers, I’ll add a few customer types that you could talk to to help you gain information. So we kind of talked about current customers, but you can also look at former and potential customers.

[00:20:52] Kyle Grieve: You want to ask things that would help you determine if the company you’re looking at has, you know, a product that’s actually worth buying and similar to talking with current customers. The thing that’s maybe even better about talking with former or potential customers is they’re going to give you unique insights that current customers might not provide because they probably don’t have a filter and they don’t, maybe they’re not in love with that product compared to current customers, so they can give you different perspectives.

[00:21:17] Kyle Grieve: So from potential customers, you can just learn things like why. They’re doing business with the business competitor. That alone is a really, really good question to ask. Cause chances are they might’ve actually tried the product of the business that you’re looking at, and they’re going to be able to compare that to different competitors products and tell you why they think one product is better than another.

[00:21:37] Kyle Grieve: And sometimes you might find that the business that you’re looking at has an inferior product. And that’s a very, very important thing to know. Essentially, what you’re trying to do is find out why they aren’t a customer. And that alone can really, really help you illuminate any of the businesses weaknesses that it might have.

[00:21:52] Kyle Grieve: So former customers can tell you a lot of things. They can tell you why they stopped paying the business in question. They can tell you what’s better or worse with the new business that they’re working with. They can tell you about the switching costs that were involved from using one product to switching to another product.

[00:22:09] Kyle Grieve: And the thing that’s really good about former customers is just the amount of honesty that you’re probably going to get. They’re probably going to think maybe about that business and not so bright of a light, which you know, could obviously bias them in other directions, but I think it’s, it’s just a good way to get a variety of different perspectives and really, really get to the truth of why a company’s products are better or worse than its competitors, or maybe they’re all the same, you never know.

[00:22:34] Kyle Grieve: But I think that this information is really useful because it can really help you identify potential red flags that you might not be able to identify in any other way. Now let’s move on to what you can learn from a business’s employees. This includes people from factory workers all the way up to the CEO.

[00:22:49] Kyle Grieve: These are going to be people like low level employees, you know, people involved in marketing the business or selling products to customers, executives of a variety of different executives. Research and development board of directors, current employees, former employees, and even competitors, employees. One of the cool things you can do when you’re first starting this is just make a list, try to find current and former employees.

[00:23:12] Kyle Grieve: Former employees is a little bit harder to figure out. I personally haven’t really figured that out yet, but you know, for current employees, you want things like names, find out their connections to people inside of the business or outside of the business and just get as much detail as you can on people for lower level employees, it can be a little bit harder to find them as.

[00:23:30] Kyle Grieve: They’re not necessarily feature on a business’s website. If you look at the proxy statement or a circular of a business, they’re going to tell you quite clearly who are management, who are the board directors. So those names are easy to come across. But if you are looking for lower level employees, sometimes if you go to a company’s website, you can see if they have an about me section.

[00:23:50] Kyle Grieve: And sometimes the about me section will actually talk about lower level employees, maybe have some quotes. And these quotes are usually I don’t even know if these quotes are actually from the employees, but sometimes they share their name. So an easy way to find out these employees is put their name into Google or put their name into LinkedIn.

[00:24:07] Kyle Grieve: And that’s the way that I personally have found a ton of employees. And then even if you can’t find the names of employees, LinkedIn is still super helpful. So if you use the search function on LinkedIn, there’s actually quite a bit of information you can find. So you can go on LinkedIn, use the search function, look at the name of the company that you’re looking for.

[00:24:23] Kyle Grieve: Then you go to the people tab and basically all the companies, employees who are on LinkedIn, who lists that business as their employer will be on there. Then you can try to reach out to them on LinkedIn. Now I’ll be honest with you from my experience. This is more of a volume game. I think with LinkedIn, a lot of people use LinkedIn for jobs.

[00:24:42] Kyle Grieve: So if they already have a job, they’re not necessarily going to be on there probably very often. Some people are, some people aren’t. And so like I said, volume game, you got to just try to connect with people, shoot them a DM and there’s probably a good chance a lot of people won’t answer you and that’s okay.

[00:24:56] Kyle Grieve: That’s just kind of part of, the scuttlebutt process, but there are enough people that will answer you that it’s, I think it’s worth it. So Philip Fisher had some great strategies for Scuttlebutt when it came specifically to this segment here about employees. So when Philip sought answers to questions about what you should look for in an investment with a lot of potential, he wrote, one way that immediately suggests itself is a logical but rather impractical.

[00:25:19] Kyle Grieve: This is to find someone who is sufficiently skilled in the various facets of management to examine each subdivision of a company’s organization and by detailed investigation of its executive personnel, its production, its sales organization, its research. And each of its other major functions form a worthwhile conclusion as to whether the particular company has outstanding potentialities for growth and development.

[00:25:42] Kyle Grieve: Now, the problem is that getting information from key personnel can be quite difficult because oftentimes these people are very, very successful and part of that success means that they’re probably working a lot and they also work for very, very successful companies, which have very high expectations.

