Thursday, 30 September 2010

Buffett’s other mentor

Buffett’s other mentor

Most people would correctly say the biggest influence on billionaire investment legend Warren Buffett is Benjamin Graham, the author of the The Intelligent Investor, bible on value investing. But a lesser-known guru, Philip Fisher, could be given almost as much credit for influencing the greatest investor of all time.

His book, Common Stocks and Uncommon Profits, helped Buffett shift from focussing purely on value to incorporating into his investment strategy the quality of businesses. Fisher is the ‘great business’ in Buffett’s philosophy of buying ‘great businesses at cheap prices.’

Like Buffett, Fisher has a buy-and-hold philosophy. He advocated buying growth stocks and sought companies which had products and management that generated long-term increases in sales and earnings.

Fisher had a battery of requirements. Though a rather shy and retiring type, he would still drill management to see if they lived up to his high expectations. His rigorous criteria are outlined in the chapter ‘Fifteen points to look for in a common stock’. It includes questions such as: Does management have a determination to continually innovate through new products? Does it have a short-range or long-range outlook in regard to profits? Does the company have a management of unquestionable integrity?

Fisher’s son, Kenneth Fisher, who described his father as “small, slight, almost guant, timid and forever fretful”, has written that his father’s most incisive question was simple. “What are you doing your competitors aren’t doing yet?” That question goes to the essence of great, innovative growth stocks and should be asked of any potential investment. Kenneth Fisher, a Forbes columnist, has himself gone on to make a fortune as a money manager.

The factors Fisher talks about are hard to measure, which is important to note in a time where everything needs to be measured and when judgement is less respected. But qualitative factors can be just as important as a company’s financials. As mentioned, Warren Buffett’s success has come from a synthesis of Fisher’s qualitative approach with the rigid quantitative methods of Graham. That’s why you’ll hear the Sage of Omaha placing so much emphasis on having honest, focused executives running the companies he invests in.

Fisher’s other insights could be seen as being at odds with the value investing school. He played down the importance of dividends and believed that high price-earnings (PE) ratios shouldn’t necessarily rule a stock out of consideration. He also eschewed diversification, believing investors should focus on a small number of stocks that they know a lot about. But he advocated buying good companies when the markets drop on fears of war.

Fisher brought a personal approach to finding great growth stocks, too. He limited the stocks he bought to areas he knew a lot about. He also made famous the ’scuttlebutt’ technique of getting the low down on a company by talking to suppliers, customers, competitors and employees.

Common Stocks and Uncommon Profits will require several readings to grasp the full impact of its message. But it sums up the characteristics of great growth stocks that generate superior returns over the long term.


Common Stocks and Uncommon Profits by Philip Fisher (Summary)

Common Stocks and Uncommon Profits
by Philip Fisher
By Kenneth L. Fisher (Philip Fisher’s Son)
Ken Fisher credits his father for teaching him the "craft" of investing. He writes that, "It’s the difference between learning to play the piano (craft) and then composing (art)." Indeed Ken’s own investment practice—his art— deviates from his father’s preference for growth stocks; Ken prefers value-oriented investments. But the process Ken uses to arrive upon investment decisions is largely based on his father’s tenets of "scuttlebutt" and "the fifteen points." As the son now runs a large investment management company he uses these principles en mass. He also believes his father’s ideas about undue diversification, in particular, influenced Buffett.
Phil Fisher went to Stanford and started work as a security analyst in San Francisco in 1928. He formed his own firm, Fisher & Co., in 1931. After some years in the game he decided to write this book, "In studying the investment record of both myself and others, two matters were significant influences in causing this book to be written. One, which I mention several times elsewhere, is the need for patience if big profits are to be made from investment. Put another way, it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens. The other is the inherently deceptive nature of the stock market. Doing what everybody else is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all."

Fisher summarizes his conclusions from the past in the following paragraph, "Such a study indicates that the greatest investment reward comes to those who by good luck or good sense find the occasional company that over the years can grow in sales and profits far more than industry as a whole. It further shows that when we believe we have found such a company we had better stick with it for a long period of time. It gives us a strong hint that such companies need not necessarily be young and small. Instead, regardless of size, what really counts is a management having both a determination to attain further important growth and an ability to bring its plans to completion…It makes clear to us that a general characteristic of such companies is a management that does not let its preoccupation with long-range planning prevent it from exerting constant vigilance in performing the day-to-day tasks of ordinary business outstandingly well."

Merriam-Webster defines "scuttlebutt" as:
1, a : a cask on shipboard to contain freshwater for a day's use, b : a drinking fountain on a ship or at a naval or marine installation
Fisher makes use of definition 2 here in the second chapter. "It is amazing what an accurate picture of the relative points of strength and weakness of each company in an industry can be obtained from a representative cross-section of the opinions of those who in one way or another are concerned with any particular company." Though he writes only three pages about scuttlebutt here, Fisher assures us the concept will be discussed in great detail all throughout the book.

Below you will find "The Fifteen points to look for in a common stock," Fisher’s famous checklist for the inquiring investor.
1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
3. How effective are the company’s research and development efforts in relation to its size?
4. Does the company have an above average sales organization?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company’s cost analysis and accounting methods?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regards to profits?
13. In the foreseeable future will the growth of the company require sufficient equity financing so that the large number of shares then outstanding will largely cancel the existing benefit from this anticipated growth?
14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
15. Does the company have a management of unquestionable integrity?

