🛢️ Scuttlebutt Investing

Do you know that by interacting with the employees and suppliers of an organisation you could outperform the market by 3% each year?

🙋🏽‍♂️ What is Scuttlebutt investing strategy?

There exists a multitude of investment strategies worth exploring, including tactics like

• Buying the Dip

• 3-Day Rule

• Skin in the Game

Among these approaches is the intriguing Scuttlebutt Investing strategy.

Before getting into the real meaning, it's important to acknowledge that people are always in the Psychological Drama in the world of investing. Investors are quick to make their financial decisions based on gossip such as the information if a CEO is planning to leave or resign abruptly does not sit well with the investors.

This is where “Scuttlebutt Investing” comes in.

This is a term that originated in the sailing world, where it referred to the rumours and gossip that sailors would exchange when they gathered at the water cask.

So, Scuttlebutt investing involves gathering information about companies and their operations through various channels like industry contacts, suppliers, and customers. Investors use this approach which proves to be particularly useful during a CEO's transition period when there may be uncertainty and potential changes in the company's direction.

🏋🏽 Does this work actually?

Well, it can turn out both ways - The stock price might come down or it might reach a new high.

For instance, Fox News Corp shares jumped 3% on the news Rupert Murdoch is stepping down as chairman and handed the sole chairmanship to his oldest son, Lachlan Murdoch.

However, a study by the University of Chicago found that investors who used scuttlebutt investing outperformed the market by an average of 3% per year.

Based on this study, we can estimate that the probability of scuttlebutt investing working is around 60%.

👀 Instances of Scuttlebutt Investing

• Latest news, TCS CEO, Rajesh Gopinathan stepped down from his role. Krithivasan has been designated as the new CEO, who went through a transition period in September 2023, which led to a 4% jump in the share price.

• When Steve Jobs resigned as CEO of Apple Inc. in 2011, the company's stock initially fell over 5% due to concerns about its future without him. The stock price recovered in the following months as Tim Cook proved to be a capable leader.

Of course, there were other factors to the stock price variation. However this shows how a CEO's departure can impact stock prices, but the long-term effects depend on factors such as leadership succession planning and the company's ability to stay competitive.

But why?

If the departure is sudden, investors may assume that something has gone wrong and lose confidence in the company 😱. A CEO transition will usually make a stock’s price more volatile in the short term, so a transition is well planned in advance.

⛹🏼‍♂️ Play Safe

• From a retail investor's vanity point - it's crucial to talk to a wide range of people in the company and to avoid biases right up front. Pattern identification can really help a lot.

• From an organisational perspective - it's imperative to announce a replacement or have a backup plan signalling stability and continuity in leadership. Negative news tends to impact stock prices, whereas a competent CEO with an impressive portfolio makes investors feel secure.