[00:25:57] Kyle Grieve: So a lot of times they’re not necessarily going to be too eager to just talk to some stranger about their job. And additionally, you know, some of these people, for instance, in research and development, they’re probably not going to be too interested in sharing the stuff that they’re working on. If there’s people from competitors that are listening in or whatever, or maybe some of them even have non disclosure agreements where they can’t talk about it.

[00:26:17] Kyle Grieve: But, you know, nonetheless, Phil liked to look at people and things like the research and development departments, as well as salespeople, you wanted to know specifically to do with salespeople. If the business had the right people inside of it to continue growing. And these are things that you can learn from.

[00:26:34] Kyle Grieve: Not only the heads of departments, but also just from lower level people in sales as well. So things that I like to find out from sales people are, you know, just ask them how things are going. Are they enjoying their job? Are they disliking their job? Are they busy? You know, do they have a lot of time on their hands?

[00:26:48] Kyle Grieve: Or are they swamped? Obviously, you know, that can help you understand more. If someone goes from being not so busy to super busy, well, maybe there’s something interesting going on in that business. You might find out how they’re incentivized. Incentivization systems are easy to find on public documentations for management, but not necessarily for employees.

[00:27:05] Kyle Grieve: So I’m not going to tell you to go and ask how much money someone makes, but you know, if you just ask them how they’re incentivized as a based off of a commission or whatever, that’s important information. And if you develop some sort of relationship, I think you can probably get that kind of information.

[00:27:19] Kyle Grieve: Other things that are really interesting to get is their thoughts on management, you know, do they like management or do they dislike management? I think that’s pretty interesting to know. And if everyone dislikes management, well, that’s probably a pretty big red flag. And then you can just get their general observations on the direction of the business.

[00:27:34] Kyle Grieve: If you talk to a bunch of people and they’re all seemingly pretty down on the business, well, that’s an interesting sign. And also on the other side, if everyone’s very, very happy about the business and giddy and excited, well, that’s another really, really good sign as well. And then, you know, if you’re talking to people about their job, and you find out that maybe a bunch of their colleagues got fired and aren’t being replaced by new people, I mean, that alone is a really good signal that maybe the business is very unlikely to increase its sales anytime soon.

[00:28:02] Kyle Grieve: Now, another area that Philip really placed a lot of emphasis on was research and development. He knew that a business that had the potential to be worth multiples of what it was today needed an R&D department that could continue to push the company to create new, innovative and excellent products that also had the right sales people in place to go out and actually sell that product to the market.

[00:28:21] Kyle Grieve: So I think you can kind of lump these two areas together to some degree. So there’s this trust manufacturer that I own, and it’s in the beginning stages of utilizing automation to increase its output by nearly doubling it in a very short period of time. Once the automation equipment’s completely installed, I’ve had the chance to speak with management multiple times and done my best to learn more about who supplies their technology.

[00:28:42] Kyle Grieve: And you know how it’s going to work once it’s fully installed and operational. Now, one of the main problems this business will eventually face is that they will be able to double their capacity. And now on the face of things, this is obviously great. A company that can double capacity with minimal incremental expenses is a very good thing.

[00:28:58] Kyle Grieve: Still, there’s another potential area that must be addressed for this whole process to be successful. And that is that they have to have the salespeople to go out and sell that additional capacity to the market. So I got a chance to reach out to a salesperson in that business. And so I asked him a few things to understand things like how the process is going with sales.

[00:29:17] Kyle Grieve: You know, I want to know, are they busy? Get a read of how things are going so that I can hopefully be directionally correct. You know, are they happy with the process? Are they unhappy, lukewarm? I want to know things like, are they adding new sales people to the team? If they’re adding, that’s generally a good sign that hopefully there’s additional demand for their product or that they’re able to find additional customers to try and send people out to sell to.

[00:29:40] Kyle Grieve: Another question would be, you know, how is the automation equipment going to impact the customers? Are their customers going to get cost savings, improve service and things like that? So if you have the ability to chat with current employees, a few things that you should try to learn, you know, gauge their temperature on the company, find out if they’re overworked or underworked, find out how promotions are handed out.

[00:30:00] Kyle Grieve: Are they happy with them? Are they unhappy with them? Find out how they’re incentivized and you know, which KPIs they’re incentivized on. Find out what they think of management. Find out, you know, if employees are being brought into the business, who are they being brought in from? Are they, is your company sealing employees from maybe competitors as a specific competitor?

[00:30:19] Kyle Grieve: And then, you know, on the other hand, if employees are exiting, you should try and find out where they’re getting their job. Are they going to a specific competitor though? These are all interesting points to improve your decision making. So in The Sleuth Investor, Avner says one of his favorite tools for learning information is just having beers with employees.

[00:30:36] Kyle Grieve: Now, this is a method that I haven’t had the time to try out yet, but I can see how valuable it would be. If you can speak with employees, when they’re in more of a casual setting, you’re likely to get better information than if you maybe just go to. The IR office of a business that’s in your local neighborhood, and they’re just showing you around the workplace in that scenario, you know, you might just get people that are going to be on their best behavior, even if maybe they don’t necessarily think highly of the business that you’re visiting just to, you know, keep their job and make the optics look good, but in an informal setting, you may get people to open up more, but I, like I said, I do realize this is a lot of work, which is why I still haven’t gotten around to trying it myself.

