What lengths would you to go for an investment?
How about becoming an Uber driver for a few months?
That is exactly what hedge fund manager Andrew Brown did.
He wanted to see if the taxi industry was really being ‘disrupted’ by ride sharing apps. His conclusion led him to buy Cabcharge Australia Ltd [ASX:CAB], which is up more than 55% since April:
‘I reckon Uber drivers clear the very, very low twenties an hour, minimum wage is $24. What you’re seeing is a lot of people are saying ‘It sounds good, you’ve got flexibility’, but other than that it is no way to make a living. A lot of guys are going back to cabs.’
How to invest US$17 billion with scuttlebutt
The method Brown uses is the scuttlebutt. The name comes from a ship’s bucket, around which sailors gathered to share the latest gossip of the sea.
The phrase was popularised by the famous American stock picker, Philip Fisher.
And after reading Fisher’s book, Common Stocks and Uncommon Profits, Warren Buffett decided to use the method to gain insights on American Express, GIECO and Apple.
When sizing up the latter, Warren new the financials back to front. He also decided to get out and find out what people thought of Apple’s products.
Here’s what Buffett said in a CNBC interview just after purchasing US$17 billion worth of Apple shares:
‘Well, I would say Apple’s — I mean, obviously it’s very, very, very tech-involved, but it’s a consumer product to a great extent too. And I mean, it has consumer aspects to it. And one of the great books on investing, which I’ve touted before, is one that Phil Fisher wrote back around 1960 or thereabouts, called “Common Stocks and Uncommon Profits”.
‘It had an effect on me. I went out to meet Phil Fisher after reading the book, I found him in this little office in San Francisco. And I recommend any investor read that book. And it’s still in print. And he talks about something called the scuttlebutt method, which made a big impression on me at the time. But I used it a lot, which is essentially going out and finding out as much as you can about how people feel about the products that they…it’s just asking questions, basically.
‘And Apple strikes me as having quite a sticky product and enormously useful product that people would use, and not that I do. Tim Cook’s always kidding me about that. But it’s a decision-based…but again, it gets down to the future earning power of Apple when you get right down to it. And I think Tim has done a terrific job, I think he’s been very intelligent about capital deployment. And I don’t know what goes on inside their research labs or anything of the sort. I do know what goes on in their customers’ minds because I spend a lot of time talking to ’em.’
I know what you might be thinking. No way am I going to be an Uber driver or head down to the nearest Apple store to see how many people walk in and out.
You might not even have enough time to read multiple annual reports, let alone hit the pavement asking strangers questions.
That’s where Port Phillip Publishing advisory services come in, but I’ll touch on that a bit later.
Aussie finance expert reveals four Aussie stocks he believes could be top performers in 2018. Get your free report now.
Good news for you lazy investors
In the last few years we’ve seen an information explosion.
Analysts not only have access to all financial results. There’s more stock price information, equations and indicators than we know what to do with. Some investors will look at satellite imaging to gauge the progress of miners and trade.
But a lot of information out there is merely noise. It won’t help you in forming strong opinions about businesses. And a lot of the research out there is far from unbiased.
So what do you think will happen if analysts at these investment banks downgrade a whole bunch of stocks? It might cause their clients to look elsewhere for public offerings, mergers and acquisitions.
It’s also an opinion that conflicts with a major source of revenues, selling stocks to the public. And it’s why, in my opinion, investment banking research is being thrown in the trash.
The Australian Financial Review writes:
‘Investment banks will have to fight even harder to get the investment community to draw on their stock research, as sweeping changes grip the industry and the unbundling of research and brokerage fees becomes more widespread.
‘Those are key findings in a report by Greenwich Associates and Thomson Reuters, titled Seismic Shifts, the Future of Investment Research, which interviewed a cross section of chief investment officers, portfolio managers and analysts around the world.’
The truth is you don’t need to look at betas, Bloomberg, the capital asset pricing model or investment banking research to be successful in the market.
All you really need is annual reports and the scuttlebutt method. The former familiarises you with how a company creates value. The latter helps you understand the businesses and its likely earnings power.
Editor, Money Morning
PS: He predicted Japan’s 1989 economic collapse, the dotcom AND subprime busts, as well as the populist wave that brought Brexit and Donald Trump…all well before the mainstream media.
Now controversial economist and bestselling author Harry Dent returns with a chilling warning for Australia…In Dent’s new must-read book Zero Hour, he lays it all out. You can pick up your copy here.