"The typical investor has usually gathered a good deal of the half-truths, misconceptions, and just plain bunk that the general public has gradually accumulated about successful investing." Fisher posits that the average investor believes only a bookish genius is capable of superior returns. He doesn’t agree with this mean mentality. "The most skilled statistical bargain hunter ends up with a profit which is but a small part of the profit attained by those using reasonable intelligence in appraising the business characteristics of superbly managed growth companies," he further expounds upon his view of apparent expertise, "Even among some of the so-called authorities on investment, there is still enough lack of agreement on the basic principles involved that it is as yet impossible to have schools for training investment experts…"

Contrary to Buffett, Fisher is looking for companies that "will have spectacular growth in their per-share earnings." (Buffett is primarily concerned with consistent and handsome returns on equity.) Buffett and Fisher do agree on the worthlessness of macroeconomic forecasting. Fisher writes, "The conventional method of timing when to buy stocks is, I believe, just as silly as it appears on the surface to be sensible. This method is to marshal a vast mass of economic data…I believe that the economics which deal with the forecasting business trends may be considered to be about as far along as was the science of chemistry during the days of alchemy in the Middle Ages." Fisher prefers to buy into outstanding companies when their earnings are temporarily depressed, and so consequently is the share price, because of a new product or process launch. "In contrast to guessing which way general business or the stock market may go, he should be able to judge with only a small probability of error what the company into which he wants to buy is going to do in relation to business in general."

Fisher is very precise about when to sell. "I believe there are three reasons, and three reasons only, for the sale of any common stock which has been originally selected according to the investment principles already discussed." They are: 
1.) Upon realizing a mistake, 
2.) When a stock no longer meets the 15 points, and
3.) If a substantially attractive investment arises and stock needs to be sold to finance that investment.
Interestingly, Buffett’s commonly told parable about investing in your classmates seems to have originated out of this chapter. Both describe a hypothetical scenario of buying a percentage of the future earnings of a classmate. The point being that we should rationally select people on the basis of their character rather than purely on their intellect. Fisher notes how foolish it would be to sell your lucrative future contract on classmate’s earnings for the sake of buying another, less proven, classmate’s earnings, simply because somebody offered to buy your original classmate investment at a high price.

Fisher warns us to be wary of two scenarios when earnings are retained and no dividends are paid. 
  • The first is when executives pile up liquid assets for a sense of security. 
  • The second occurs when "substandard managements can get only a subnormal return on the capital already in the business, yet use the retained earnings merely to enlarge the inefficient operation rather than to make it better."
Fisher posits that "regularity or dependability" is the most important characteristic of dividends. He illustrates his claim using the restaurant parable that Buffett so often cites. "There is perhaps a close parallel between setting policy in regard to dividends and setting policy on opening a restaurant. A good restaurant man might build up a splendid business with a high priced venture. He might also build up a splendid business with an attractive place selling the best possible meals at the lowest possible prices. Or he could make a success of Hungarian, Chinese, or Italian cuisine. Each would attract a following. People would come there expecting a certain kind of meal. However, with all his skill, he could not possibly build up a clientele if one day he served the costliest meals, the next day low-priced ones, and then without warning served nothing but exotic dishes. The corporation that keeps shifting its dividend policies becomes as unsuccessful in attracting a permanent shareholder following. Its shares do not make the best long-range investments."

"1. Don’t buy into promotional companies."
"When a company is in a promotional stage…all an investor or anyone else can do is look at a blueprint and guess what the problems and strong points may be."
"There are enough spectacular opportunities among established companies that ordinary individual investors should make it a rule never to buy into a promotional enterprise."
Fisher wants to see a firm with at least one year of operational profit and two to the three years of business before investing.
"2. Don’t ignore a good stock just because it is traded ‘over the counter.’"
"3. Don’t buy a stock just because you like the ‘tone’ of its annual report."
"The annual report may…reflect little more than the skill of the company’s public relations department in creating an impression about the company in the public mind."

"4. Don’t assume that the high price at which a stock my be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been discounted already in the price."
"…why shouldn’t this stock sell five years from now for twice the price-earnings ratio of these more ordinary stocks just as it is doing now and has done for many years past?"

"5. Don’t quibble over eights and quarters."
"If the stock seems the right one and the price seems reasonably attractive at current levels, buy ‘at the market.’"

Given the recent terror and talk of war, we will focus on point two in this chapter.
"2. Don’t be afraid of buying on a war scare."
"At the conclusion of all actual fighting—regardless of whether it was World War I, World War II, or Korea—most stocks were selling at levels vastly higher than prevailed before there was any thought of war at all. Furthermore, at least ten times in the last twenty-two years, news has come of other international crises which gave threat of major war. In every instance, stocks dipped sharply on the fear of war and rebounded sharply as the war scare subsided."
"War is always bearish on money. To sell a stock at the threatened or actual outbreak of hostilities so as to get into cash is extreme financial lunacy. Actually just the opposite should be done. If an investor has about decided to buy a particular common stock and the arrival of a full-blown war scare starts knocking down the price, he should ignore the scare psychology of the moment and definitely begin buying."

The other four points…
1. Don’t overstress diversification.
3. Don’t forget your Gilbert and Sullivan.
4. Don’t fail to consider time as well as price in buying a true growth stock.
5. Don’t follow the crowd.

"Possibly one-fifth of my first investigations start from ideas gleaned from friends in industry and four-fifths from culling what I believe are the more attractive selections of a small number of able investment men. These decisions are frankly a fast snap judgment on which companies I should spend my time investigating and which I should ignore. Then after a brief scrutiny of a few key points in an SEC prospectus, I will seek ‘scuttlebutt’ aggressively, constantly working toward how close to our fifteen-point standard the company comes. I will discard one respective investment after another along the way. Some because the evidence piles up that they are just run of the mill. Others because I cannot get enough evidence to be reasonably sure one way or the other. Only in the occasional case when I have a great amount of favorable data do I then go to the final step of contacting the management. Then if after meeting with management I find my prior hopes pretty well confirmed and some of my previous fears eased by answers that to me make sense, at last I am ready to feel I may be rewarded for all my efforts."
Fisher also notes that he’ll invest in one stock out of two hundred fifty that he initially considers. For every two to two and a half visits he’ll buy into the company—this points to the fact that most of his work is done beforehand.

