Primary Research: The Sleuth Investor and Scuttlebutt

After reading Lecture 4:  and Lecture 5:,
you learned that those two investors dug deeply into the companies they researched by speaking to primary sources, calling management, visiting stores, etc.  If you are concentrating your investing in micro-caps or small-cap companies, then scuttlebutt  is a critical tool for you to use. Conversely, unless you are using a basket approach of buying net/nets[1], for example, then you will likely lose if you are on the other side of the trade from an investor who does thorough primary research.

Typical Wall Street analysts sitting at their desk reading news sources rarely have any edge, and they face perceptual problems as outlined here in this CIA Intelligence Manual:

If you wish to gain an edge in small-cap investing, I suggest you learn about scuttlebutt techniques from the pioneer, Philip A. Fisher in his book, Common Stocks and Uncommon Profits. Buffett learned from his reading of the book and you will too. If you want a few comments on the book and technique go here:

Reading those links is no substitute for studying Fisher’s book.  A more recent work (2007) focused on primary research—and one I highly recommend—is The Sleuth Investor: Uncover the Best Stocks Before They make Their Move (Hardcover) by Avner Mandelman.

From an Amazon reader’s comments:

This is a unique book. It explains how to determine competitive advantage from a gumshoe point of view. If you believe the little squiggly lines on your Excel spreadsheet and love to push numbers around in your sandbox, you may be insulted by some of the techniques presented.

In my view, Avner Mandelman has taken the above classic and squared it into Scuttlebut^(2). Some highlights are:

Chapter 2 Getting To Know The Company’s Customers,

Chapter 3 The Company’s Suppliers, and

Chapter 8 Sleuthing Bloopers – Two Cautionary Tales

The author, Avner Mandelman lectured at the Ivey MBA School, Graham Center for Investing (Canada). To listen to the  audio go here: and scroll down to 2007, second speaker.

Knowing the proper tactics for your strategy is critical. Trying to gain an edge through scuttlebutt research would be extremely difficult and time-intensive in large-cap, multinational companies like IBM, Novartis, and Coke. As Avner demonstrates, his fishing pond of small-cap technology companies is highly suited for intensive, primary research.  If you can’t afford to do such research then shy away from being on the other side of the trade from Avner Mandelman!


We can apply primary research methods to learning more about the world.  I have always been curious about the forbidden island, Cuba, so I went there in 2002, travelled throughout the back roads of Cuba and spoke to Cubans.  I learned more about the reality of Cuban than reading traditional news sources such as:

My story is here: A Glimpse of Cuba

Now in 2011 a documentary of what  is actually going on in Cuba—a story that the international press doesn’t  report. Devastating!

Documentary “Cuba y Los  Elefantes” with subtitles in English

Part 1 is here:

Sept. 10 – This documentary was made by Peru’s Institute for Political Freedom.

Includes interviews with Dr. Darsi Ferrer, Jorge Luis García Pérez “Antunez” and other dissidents.  It will help you understand the reality of life under the tyranny of the Castro brothers.

But no matter how brave the Cubans are in the above documentary and in my travelogue, the question remains, “Who supports Castro’s Tyranny?”  Who are those people savagely beating old ladies dressed in white? Whom do they support and why?  A lesson for all research and search for truth is to look at all opposing views. Ironically, a tyranny can’t exist without the support of the people (a powerful minority?) Perhaps the answer resides here:,  (The Politics of Obedience: The Discourse of Voluntary Servitude by Etienne de La Boetie).


“In  a net-net situation, an investor estimates a liquidation value for a company, then tries to  pay a fraction of that value in the market. Ben Graham defined the net-net  value as: Cash and short-term investments + (0.75 * accounts receivable) + (0.5 * inventory) – total liabilities.

Graham  looked for companies whose market values were less than two-thirds of that  net-net value, for two reasons. First, he wasn’t sure he would receive the full  value for accounts receivable and inventory before paying off the creditors.  Second, he wanted to make sure he had a margin of safety to fall back on, in case it  didn’t work out. After all, if the market valued the company this low, something was certainly wrong with it. Graham’s idea was to bet on a situation with asymmetrical odds. In such situations, the probability of losing money is fairly high, but the magnitude of any loss would  be small. However, the potential payoff is large, despite having a lower  probability of success. That’s why these situations are special and worth  looking for, even today.”

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