[00:31:16] Kyle Grieve: A few other people who are worth chatting with are members of the board of directors. Although they have to be very, very cautious about what they say, this is probably good. You know, you don’t want them getting in trouble giving insider information, but they can still be pretty good source of information.

[00:31:30] Kyle Grieve: A few things that you can learn from them would be, you know, what value are they bringing to the company? Are they actually doing something to provide value to, to that board or are they just there to pump up the CEO and agree with everything that he says? You may want to find out how they came about that.

[00:31:47] Kyle Grieve: Board seat, you know, was it because they went to college with the CEO or someone else on the board or maybe another executive or was it because they’ve been in the industry for 30 years and they’ve done incredibly well with other businesses? You should look at a track record of board members. Do they have a long track record of success or failure with some of the other businesses that maybe they’ve either managed or been a board member of?

[00:32:09] Kyle Grieve: And then another one here that I think is really important is what are they doing for income? Is this board seat their primary source of income? Because, you know, If they’re only getting income from being on boards of a few companies, that’s very important because that means that they’re probably not going to go out of their way to make things difficult.

[00:32:27] Kyle Grieve: If they see that things aren’t being managed properly, you know, and really the point of the board is they’re employed for the shareholders, not the CEO. But if you have someone who really needs to keep their board seat, chances are they’re getting more likely to be leaning towards agreeing with the CEO to not make their job get into any jeopardy.

[00:32:49] Kyle Grieve: So another great lesson that I’ve learned from talking with employees was one of Buffett’s most famous investments, which was Geico. So Buffett learned about Geico when he was still a student of Benjamin Graham’s at Columbia University. So he was in the library one day and he realized that Benjamin Graham was the chairman of Geico.

[00:33:06] Kyle Grieve: So I think this was just like a week later. He ended up making the trek to Washington on a weekend. And he got to the Geico HQ and was disappointed to learn that the doors were locked, the location was closed for business. Luckily, there was a janitor who was working in there and let Buffett in. And so, the janitor brought Warren to Lorimer Davidson, and who was the only person who was working in that day.

[00:33:29] Kyle Grieve: And he actually spent four hours answering just endless questions from a young and curious Warren Buffett about Geico and just the insurance business in general. Warren said this one event changed his life. Now, this story has many interesting implications. It shows that you need the drive to go and do things that 99. 99 percent of investors just won’t do, like travel on a weekend to a company’s headquarters. You need to be curious about the business and come prepared with questions to show people that you really understand them to some degree, and you also need a bit of luck. If the janitor was on a break or didn’t want to be bothered, he may never have let Warren in and maybe Warren would have just passed on that business if he didn’t have the drive to go and give the headquarters another visit.

[00:34:08] Kyle Grieve: Now, let’s transition here and discuss another critical area of a business’s operations, which is its suppliers. This is an area that Philip Fisher didn’t spend too much time on in Common Stocks and Uncommon Profits. So we’re going to look at two other books, The Sleuth Investor and Scuttlebutt Investor for some ideas on why and how we should look at suppliers to kind of better understand that relationship between a company and its suppliers.

[00:34:31] Kyle Grieve: Before that, I recently listened to a great podcast where Mohnish Pabrai was discussing win win business relationships. Part of the reason for Charlie’s love affair with Costco was that the business was in this win win relationship. Suppliers won, just like shareholders and customers. This is a pretty rare relationship to find.

[00:34:49] Kyle Grieve: That’s not to say that you must have these types of relationships to find successful investments, but it doesn’t hurt to find out more about the relationship that a company has with its suppliers. So here’s what Monish said about win lose relationships between a business and its suppliers. There are many business models which you could call win lose.

[00:35:06] Kyle Grieve: For example, there’s a company that stretches out the payments they have to make to their suppliers. Maybe they take 60 or 90 days to pay their suppliers and they use the float to improve their financials. Well, that works well for the company, but not so well for the suppliers. So that’s kind of an example of a win lose business.

[00:35:23] Kyle Grieve: Now, businesses can still succeed with these win lose relationships, but like I said before, it’s important to understand this relationship in a little more detail. There are multiple ways to look at how you can use information from suppliers to improve your decision making. In The Sleuth Investor, Avner points out that you can go to the supply chain to understand the volumes and the prices of what’s being supplied, and what kind of volume a supplier is offering a business.

[00:35:46] Kyle Grieve: Another strategy Avner likes is getting to understand potential suppliers. If a company could be boosted by having close relationships with better suppliers, they could see a significant boost in their value. Avner has a bunch of strategies that take a lot of work but can be highly valuable to anyone who wants to put the effort in.

[00:36:02] Kyle Grieve: Now one great story from Avner’s book was about a sleuth he met who he called Michelle. Michelle had a Ph. D. in Mathematical Finance and she was hired by a Canadian subsidiary of this U. S. bank that had started an index fund. She told Avner that she’d made about 90, 000 in the market in a very, very quick period of time using some of the interesting sleuthing techniques that she was lucky to be exposed to.