Chapter eleven concludes the first part of Fisher’s book; it and the chapters leading to it comprise a book within a book. "This book has attempted to show what these basic principles are, what type of stock to buy, when to buy it, and most particularly, never to sell it—as long as the company behind the common stock maintains the characteristics of an unusually successful enterprise."

Part two is of the book is entitled, "Conservative Investors Sleep Well."
Fisher begins by defining two terms:
"1. A conservative *investment* is one most likely to conserve (i.e. maintain) purchasing power at a minimum risk.
2. Conservative *investing* is understanding of what a conservative investment consists and then, in regard to specific investments, following a procedural course of action needed properly to determine whether specific investment vehicles are, in fact, conservative investments."
At the time of writing, in mid-1974, Fisher noted that the morale of the investor was the lowest it had been in history since the Depression. Consequently there existed, "a magnificent opportunity for those with the ability and the self-discipline to think for themselves and to act independently of the popular emotions of the moment."

"The company that qualifies well in this first dimension of a conservative investment is a very low cost producer or operator in its field, has outstanding marketing and financial ability and a demonstrated above-average skill on the complex managerial problem of attaining worthwhile results for its research or technological organization. In a world where change is occurring at an ever increasing pace, it is 
(1) a company capable of developing a flow of new and profitable products or product lines that will more than balance older lines that maybe become obsolete by the technological innovations of the others; 
(2) a company able now and in the future to make these lines at costs sufficiently low so as to generate a profit stream that will grow at least as fast as sales and that even in the worst years of general business will not diminish to a point that threatens the safety of an investment in the business; and 
(3) a company able to sell its newer products and those which it may develop in the future at least as profitably as those with which it is involved today." - Fisher.

The second dimension is the most important of the qualitative aspects of sound investing: the people factor. "Here is an indication of the heart of the second dimension of a truly conservative investment: a corporate chief executive dedicated to long-range growth who has surrounded himself with and delegated considerable authority to an extremely competent team in charge of the various divisions and functions of the company."
Fisher warns us of one-man shows and provides an insight into determining the managerial balance of an investment, "If the salary of the number-one man is very much larger than that of the next two or three, a warning flag is flying."
Fisher concludes with three points about the second dimension:
"1. The company must recognize that the world in which it is operating is changing at an ever increasing rate." Dow Chemical is looked at as an example.
"2. There must always be a conscious and continuous effort, based on fact, not propaganda, to have employees at every level, from the most newly hired blue-collar or white-collar worker to the highest levels of management, feel that their company is a good place to work." Texas Instruments is looked at as an example.
"3. Management must be willing to submit itself to the disciplines required for sound growth."

Investment Characteristics of Some Businesses
Fisher’s third degree deals with "the degree to which there does or does not exist within the nature of the business itself certain inherent characteristics that make possible can above-average profitability for as log as can be foreseen into the future." Fisher’s views on profitability jibe with Buffett’s concerns about inflation, indeed Fisher may have influenced Buffett in this regard. "A company that has annual sales three times its assets can have a lower profit margin but make a lot more money than one that needs to employ a dollar of assets in order to obtain each dollar of annual sales."
Fisher sides with industry leaders rather than number two and three players. "It has been our observation, that in many years of trying, Westinghouse has not surpassed General Electric, Montgomery Ward has not overtaken Sears, and---once IBM established early dominance in its areas of the computer market—even the extreme efforts of some of the largest companies in the country, including General Electric, did not succeed in displacing IBM from it’s overwhelming share of that market."
In short, along with good leadership, a company needs great economics for it to be truly a conservative investment.

Price of a Conservative Investment
Fisher posits that many fortunes have been made when investors have refused to sell their position in a rapidly appreciating equity. If the company is of a high quality then selling it is rather foolish, at almost any price, because of the scarcity of high-quality investments. What will you do with the money?
"Every significant price move of any individual common stock in relation to stocks as a whole occurs because of a changed appraisal of that stock by the financial community," writes Fisher. He warns us about the vagaries of these "appraisals", emphasizing that they are not snapshots of true company performance but only opinions of fallible human minds—minds prone to herd behavior at that.

To illustrate the willy-nilly stances common to analysts Fisher looks their views chemical industry from the 1950s to the 1970s. In the 50s chemical concerns were golden synthesizing wonder products like DDT and nylon. In the 60s they appeared to be commodity producers with seemingly the same business characteristics of steel mills. Then in the 70s, for whatever reason, chemical stocks became expensive again.

"The fourth dimension to stock investing might be summarized in this way: The price of any particular stock at any particular moment is determined by the current-financial community appraisal of the particular company, of the industry it is in, and to some degree of the general level of stock prices. Determining whether at that moment the price of a stock is attractive, unattractive or somewhere in between depends for the most part on the degree these appraisals vary from reality. However, to the extent that the general level of stock prices affects the total picture, it also depends somewhat on correctly estimating coming changes in certain purely financial factors, of which interest rates are by far the most important."

--Part III is entitled "Developing an Investment Philosophy"--
This chapter reviews Fisher’s early hard-luck experiences and how they forged his philosophy. His interest in investing bubbled up as grammar school kid when he overheard his uncle explaining stocks to Fisher’s grandmother. Fifteen years or so later he had completed his first year at Stanford and went to work for a bank "writing" reports on companies which the bank was issuing high-yield debt for. (He noted that he wasn’t really originating the reports, as the standard practice was to paraphrase whatever was in Moody’s.) Encouraged by a supporting boss, Fisher began seeking out the management of the debt issuing companies and incorporating his inquiries into his reports.
In performing his due diligence Fisher came to a first principle, "Reading the printed financial records about a company is never enough to justify an investment."
Fisher went on to loose money during this period of time. He wasn’t alone: it was 1929. Another principle learned – "what really counts in determining whether a stock is cheap or overpriced is not the ratio to the current year’s earnings, but its ratio to the earnings a few years ahead"--, and one more job completed at an investment firm, Fisher struck out on his own. In 1933 he managed a monthly profit of $29 (rent was $25), but soon (1935) his practice was "extremely profitable."

Fisher begins by recounting his intrigue with Food Machinery Corporation; he started pay attention to the operations of this firm in 1928. Food Machinery Corporation was the product of a merger between three agricultural machinery companies. The company appealed to Fisher for three business reasons: it was a "world leader in size," it had cornered some pockets of the market, and it enjoyed the fruits of a "superbly creative research or engineering department." In addition to these favorable business economics Fisher trusted and admired the company’s management. There was a shotgun burst of IPOs in 1928, including that of Food Machinery Corporation. "Food Machinery was thought to be just another of the many ‘flaky’ which were sold to the public at the height of a speculative orgy…it was possible to buy these shares in quantity at the ridiculous price to which they had sunk." And that was what Fisher did for his clients. Unfortunately, Fisher doesn’t disclose the success of this investment in this chapter. He does gives us another principle, namely, "I established what I called my three-year rule. I have repeated again and again to my clients that when I purchase something for them, not to judge the results in a matter of a month or a year, but allow me a three year period." Fisher broke this rule one time, when he sold Rogers Corporation in the mid 1970s.

Fisher’s entrepreneurial efforts stalled when he served in the Air Force for three years starting in 1942. His assignments occasionally gave him time to plot his return to investing. Upon returning he decided to earnestly investigate the chemical industry, as Fisher was convinced of its post-war growth potential. His research culminated when, in 1947, he invested in Dow Chemical. Dow appealed to Fisher because of its efforts to become the lowest cost producer in each of its markets and because of its emphasis on the "people factor." When Fisher asked the president of Dow what he foresaw as Dow’s biggest problem in the future the president confessed that he worried about Dow becoming a more "military-like organization" – such concern for people sold Fisher.
One of Fisher’s key principles is repeated in this chapter: "Even if the stock of a particular company seems at or near a temporary peak and that a sizable decline may strike in the near future, I will not sell the firm’s shares provided I believe that its longer term future is sufficiently attractive."

According to Fisher, the market is not efficient. "Efficient market theory grew out of the academic School of Random Walkers. These people found that it was difficult to identify technical trading strategies that worked well enough after transactions [sic] costs to provide an attractive profit an attractive profit relative to the risks taken. I don’t disagree with this. As you have seen, I believe it is very, very tough to make money with in and out trading based on short-term market forecasts. Perhaps the market is efficient in this narrow sense of the word…I do not believe that prices are efficient for the diligent, knowledgeable, long-term investor."
Fisher points out that the prevailing view, that is the fully informed professional perspective, has often been incorrect or inefficient. "With the possible exception of the 1960’s, there has not been a single decade in which there was not some period of time when the prevailing view was that external influences were so great and so much beyond the control of individual corporate managements that even the wisest common stock investments were foolhardy and not perhaps for the prudent…Yet everyone of these periods created investment opportunities that seemed almost incredible with all the advantages of hindsight."

Here are the points, abbreviated, Fisher gives as his conclusion:
1. Buy into companies that have disciplined plans for achieving dramatic long-range growth in profits and that have inherent qualities making it difficult for newcomers to share in that growth.
2. Focus on buying these companies when they are out of favor.
3. Hold the stock until either (a) there has been a fundamental change in its nature (such as a weakening of management through changed personal), or (b) it has grown to a point where it no longer will be growing faster than the economy as a whole.
4. For those primarily seeking major appreciation of their capital, de-emphasize the importance of dividends.
5. Taking small profits in good investments and letting losses grow in bad ones is a sign of abominable investment judgment. A profit should never be taken just for the satisfaction of taking it.
6. There are a relatively small number of truly outstanding companies. Their shares frequently can’t be bought at attractive prices. Therefore, when favorable prices exist, full advantage should be taken of the situation.
7. A basic ingredient of outstanding common stock management is the ability to neither accept blindly whatever may be the dominant opinion in the financial community at the moment nor to reject the prevailing view just to be contrary for the sake of being contrary.
8. In handling common stocks, as in most other fields of human activity, success depends greatly on a combination of hard work, intelligence, and honesty.


"Investing is simple, but not easy." - Warren Buffet


















Source: Common Stocks and Uncommon Profits and Other Writings, Philip A. Fisher

Philip Fisher: Growth Stock Investigator

Legendary Investor

Philip Fisher: Growth Stock Investigator
Matthew Schifrin, 02.23.09, 6:00 PM ET

Who was Philip Fisher?
Most Forbes readers are familiar with Ken Fisher, money manager billionaire and longtime Portfolio Strategy columnist in Forbes magazine. However, what isn't as widely known among younger investors is that Ken Fisher comes from investing royalty. His father was Philip Fisher, who, starting in 1931, ran a small Northern California investment counseling firm. In 1958, Phil Fisher wrote the first investment book ever to make The New York Times bestseller list, Common Stocks and Uncommon Profits. It also became required reading in the investments class at Stanford's Graduate School of Business (where Phil taught for a time).