[00:36:22] Kyle Grieve: Let’s get into some of the details of how Michelle sleuthed and made this windfall. So across from Michelle’s desk was the office of an investment bank, which Avner refers to as the Bank of Industry. Now, there are only two primary outcomes that would happen. Either the debt would be restructured, which was very good for the company and the stock price, or the bankers would force the company to pay, which tend to be unfavorable for the business and its stock price.

[00:36:43] Kyle Grieve: So it’s easy to understand why, you know, if a business has its interest payments cut, that means it’s pre tax income goes up and earnings will probably show a bump. The company must pay increased interest expense, pre tax income decreases, and earnings will suffer. So, Michelle had observed that there was an ad agency that she watched where the business borrowed about 10 million from this bank.

[00:37:04] Kyle Grieve: And unfortunately what happened was the company lost a key customer. Now the Bank of Industry, in order to recoup its debt, wanted the business to slash costs, basically fire people in order to raise money to service the debt. But the businesses, executives, and key personnel threatened to quit on mass if the business started doing this.

[00:37:26] Kyle Grieve: Now, this was a horrible proposition to the bank because for this business, employees and executives were not easily replaceable. And if they left, the company would likely be next to useless. So the bank relented. And once the debt was restructured, the share price increased by 50 percent in a very, very short period of time.

[00:37:43] Kyle Grieve: Now, knowing this case study, Michelle dreamt of being a fly on the wall in one of these meetings. Now, obviously, there was no way for her to arrange this and taking advantage of it would be illegal anyway. But there were other ways for her to sleuth legally, which she ended up doing. So she was just a keen observer of people.

[00:37:58] Kyle Grieve: And most of the time, the bankers were very cool, calm, and collected, while the business executives who were coming in to talk to their bankers were more nervous when they were walking in. Well, the business’s executives were nervous walking in, but on one occasion, she observed the complete opposite. The executives look calm entering the office while the bankers actually look nervous.

[00:38:16] Kyle Grieve: After the meeting had ended, she observed the nature of the bankers and the executives. And once again, the bankers looked ejected while the executives were high fiving each other as they left the building. Now, during this process, she really wanted to know who this company was, and so she just looked at them and tried to find a logo or something on that would identify who they were and ended up seeing a logo on one of the shirts of one of the people that had been part of the meeting who worked for the business.

[00:38:40] Kyle Grieve: So, after that, she looked at their annual report and found the names and pictures of the executives, which she then used to verify their identity. It was indeed the company. Avner refers to it here as Filmex. It was similar to the ad agency case study I spoke about where cost cutting wasn’t in the cards.

[00:38:55] Kyle Grieve: So, given the behavior of the bankers and the executives, it was quite clear to Michelle that the executives had just gotten a win in terms of their financial health. So, she ended up buying shares and made about 90, 000 over two days after the news of the restructuring had been announced to the public.

[00:39:10] Kyle Grieve: Now, here’s an excellent summary of the experience. Michelle was not an employee of the Bank of Industry nor an employee of Filmex. Not of their lawyers or accountants or anyone else defined by law as the company’s insider. She had not bribed anyone nor stolen any information. She had merely observed some physical events that took place off of Filmex’s premises in a public hallway.

[00:39:30] Kyle Grieve: Yet she could say with an extremely high certainty that the business of industry was about to cut Filmex’s debt and that Filmex’s stock would, in all likelihood, soar as a result. Now, as the story of illustrates a businesses supplier doesn’t have to be the supplier in the traditional sense. It could be bankers as well.

[00:39:47] Kyle Grieve: It’s up to you to kind of think outside the box and use your opportunity set and skill set to find ways of observing things that are happening around you and things that you can use to your own advantage. If you happen to find current suppliers, there’s a few things that you’re going to want to find out.

[00:40:00] Kyle Grieve: And these are things like, you know, how big of a customer is the company for the supplier. If the supplier is the only supplier of a particular material to the company in question. How easy it would be for a company to find an alternative supplier and you should just get an idea of what the supplier thinks of the company that they supply to.

[00:40:17] Kyle Grieve: Do they like them or do they speak about them in negative terms? A few themes here that you want to dig into is just how critical a supplier is to your business. If your business can’t run without one supplier, that information is very, very key. If something were to happen to that supplier, then your business would essentially be done if the supplier could no longer supply the business.

[00:40:37] Kyle Grieve: This is why having a business with multiple suppliers is good and a good thing to know. It protects you if something goes wrong with one supplier. It’s good to have, you know, another couple suppliers on hand that you can use just in case something like that happens. Additionally, it also allows the business to negotiate rates between suppliers to find the best possible deal for the company.

[00:40:56] Kyle Grieve: Also, if a supplier is the sole supplier of a key piece to many different businesses, you might run into just a great investing opportunity. You know, there might be one supplier who’s key to a whole bunch of different companies that require it for their business to run. ASML, I think, is a really good example here.

[00:41:14] Kyle Grieve: I’m by no means a semiconductor specialist, but I know that that business supplies many semiconductor businesses the machinery that’s needed to manufacture their widgets. And for that reason, ASML has made an exceptional investment. Compounding at 26 percent per annum over the last decade. Now, just like former employees speaking with former suppliers can be a great source of information as you’re likely to get to the truth quickly.

[00:41:35] Kyle Grieve: It also helps identify any potential weaknesses that business might have. You know, you should probe into why the business relationship was severed, what the former supplier thinks of management, the history of payments. Whether they were on time or late, negotiating leverage between the supplier and the company, etc.

[00:41:50] Kyle Grieve: If you find out the supplier left because it was constantly being squeezed by the business, that’s a red flag. And that might signal that there’s other suppliers that may end up doing the same thing in the future. Now let’s look at specialists, or people who aren’t intimately involved in a business sense, but can be invaluable in learning more about the business.

[00:42:06] Kyle Grieve: They’re often very willing to chat and share their knowledge. The most important people to talk to in this segment, I think, are the business’s competitors. Let’s say you speak with five businesses that are competing with the business that you’re researching, and they all identify the business that you’re looking at as the business that they fear the most.

[00:42:22] Kyle Grieve: In that case, that’s a very, very good indicator that you’ve identified the leader in that industry or niche. If, on the other hand, all your Scuttlebutt identifies a different business as the one that scares everyone else the most, well, maybe that means you’re looking at the wrong business. Now here’s some questions that you can ask to understand competitors and their dynamics concerning the business that you’re doing Scuttlebutt on.

[00:42:43] Kyle Grieve: Which competitors scare you the most and why? Which competitors scare you the least and why? Who are your suppliers? What are the biggest hurdles to success in the industry today, and what are you doing to overcome them? Are you hiring employees or firing employees? And if the competition is firing employees, who are they going to?

[00:43:01] Kyle Grieve: And if they’re hiring new ones, where are they coming from? Now, arguably the lowest hanging fruit in the specialist category are analysts themselves. You can often get your hands on analyst reports. Buffett has famously said that he doesn’t rely on other analysts to do his decision making for him. And I completely agree with that.

[00:43:17] Kyle Grieve: But if you find other thoughtful analysts, they might know things you don’t. They can help guide or connect you with maybe people worth learning more from. Or they can just offer their opinion, which might be highly valuable on specific matters in the business that maybe you’re just a little unfamiliar with.

[00:43:33] Kyle Grieve: Now, usually when reading an analyst report, I enjoy learning about their particular perspective. They might’ve looked at a business differently than I have, and knowing this can be helpful in the Scuttlebutt process. Since they’ve already announced to the world that they are researching the business, they’re more likely to contact you if you have further questions.

[00:43:49] Kyle Grieve: But at the end of the day, Buffett is correct. And you, you should never rent conviction from others on an idea. If you do this, you will lose money or you’re going to make egregious mistakes during downturns. Now, similar to analysts are shareholders who are a very good source of information. Some of them might have already done a ton of scuttlebutt themselves and can help share information with you or guide you in the right direction.

[00:44:08] Kyle Grieve: I can’t tell you how vital this can be, especially when you’re first learning about a new business that maybe you haven’t spent too much time on. It can be hard to understand what makes a company fire on all cylinders when you first start researching it. However, current shareholders will have their hypothesis that they will share with you.

[00:44:25] Kyle Grieve: So you can just go out and see if their hypothesis is correct or not and make your own. A few other areas I like looking at are industry insiders. You can find these people easily through Google. If you’re researching a well known company, you can often find news articles about it. And these articles themselves can be helpful on their own, but it’s actually the lists of the people that are referenced in articles that I personally find most interesting.

[00:44:45] Kyle Grieve: You can see who was quoted, and you can reach out to them, as well as the original author, and see what kind of information you can get. There’s a small cap that I’m looking at right now, and I found an interesting article on bankruptcy in Canada. This has led me to contact the author and some of the bankruptcy lawyers in the industry that were mentioned in his article.

[00:45:02] Kyle Grieve: I’ve been lucky enough to connect with the author who provided me with some very, very interesting information as well as some other resources. And from looking at some of the people he quoted in his article, I actually landed a call with a lawyer who specializes in that area. Now, one of my favorite high profile Scuttlebutt techniques is from Li Lu, who my co host Clay spoke about in depth on TIP 636.

[00:45:23] Kyle Grieve: Li Lu gave an excellent case study about the importance of acting like a journalist when looking at a stock. One quote stuck out to me from his presentation, which was, you gotta have a very active, very curious mind, and you can’t be satisfied with bogus answers. He added, most people who have built businesses also have a big personality, have a history that you can go audit, and leaves a trail of evidence of what kind of person they are and what they have done, how they deal with different situations.

[00:45:51] Kyle Grieve: Li Lu mentions that as part of his scuttlebutt into Timberland, he went and spent a few weeks in the neighborhood where the family who owned the business lived. He mentioned things like going to their church and talking with their friends, their colleagues and their neighbors. He would also ask what the manager did for the community and what people thought of him.

[00:46:08] Kyle Grieve: He also mentions trying to learn about family dynamics, educational history, and their history in philanthropy. Additionally, he actually found out that the son of the CEO was on a board and Li Lu managed to actually get on that board. He eventually became friends with the son and with that relationship understood the business at an even deeper level.