The book laid out senior Fisher's 15-point strategy for finding great long-term growth stocks at a time when most investors and strategies swung with business cycles. His methods were so convincing that a young Warren Buffett went to visit with Fisher and eventually incorporated a good deal of Fisher's methods into his own stock selection process. Buffett later described his strategy as 15% Fisher and 85% Benjamin Graham.

As Ken Fisher recounts in the forward to his father's classic investment tome, his father was a bit impatient and the young Fisher only worked at his father's firm briefly. But Fisher went on hundreds of company visits with his father in the 1970s and absorbed his father's investigative style of investing. Still, young Fisher's response to people who would often ask him which experience with his father was his favorite was, "The next one."

Ken's strategy, which focuses largely on stocks undervalued according to their price-to-sales ratios, is much more straight value in it's approach. He seeks stocks that are cheap because they have an undeserved bad image. His father, who wrote his book during a time of great prosperity that resulted in a long post-World War II bull market, wanted stocks he could hold forever because they were well managed and would continue to grow. In fact, by the time Philip Fisher died at the age of 96 in 2004, he still held shares of Motorola that he had purchased 21 years earlier. The stock had appreciated more than 20-fold versus a seven-fold appreciation of the S&P 500.

Phil Fisher's Stock-Picking Strategy
Phil Fisher's 15-point approach essentially attempts to determine whether a company is in a position to continue to grow sales for several years, has an innovative and visionary management, strong profit margins, effective sales organization and high-quality management. Fisher also argued against over-diversifying and, in his heyday, tended to hold only about 30 stocks. This is one of the Buffett strategies borrowed from Fisher as was his don't follow the crowd approach.

Not insignificant in Fisher's approach to growth stock investing was something he called "scuttlebutt." This was the process of veering from printed financial stats or company disclosures. Fisher felt strongly that investors should "investigate" potential portfolio holdings by questioning customers, competitors, former employee's and suppliers, as well as getting information from management itself. The art to this was not just in the answers Fisher got, but in asking the right questions.

Thanks to help from the American Association of Individual Investor's Stock Investor Pro software, recently created a Philip Fisher screen. Below are the criteria used and 10 stocks that passed our Fisher test. Of course, true Phil Fisher devotees will need to do the "scuttlebutt" part of the analysis on their own.

*Net profit margin for the last 12 months and each of the last five fiscal years is greater than the industry's median net profit margin for the same period.
*Sales have increased on a year-to-year basis over each of the last three years (Y4 to Y3, Y3 to Y2, Y2, to Y1) and over the last 12 months (Y1 to 12 months).
*The three-year growth rate in sales is greater than or equal to the industry's median sales growth rate over the same period.
*The company is not expected to pay a dividend in the next year (indicated divided is zero).
*The ratio of the current price-earnings ratio to the estimated growth rate in earnings per share (PEG ratio) is greater than 0.1 and less than or equal to 0.5.

Company Business Price Market Cap Five-year PEG Ratio Five-Year Sales Growth Net Profit Margin
America Movil Communications Services $31.05 $53.5 billion 0.2 39.1% 31.2%
NII Holdings Communications Services $20.56 $3.4 billion 0.9 33.4% 11.6%
Inverness Medical Innovations Biotechnology & Drugs $25.09 $2.0 billion 32.3% -4.2% Computer Services $45.61 $1.8 billion 0.2 45.8% 31.4%
General Cable Communications Equipment $19.61 $1.0 billion 26% 3.9%
Arena Resources Oil & Gas Operations $26.8 $1.9 billion 0.1 125.9% 37.6%
EZCORP Retail (Specialty Non-Apparel) $13.87 $599.3 million 0.3 17.3% 11.5%
Cabela's Retail (Specialty Non-Apparel) $6.32 $421.4 million 0.6 13.9% 3.2%
Team Business Services $16.49 $310.5 million 0.3 39.1% 5.2%
Volcom Apparel/Accessories $9.52 $232.0 million 0.2 36.3% 11.2%
Continucare Health Care Facilities $1.96 $117.2 million 0.3 21.2% 5%
Source: AAII Stock Investor Pro.

Philip A. Fisher and `Scuttlebutt'

Philip A. Fisher and `Scuttlebutt'