[00:46:27] Kyle Grieve: I love this story because it’s proof that the further down the rabbit hole that you go, the better the picture of reality that you’ll get. But, you know, I also have to admit that doing this is nearly impossible for the average person who can’t spend, you know, weeks away from their job and may not have the means or even the inclination to put themselves up for weeks at a time.

[00:46:44] Kyle Grieve: In theory, it’s great. You will 100 percent learn a lot about a person doing this, but in reality, I’m not sure even the top hedge fund managers worldwide are going to employ the strategy if they’re managing billions of dollars. Maybe they could get someone like an analyst to get their boots on the ground and learn more about the managers that way.

[00:47:01] Kyle Grieve: Now, with this thought, I want to move on to discuss some of the ways that you can use this information on Scuttlebutt to make better decisions without necessarily having to leave your home for weeks at a time and spending thousands of dollars on travel costs. For those who can, well, congrats, but I think you’re probably in the minority.

[00:47:18] Kyle Grieve: I think what it really comes down to is building relationships. Someone like Warren Buffett has just a massive network of people who really, truly want to help them. And I think these are people that he could get some very high quality information just by picking up the phone and asking if they know someone in an industry or someone who maybe used to work in an industry that he’s trying to learn more about.

[00:47:39] Kyle Grieve: Now I won’t say that anybody can build as extensive a network as Warren Buffett. I know I can’t. But I think I can guarantee that you can connect with some very, very fascinating people. If you put yourself out there and meet people, send emails to management or investor relations. And socialize with people on things like Twitter and LinkedIn.

[00:47:57] Kyle Grieve: I wrote something up on Twitter about the trust manufacturer and had a follower of mine or reader of that tweet, tell me that he used their product before as a customer that opened up a wonderful conversation, direct messages, where I use some of the questions I listed earlier in the episode to learn more about why they went with that company and his thoughts on his experience working with them.

[00:48:16] Kyle Grieve: So even if you don’t want to go full sleuth. I think many great points are here to help you get an informational advantage. Bill Miller says there’s three advantages that investors can get, which is analytical, informational, and psychological. While I, I agree with Bill that the psychological edge is probably the.

[00:48:33] Kyle Grieve: Easiest to get, but might be the hardest to portray in reality. Anybody can get an informational edge if they’re willing to speak to the right people and learn more about a business. Most investors base 100 percent of their decision making on accessible information. Things like annual reports, quarterly reports, earnings releases.

[00:48:49] Kyle Grieve: The Q and A’s use items and, you know, quantitative information that you can get on the internet. Now, like I’ve already kind of drilled this into you, I hope by now, you know, the problem is that everyone has access to this information. So it’s really hard to actually get a variant perception. But if you talk to the right people around a business, you can get information that maybe these massive investors or billion dollar hedge fund managers don’t have access to, or aren’t willing to put the work in to get access to.

[00:49:15] Kyle Grieve: And this is the kind of information that can keep you invested in a company when maybe hedge funds are dumping it. If you know the long term fundamentals of the business are still in great shape, but investors are dumping due to maybe some short term headwind, you can take advantage of this by buying more shares.

[00:49:31] Kyle Grieve: But this exact scenario depends on your conviction about an idea and finding hard to find physical information will be one underutilized way to build conviction that very few will try and find. If you do this on a few businesses, you can do incredibly well on just a few ideas, which can help propel you for many, many years.

[00:49:48] Kyle Grieve: Now that you have a good idea of how to do scuttlebutt on a business, I want to share some interesting findings about how to continue improving your circle of competence. I think scuttlebutt and circle of competence are very closely related. Warren and Charlie have discussed at length how to understand the boundaries of your circle of competence, but there is an area I don’t believe they’ve mentioned enough that I think has been integral to their improvement, but also my own improvement as an investor.

[00:50:11] Kyle Grieve: As well as other investors that we’ve had on the show, such as John Huber. And this is how to utilize journaling and self reflection to become a better investor. Warren and Charlie have primarily stayed away from using words like journaling, meditation, or self reflection, but I can only assume that during their thinking time, they’re probably doing a lot of self reflection.

[00:50:30] Kyle Grieve: They’re also so intelligent that they don’t necessarily need to record their thoughts in a journal. However, for an average person like myself, it helps a lot to record some of my thoughts and experiences in a journal so that I can more easily reflect on them in the future. I’ve learned to value journaling so much because of some of my learnings from a wonderful interview the folks from Journalytic did with John Huber.

[00:50:48] Kyle Grieve: In that chat, John said that one of the most significant use cases of his journaling was going back and looking at his mistakes. Since watching this, I’ve tried to journal more about my mistakes and get to the essence of why I made these mistakes. This alone has been very, very powerful for helping me improve.

[00:51:04] Kyle Grieve: But there’s another area of improvement that relates directly to the circle of competence. Godembey had a great definition of what the circle of competence is. When you are unsure and doubtful about what you want to do, do not do it. That’s it. Now, the way that I’ve weaved this into my journaling is to look at some of my previous failures, which identify what I’m maybe unsure or doubtful about.

[00:51:23] Kyle Grieve: Now, one of the failures that I’ve been reflecting on is probably going to go against the grain for many of the value investors that listen to this show. Many value investors like investments whose value comes from a business’s assets. For instance, you might buy a company where the assets of a business are worth 2 billion while the company is only trading for a billion or 500 million.

[00:51:41] Kyle Grieve: I’ve looked at a few of my previous investments and determined that I have either made very little or lost money whenever I attempt to do this exact same thing. So from this, I can gain a new insight into where my circle of competence is strong or weak. And since my track record in this area is not good, I can assume that I’m weak.

[00:51:57] Kyle Grieve: Reflecting on this, I found that a new principle was established, and so here’s how I have it written in my journal. When looking at a business that is attractive primarily because it’s value below what some of the parts do not bother with the business. Instead focus on the business from a future earnings power perspective. The sum of the parts can be seen as downside protection, but not as a reason to purchase. I think NRP is a good example of this where I care mostly about earnings power. But the assets provide a decent floor if something were to happen to the earning stream. Now, this is a principle that I’ve naturally gravitated towards over the last few years, but I think it’s been worth reflecting on to ensure that I’m not making, hopefully, money-losing decisions in the future.

[00:52:36] Kyle Grieve: Another interesting lesson here is to track your decision making as often as possible. You want data points that you can use in the future to help you understand where your strengths and weaknesses lie. An app that I’d highly recommend is Journalytic, which offers you just a ton of data for free. They are also very eager to improve their platform to make it more and more valuable for its users.

[00:52:55] Kyle Grieve: On a recent trip to New York, I was chatting about predictions with members of the Richer, Wiser, Happier Masterclass at a dinner. Part of Journalytic allows you to make predictions with an established due date. Humorously, I made a prediction back in September of 2024. And that was that the share price of Dino Polska was unlikely to move due to a lack of new store openings.

[00:53:14] Kyle Grieve: So I was alerted by the app at the end of 2024, about three months later. And when I checked the share price, I realized that it already appreciated by about 33%. So we all had a good laugh, but you know, really, this tells me a few things. A, I stink at making predictions B, at least being wrong resulted in making money, which is great because I think it’s usually the opposite way.

[00:53:34] Kyle Grieve: And see, I should probably not bother making predictions in the future. Or if I do, I should heavily reduce the certainty that I’m going to be correct. Now, not only can journaling help you avoid mistakes, but it also illuminates your strengths. And if you continue investing in what you’re strongest at, you tilt the odds in your favor that you will continue making these successful investments.

[00:53:52] Kyle Grieve: If you can continue doubling down on your strengths while avoiding weaknesses, you should have a lot more success in investing. If you journal or even think deeply about mistakes, you’re going to gain pretty significant insight into what you are doing that works and doesn’t work. Additionally, you’ll be able to save even more time as you learn what new ideas can go into the too hard pile at a much quicker pace.

[00:54:14] Kyle Grieve: Or, if you identify a weakness in your thinking, if you have time to learn more, now you know certain areas you can learn about to maybe turn a weakness into a strength. To finish today’s episode, I just want to go over five of my biggest takeaways that I think listeners can hopefully utilize to improve their scuttlebutt and decision making.

[00:54:29] Kyle Grieve: So when discussing customers here, learning for customers is just crucial to learning about a business. You can take the Peter Lynch approach and research businesses that you’re already a customer of. Lynch gave the example of going to the shopping mall and learning more about a business that way. You can talk with family, friends, colleagues to see which products they can’t live without.

[00:54:47] Kyle Grieve: You will understand the product and what makes it great if you are the customer. You will know why you use it versus a competitor. You’ll appreciate the switching costs involved with using a different product. You’ll know if the product keeps you as a captive customer and if you are annoyed or happy to pay more over time.

[00:55:02] Kyle Grieve: For instance, I see the price of streaming services continue to increase while I think the service isn’t getting any better. Amazon hasn’t really increased prices, but now it shows ads every time I watch it. Netflix continues raising its ad free prices or allows users to go with ads, but at a reduced price.

[00:55:19] Kyle Grieve: And Disney seems to be just increasing its prices, but not showing hats. So, you know, I know personally that I like Netflix’s library the most and the pain from having to pay more hasn’t forced me to cancel yet. But if you think in this light about the product of a business you’re researching, you’re going to learn some very valuable information.

[00:55:36] Kyle Grieve: The second point here is just on sleuthing employees. So if you’re talking with a CEO and they say that part of the reason the business has had so much success is because of the culture, you’re only going to really know this if you start talking with people that are intimately involved with the business.

[00:55:53] Kyle Grieve: A CEO can, of course, say a culture is good. And then when you talk to people, find out that the culture is horrible or there is no culture. And that’s very important information because culture is very, very important, especially if you’re a long term investor. And the only way that you’re going to find this out is from talking with employees.

[00:56:08] Kyle Grieve: Or you’re going to find out when it’s too late and the share prices is probably going to go down on you. So you can also just learn a lot about actual management from talking with employees. They can help you understand if a management is well liked and effective. If everyone dislikes management, that’s a pretty big red flag.