July 11, 2000

I first encountered the word `scuttlebutt' in the novel `Battle cry', story of a US Marine Corps battalion against the background of WW II, by Leon Uris. Almost twenty-five years later, I encountered it again in `Common stocks and Uncommon profits', a book on investment, by Philip A. Fisher. Some words remain stuck in your mind for reasons unknown. During the first encounter I had not bothered to find out the meaning but this time I opened my copy of COD and learned that `scuttlebutt' is a colloquial word, meaning `rumor or gossip'. 
Phil Fisher is a name to reckon with in the field of security investing. His book, mentioned above, first appeared in 1958 and has remained a `must read' since then for all those interested in the art and science of investing. The book carries a small chapter of three pages titled `What "Scuttlebutt" Can Do' and according to some, those three are amongst the most important pages of the book. 
Cold figures and dry notes in any company annual report do not tell the whole story. Every company has some very strong points and also some that are worth hiding. The research team may be on the verge of a breakthrough that may lead to huge profits for many years to come, or the union leaders may be plotting a strategy to trap the management, or some key officials may be planning a new company in direct competition. These events when actually happen will have far reaching effects on the performance but the annual report may not carry any clue to help the investor. Yet, these are of great interest to him because future is all he cares for. Now, if he can not get the information through official sources, he has to use some back channels and that is where scuttlebutt comes in. 
Fisher has explained the importance of scuttlebutt very well in the book. He says: 
"The business `grapevine' is a remarkable thing. It is amazing what an accurate picture of relative points of strength and weakness of each company in an industry can be obtained from a representative cross section of the opinions of those who in one way or another are concerned with any particular company. Most people, particularly if they feel sure there is no danger of their being quoted, like to talk about the field of work in which they are engaged and will talk rather freely about their competitors. Go to five companies in an industry, ask each of them intelligent questions about the points of strength and weakness of the other four, and nine times out of ten a surprisingly detailed and accurate picture of all five will emerge."
To get such a picture, one has to visit the company, talk to its customers, vendors, employees, ex-employees and dealers etc. The word `scuttlebutt' used by Fisher is very apt because all those mentioned do not provide any hard quantifiable data; they offer opinions that are subjective. Most of what they tell, falls under the category of `gossip' but if analyzed well, it never fails to give an insight. All investors have their own method of collecting scuttlebutt but most of them don't give it as much importance as it deserves. Analyzing a balance sheet is more cerebral and more satisfying. It gives a `high' of a different kind but the high does not get converted into success if the scuttlebutt is inferior. 
Having read so much about the scuttlebutt method, I decided to try it out. Since visiting companies and getting to talk to people there is difficult I chose the easier path of visiting several branches of banks, both private and nationalized. Currently all branch managers are eager to talk to you because all of them want your account and deposits. The information obtained was very interesting. Since it was all hearsay I will not take names but would like to give a sample. In one bank I was told "We are young and dynamic. They belong to the Middle Ages. Or "We have a wide shareholding pattern but they are really a family owned concern." At another place it was "We are very cosmopolitan and diversified, they have a typical south Indian maharashtrian mentality. Try getting a TOD from then and see how many forms you have to sign" About one bank I was told that the chairman and the managing director do not see eye to eye. Many such interesting bits of information came my way. All were pieces of gossip but they all added little extra sharpness to the picture in my mind. 
Employees, if they feel secure, give lots of helpful information. Inventory is a big issue in manufacturing companies, and its valuation is a complicated affair. If an employee tells me that the company has a lot of dead inventory, I change my discounting factor from 80% to 70%. If more than three persons from the materials division say the same thing I reduce it further. If four out of five employees make disparaging remarks about the management, I revalue long term prospects for the company. No company can go places if the work force is dissatisfied. I know of a company where a relatively simple product has been under design for more than five years. Can this company stand against competition? I doubt. 
More than employees, ex-employees prove more valuable because they are not scared of voicing their opinions. However, Fisher warns that though they may provide valuable insight, their opinions should not be accepted without ample verification because many of them have an axe to grind. Drivers and peons fall in the same category. They come to know many things before the rest of the crowd, but one has to take what they say with not a pinch but a sack of salt. 
In the ultimate sense, an investor chooses to become a partner with the promoters of the company when he purchases a stock. If I do not like a person and his ways of running his business, I will definitely hesitate before deciding to own a part of that business. Personal chemistry does play a role. Many investors like to know about the CEO before they invest and they do not trust the articles appearing in magazines but collect information through their own sources. Personality of the CEO does contribute in the decision making process, especially with women, though not to a great extent. "Ratan Tata looks like a gentleman and gives me confidence" or " So and so from the Birla family does not smoke, does not drink and is a vegetarian" or "The new CEO (of a multinational) is really using this assignment as a stepping stone and will do any thing to please his bosses back home", are not statements to be ignored. This information goes beyond the cold figures of the annual report but it helps in getting a sharper view.
Philip Fisher always took a very long-term view. His famous statement " If the job has been correctly done when a common stock is purchased, the time to sell it is -almost never!" is indicative of that policy. Fisher also believed in having few outstanding companies in his portfolio. He once told John Train, another investor and author " I don't want a lot of good investments, I want a few outstanding ones." To have a few outstanding ones, one has to study quite a few and study them well. 
In his book Fisher provided fifteen points for the investor for examining a given stock and interestingly use of scuttlebutt appears in four of them.  
  1. He suggests use of scuttlebutt for learning about company's cost analysis,
  2. and accounting controls. 
  3. He again suggests use of it while finding out whether the company has short range or long range outlook in regard to profits. 
  4. Finally when it comes to the integrity of the management group, he again depends upon scuttlebutt. He has this to say, " The management of a company is always far closer to its assets than is the stockholder. Without breaking any laws, the number of ways in which those in control can benefit themselves and their families at the expense of the ordinary stockholder is almost infinite." He then says, "There is only one real protection against abuses like these. This is to confine investments to companies, the managements of which have a highly developed sense of trusteeship and moral responsibility to their stockholders. This is a point concerning which the "scuttlebutt" method can be very helpful."
Fisher felt that there is no way of knowing management's integrity but through scuttlebutt. There is nothing wrong if some services are purchased from a relative of the director or CEO but only scuttlebutt will inform us whether those services are being purchased at an appropriate price. If amounts disproportionate to the services received are being paid, it is the shareholder that is getting robbed of his legitimate profit.
All said and done, it is very difficult for an individual investor to follow the scuttlebutt method, because he has neither the time nor the network, but those young men and women who wish to pursue a career in security investment can start building their network at a young age. By the time they mature they will have an intangible asset of infinite value.
The saying, `No smoke without a fire' works in security investing too. Experience teaches us to notice the smoke but scuttlebutt helps us to locate the fire and judge its intensity.