[00:56:23] Kyle Grieve: And that means that you should probably find out why. And if maybe there’s a suitable replacement who might be even better than the current management. Another good thing about talking with employees is getting an update on the business. I luckily know a few CEOs of companies that I own, and they’ve been invaluable to me when I have questions to ask or want an update, or maybe there’s a gray area that I want to understand better.

[00:56:42] Kyle Grieve: If you go to events where CEOs go, you know, trade shows for something or something like that, I don’t think it’s too tough to establish some rapport with them where they are more likely to answer your questions in the future. So a third one here on suppliers. You know, for me personally, I’m a long term investor, so, you know, sleuthing for events that are only going to make a difference to the share price for a quarter or two, or, you know, even a couple of days, it just doesn’t interest me very much.

[00:57:05] Kyle Grieve: So, the part about suppliers that interests me the most is finding out how they’re involved in a business supply chain I’m looking at. You know, if I know a supplier likes working with a company and wants to keep their business and has great relationships, that’s very, very valuable, and it shows that hopefully this business will continue being supplied by their suppliers for a long period of time.

[00:57:23] Kyle Grieve: You know, for any investor, whether you’re looking at a manufacturer or a tech business, there’s usually a supplier angle. And, you know, I think learning more about that relationship can be very helpful in learning more about how just the business works. The other interesting part about suppliers is that finding out who they are can be pretty difficult at times.

[00:57:38] Kyle Grieve: Some public companies might say explicitly in their documentation. But I think some of them also like to keep it a secret so as to not tip off any competition. Now, if that’s the case, if they don’t want to talk about it openly, it definitely requires some more work and innovation to find out who the suppliers are.

[00:57:53] Kyle Grieve: You might have to reach out to management or employees to find out if they’ll share it with you. Or you can look at other competitors or industry insiders and try to get to suppliers that way. So the fourth area here is just talking to specialists. I love talking with specialists. I think it’s a great source, but one thing that you really have to watch out for is bias.

[00:58:14] Kyle Grieve: You know, if you speak to someone who owns a stock, you’re likely to hear very cheery news from other bulls about that company in this sense, you know, talking to someone who’s short can actually be more helpful. You’ll learn why they think the business will likely decrease in value or price. And then it’s up to you to analyze if their evidence is more compelling than the evidence for the bulls.

[00:58:34] Kyle Grieve: If it’s more convincing than your current beliefs, you know that. Maybe you don’t need to continue researching stock or maybe if you own it, then maybe you should sell it. So, you know, just, just realize here, we talked about this a lot. I talked about this a lot. Everyone has biases and it can be very helpful to determine what that bias is before you talk to a specialist on a business because you know, if you talk to someone and it’s their biggest position, it’s very likely that they’re going to be thinking quite highly of it.

[00:59:01] Kyle Grieve: So just understand that, you know, if you can find specialists that maybe have no vested interest in the business, that can be helpful because they don’t have a financial bias. And hopefully that means that maybe some of the information you might get might be not distorted. So the last one here is about my framework for learning from mistakes.

[00:59:18] Kyle Grieve: I wanted to just quickly discuss a general framework that I’ve used for learning from my own investing mistakes that I think will be very, very helpful. So I have kind of this four step process and I’ll expand the example that I just used a few minutes ago here. So the first one is looking where your most significant losses are.

[00:59:37] Kyle Grieve: So for me, I also look at businesses where perhaps the investment didn’t lose money, but my thought process on it ended up being kind of wrong. So a good example of that is heritage growth properties where I made money on the investment, but I didn’t see it as a successful investment because the thesis just didn’t really play out as I thought.

[00:59:56] Kyle Grieve: So the second part here is identify similar thought patterns. You know, some of my least successful investments have been when the primary driver of the investment, like I just said, was doing this sum of the parts calculation. I’d see very clearly that the sum of the parts was much higher than the share price and then buy it hoping that gap would close.

[01:00:11] Kyle Grieve: Now I’ve had kind of about four investments in this area and the three of them, I lost money. So, and a pretty significant amount. So that was definitely an interesting learning point. The third point here is to try to find similarities. And why I made the mistake. So I think the similarities here are pretty self evident.

[01:00:29] Kyle Grieve: It’s just looking at businesses where the sum of the parts is higher than the stock price. I know that this is a thought pattern that has attracted me in the past and it’s Detroit capital. So if I’m looking at newer investments, I can use that to my advantage. So that leads to the fourth point here, which is avoid these patterns as part of your analysis.

[01:00:44] Kyle Grieve: So now that I’m aware of this thought pattern, I know that if someone pitches me an idea or if I’m reading about an idea, and the primary reason for this idea of being attractive is some of the parts. Well, it immediately goes into the too hard pile and I will immediately take a pass. So, that’s all I have for you today.

[01:01:02] Kyle Grieve: If you want to interact with me on Twitter, please follow me at IrrationalMrkts, or on LinkedIn under Kyle Grieve. If you enjoy my episodes, please feel free to let me know how I can make your listening experience even better. Thanks for tuning in. Bye for now.

[01:01:16] Outro: Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.