Standing on the Shoulders of a Growth Giant: Philip Fisher

Standing on the Shoulders of a Growth Giant: Phil Fisher

November 17, 2009

Sir Isaac Newton
Sir Isaac Newton

It was English physicist, astronomer, philosopher, and mathematician Sir Isaac Newton who in 1675 stated, “If I have seen further it is by standing on the shoulders of giants.” Investors too can stand on the shoulders of market giants by studying the timeless financial knowledge from current and past market legends. The press, all too often, focuses on the hot managers of our time while forgetting or kicking to the curb those forgotten or temporarily out of favor. Famous and enduring value managers typically have gained the press spotlight, rightfully so in the case of current greats like Warren Buffett or past talents like Benjamin Graham, because they managed to prosper through numerous economic cycles. However, when it comes to growth legends like Phil Fisher, author of the must-read classic Common Stocks and Uncommon Profits, many people I bump into have never heard of him. Hopefully that will change over time.

The Past
Born on September 8, 1907, Mr. Fisher lived until the ripe age of 96 when he passed on March 4, 2004. Fisher was no dummy – he enrolled in college at age 15 and started graduate school at Stanford a few years later, before he dropped out and started his own investment firm in 1931. His son, Ken, currently heads his own investment firm, Fisher Investments, writes for Forbes magazine, and has authored multiple investment books. Unlike his dad, Ken has more of a natural bent towards value stocks.


Philip A. Fisher

Phil Fisher’s iconic book, Common Stocks and Uncommon Profits, was published in 1958. Mr. Fisher believed in many things and perhaps would have been thrown under the bus today for his long-term convictions in “buy-and-hold.”  Or as Mr. Fisher put it, “If the job has been correctly done when a common stock is purchased, the time to sell it is – almost never.” Not every investment idea made the cut, however he is known to have bought Motorola (MOT) stock in 1955 and held it until his death in 2004 for a massive gain. Generally, he gave initial stock purchases a three-year leash before considering a change to his investment position. If the conviction to purchase a stock for such duration is not present, then the investment opportunity should be ignored.

Fisher’s concentration on growth stocks also shaped his view on dividends. Dividends were not important to Fisher – he was more focused on how the company is investing retained earnings to achieve its earnings growth. Like Fisher, Peter Lynch is another growth hero of mine that also felt there is too much focus on the Price/Earnings (PE) ratio rather than the long-term earnings potential. 

Another classic trademark of Fisher’s investing style was his commitment to fundamental research. He was focused on accumulating data covering a broad range of areas including, customers, suppliers, and competitors. Fisher also emphasized factors like market share, return on invested capital, margins, and the research & development budget. What Mr. Fisher called his varied approach to gathering diverse sets of information was “scuttlebutt”.

Buying & Selling Points
Although Fisher believed firmly in buy and hold, he was not scared to sell when the firm no longer met the original buying criteria or his original assessment  for purchased was deemed incorrect.

When buying, Fisher preferred to buy stocks in downturns or temporary problems – contrary to your typical momentum growth manager today (read article on momentum).  Fisher has this to say on the topic: “This matter of training oneself to not go with the crowd but to be able to zig  when the crowd zags, in my opinion, is one of the most important fundamentals of the investment success.”

Learning from Mistakes
Like all great investors I have studied, Phil Fisher also believed in learning from your mistakes:
“I have always believed that the chief difference between a fool and a wise man is that the wise man learns from his mistakes, while the fool never does.”
He expanded on the topic by saying the following:
“Making mistakes is inherent cost of investing just like bad loans are for the finest lending institutions. Don’t blindly accept dominant opinion and don’t be contrary for the sake of being contrary.”
I could only dream of having a fraction of Mr. Fisher’s career success – he retired in 1999 at the age of 91 (not bad timing).  As I continue on my investment journey with my investment firm (Sidoxia Capital Management, LLC), I will continue to study the legendary giants of investing (past and present) to sharpen my investment skills.

Wade W. Slome, CFA, CFP®

Philip A Fisher

Ten great investors

3. Philip A Fisher

Job description
Investment advisor at his own San Francisco-based firm.

Investment style
Ultra long-term buy-and-hold investor in technology growth stocks.

After training as an analyst in a San Francisco bank, Phil Fisher started his own investment advisory business in 1931. He has always specialized in the type of firm for which California is best known: innovative technology companies driven by research and development. But he began almost 40 years before the name Silicon Valley was even thought of.

The firms he bought for his clients then were relatively low-tech, such as Dow Chemical or Food Machinery Corporation. Later on, he was one of the first professional investors to recognize the merits of hi-tech firms like Motorola and Texas Instruments when they were starting out.

Now in his nineties, he is still working in the same way he has always done. He is an extremely logical and methodical man, who only selects companies for purchase after a painstaking process of trawling through trade literature and interviewing managers and competitors. But he also has an unconventional and contrarian turn of mind, which helps him to spot value before the crowd.

Long-term returns
Not known.

Biggest success
Fisher acquired a lot of stock in Texas Instruments in 1956, long before it went public in 1970. It was first quoted at around $2.70, and has recently gone as high as $200 - a rise of 7,400% even without dividends. Fisher's own gains have probably been significantly higher, given that he bought the shares privately.

Methods and guidelines
Concentrate your attention and your cash on young growth stocks.
In order to identify and research promising prospects,
  • read everything you can lay your hands on, from trade journals to brokers' reports
  • interview those in the know, such as managers and employees, but especially suppliers, customers and competitors, who will be more forthcoming
  • visit various company sites if you can, and not just the headquarters.
Before you buy, make sure you get satisfactory answers to 15 key questions:
  1. Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?
  2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
  3. How effective are the company's research and development efforts in relation to its size?
  4. Does the company have an above average sales organization?
  5. Does the company have a worthwhile profit margin?
  6. What is the company doing to maintain or improve profit margins?
  7. Does the company have outstanding labour and personnel relations?
  8. Does the company have outstanding executive relations?
  9. Does the company have depth to its management?
  10. How good are the company's cost analysis and accounting controls?
  11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
  12. Does the company have a short-range or a long-range outlook in regard to profits?
  13. In the foreseeable future, will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?
  14. Does the management talk freely to investors about its affairs when things are going well, but 'clam up' when troubles and disappointments occur?
  15. Does the company have a management of unquestionable integrity?
Source:Common Stocks and Uncommon Profits, P Fisher, 1958

There are only ever three reasons to sell:
  1. If you have made a serious mistake in your assessment of the company
  2. If the company no longer passes the 15 tests as clearly as it did before
  3. If you could reinvest your money in another, far more attractive company. But before you do this, you must be very sure of your reasoning.
Key sayings
"I don't want a lot of good investments; I want a few outstanding ones."

"The greatest investment reward comes to those who by good luck or good sense find the occasional company that over the years can grow in sales and profits far more than industry as a whole."

"The business 'grapevine' is a remarkable thing. It is amazing what an accurate picture of the relative points of strength and weakness of each company in an industry can be obtained from a representative cross-section of the opinions of those who in one way or another are concerned with any particular company."

"If the job has been correctly done when a common stock is purchased, the time to sell it is - almost never."

Further information
Fisher outlined his views and methods in the book Common Stocks and Uncommon Profits, first published in 1958. The 1996 edition published by J Wiley also comprises two shorter pieces, 'Conservative Investors Sleep Well' and 'Developing an Investment Philosophy', a highly educational account of his early experiences.

Recommend Reading

The Greatest Investors: Philip Fisher

Philip A. Fisher

Born: San Francisco, California in 1907; Died 2004
  • Fisher & Company
Most Famous For: Philip Fisher was one of the most influential investors of all time. His investment philosophies, recorded in his investment classic, "Common Stocks and Uncommon Profits" (1958) are still relevant today and are widely studied and applied by investment professionals. It was the first investment book ever to make the New York Times bestseller list.  Fisher's son, Kenneth L. Fisher, wrote a eulogy for his father in his regular column in Forbes magazine (March 11, 2004):

"Among the pioneer, formative thinkers in the growth stock school of investing, he may have been the last professional witnessing the 1929 crash to go on to become a big name. His career spanned 74 years, but was more diverse than growth stock picking. He did early venture capital and private equity, advised chief executives, wrote and taught. He had an impact. For decades, big names in investing claimed Dad as a mentor, role model and inspiration."

Personal Profile

Philip Fisher's career began in 1928 when he dropped out of the newly created Stanford Business School to work as a securities analyst with the Anglo-London Bank in San Francisco. He switched to a stock exchange firm for a short time before starting his own money management business as Fisher & Company in 1931. He managed the company's affairs until his retirement in 1999 at the age of 91, and is reported to have made his clients extraordinary investment gains.

Although he began some fifty years before the name Silicon Valley became known, he specialized in innovative companies driven by research and development. He practiced long-term investing, and strove to buy great companies at reasonable prices. He was a very private person, giving few interviews, and was very selective about the clients he took on. He was not well-known to the public until he published his first book in 1958.

Investment Style 

Fisher achieved an excellent record during his 70 plus years of money management by investing in well-managed, high-quality growth companies, which he held for the long term. For example, he bought Motorola stock in 1955 and didn't sell it until his death in 2004.

His famous "fifteen points to look for in a common stock" were divided up between two categories: management's qualities and the characteristics of the business. 

  1. Important qualities for management included integrity, conservative accounting, accessibility and good long-term outlook, openness to change, excellent financial controls, and good personnel policies.
  2. Important business characteristics would include a growth orientation, high profit margins, high return on capital, a commitment to research and development, superior sales organization, leading industry position and proprietary products or services.

Philip Fisher searched far and wide for information on a company. A seemingly simplistic tool, what he called "scuttlebutt," or the "business grapevine," was his technique of choice.

He devotes a considerable amount of commentary to this topic in "Common Stocks And Uncommon Profits". He was superb at networking and used all the contacts he could muster to gather information and perspective on a company. He considered this method of researching a company to be extremely valuable.


  • "Common Stocks And Uncommon Profits" by Phillip A. Fisher(1958)
  • "Conservative Investors Sleep Well" by Phillip A. Fisher (1975)
  • "Developing An Investment Philosophy" by Philip A. Fisher (1980)


"I don't want a lot of good investments; I want a few outstanding ones."

"I remember my sense of shock some half-dozen years ago when I read a [stock] recommendation to sell shares of a company . . . The recommendation was not based on any long-term fundamentals. Rather, it was that over the next six months the funds could be employed more profitably elsewhere."

"I sought out Phil Fisher after reading his "Common Stocks and Uncommon Profits". When I met him, I was impressed by the man and his ideas. A thorough understanding of a business, by using Phil's techniques … enables one to make intelligent investment commitments." (Warren Buffett)

Table of Contents
1) Greatest Investors: Introduction
2) The Greatest Investors: John (Jack) Bogle
3) The Greatest Investors: Warren Buffett
4) The Greatest Investors: David Dreman
5) The Greatest Investors: Philip Fisher
6) The Greatest Investors: Benjamin Graham
7) The Greatest Investors: William H. Gross
8) The Greatest Investors: Carl Icahn
9) The Greatest Investors: Jesse L. Livermore
10) The Greatest Investors: Peter Lynch
11) The Greatest Investors: Bill Miller
12) The Greatest Investors: John Neff
13) The Greatest Investors: William J. O'Neil
14) The Greatest Investors: Julian Robertson
15) The Greatest Investors: Thomas Rowe Price, Jr.
16) The Greatest Investors: James D. Slater
17) The Greatest Investors: George Soros
18) The Greatest Investors: Michael Steinhardt
19) The Greatest Investors: John Templeton
20) The Greatest Investors: Ralph Wanger