•Philip
Fisher’s Investment Philosophy
•Introduction
•The late Phil Fisher was
one of the great investors of all time and the author of the classic book Common
Stocks
and Uncommon Profits.
•Introduction
•Fisher started his money
management firm, Fisher & Co., in 1931 and over the next seven decades made
tremendous amounts of money for his clients.
•Introduction
•For example, he was an
early investor in semiconductor giant
Texas Instruments TXN.
•Fisher also purchased Motorola
MOT in 1955, and in a
testament to long-term investing, held the stock until
his death in 2004.
•Introduction
•"Common
Stocks and Uncommon Profits" - is a MUST READ!
•Fisher's Investment Philosophy
•Fisher's investment philosophy
can be summarized in a single sentence: Purchase
and hold for the long term a concentrated portfolio of outstanding
companies with compelling growth
prospects that you understand very
well.
•Fisher's Investment Philosophy
•This sentence is clear on
its face, but let us parse it carefully to understand the advantages of Fisher's
approach.
•Fisher's Investment Philosophy
•The question that every
investor faces is, of course, WHAT
to buy? - and - WHEN to buy it?
•Fisher's answer is to purchase
the shares of superbly managed growth companies, and he devoted an
entire chapter in Common Stocks and Uncommon Profits to this topic.
•Fisher's Investment Philosophy
•The chapter begins with a
comparison of "statistical
bargains,"
or stocks that appear cheap based solely on accounting figures, and growth
stocks, or stocks with
excellent growth prospects based on an intelligent appraisal of the underlying
business's characteristics.
•Fisher’s
Investment Philosophy –
The Problem with Statistical Bargains
•The problem with
statistical bargains, Fisher noted, is that while there may be some
genuine bargains to
be found, in many cases the businesses face
daunting headwinds that cannot be discerned from accounting figures, such that
in a few years the current "bargain" prices will have proved to be
very high.
•Fisher’s
Investment Philosophy –
The Problem with Statistical Bargains
•Furthermore, Fisher stated that
over a period of many years, a well-selected
growth stock will substantially outperform a
statistical bargain.
•Fisher’s
Investment Philosophy –
The Problem with Statistical Bargains
•The reason
for this disparity,
Fisher wrote, is that a growth stock, whose intrinsic value grows steadily over
time, will tend to appreciate
"hundreds of per cent each decade," while it is unusual for a statistical bargain to be
"as much as 50 per cent undervalued.”
•Fisher’s
Investment Philosophy – The Universe of Growth Stocks
•Fisher divided the universe
of growth stocks into large and small
companies.
•Fisher’s
Investment Philosophy – The Universe of Growth Stocks
•On one end of the
spectrum are large financially strong companies with solid growth prospects.
•At the time, these
included IBM (IBM), Dow Chemical (DOW), and DuPont (DD), all of which increased
fivefold in the 10-year period from 1946 to 1956.
•Fisher’s
Investment Philosophy – The Universe of Growth Stocks
•Although such returns are
quite satisfactory, the real home runs
are to be found in "small and frequently young
companies...
[with] products that might bring a sensational future.”
•Fisher’s
Investment Philosophy – The Universe of Growth Stocks
•Of these companies,
Fisher wrote, "the young growth stock offers by far the greatest
possibility of gain.
•Sometimes this can mount
up to several thousand per cent in a decade.”
•Fisher’s
Investment Philosophy – The Universe of Growth Stocks
•Fisher's answer to the
question of what to buy is clear:
•All else equal, investors with
the time and inclination should concentrate their
efforts on uncovering young
companies with outstanding growth
prospects.
•Fisher’s
Investment Philosophy – The Universe of Growth Stocks
•Remember - much has changed -
therefore YOU must integrate "today's" Economics and Financial
Markets in with Mr. Fisher's Philosophy!
•Fisher's
15 Points
•All good principles are
timeless, and Fisher's famous
"Fifteen Points to Look for in a Common Stock" from Common
Stocks and Uncommon Profits remain as relevant today as when they were first
published.
•Fisher's
15 Points
•The 15 points are a qualitative
guide to finding
superbly managed companies with excellent growth
prospects.
•According to Fisher, a company must
qualify on most of these 15 points to be considered a worthwhile investment:
•Fisher's
15 Points
•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?
•A company seeking a
sustained period of spectacular growth must have products
that address large and expanding markets.
•Fisher's
15 Points
•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?
•All markets eventually
mature, and to maintain
above-average growth over a period of decades, a company must continually
develop new products to either expand existing markets or enter new ones.
•Fisher's
15 Points
•3. How
effective are the company's research-and-development efforts in relation to its
size?
•To develop new products,
a company's research-and-development (R&D) effort must be both
efficient and effective.
•Fisher's
15 Points
•4. Does
the company have an above-average sales organization?
•Fisher wrote that in a competitive
environment, few products or
services are so compelling that they will sell to their maximum
potential without
expert merchandising.
•Fisher's
15 Points
•5. Does
the company have a worthwhile profit margin?
•Berkshire Hathaway's (BRK.B)
vice-chairman Charlie Munger is fond of saying that
if something is not worth doing, it is not worth doing well. Similarly, a company
can show tremendous growth, but the growth must bring
worthwhile profits to reward investors.
•Fisher's
15 Points
•6. What
is the company doing to maintain or improve profit margins?
•Fisher stated, "It is
not the profit margin of the past but those of the future that are basically
important to the investor." Because inflation increases a company's
expenses and competitors will pressure profit margins, you should pay
attention to a company's strategy for reducing costs and improving profit
margins over the long haul. This is where the moat framework can be a big help.
•Fisher's
15 Points
•7. Does
the company have outstanding labor and personnel relations?
•According to Fisher, a company with
good labor relations tends to be more profitable than one with
mediocre relations because happy employees are
likely to be more productive. There is no single yardstick to measure the state of a
company's labor relations, but there are a few items investors should
investigate. First, companies with good labor relations usually make
every effort to settle employee grievances quickly. In addition, a
company that makes above-average profits, even while paying above-average wages
to its employees is likely to have good labor relations. Finally, investors
should pay attention to the attitude of top management toward
employees.
•Fisher's 15 Points
•8. Does
the company have outstanding executive relations?
•Just as having good
employee relations is important, a company must also cultivate the
right atmosphere in its executive suite. Fisher
noted that in companies where the founding family retains control, family
members should not be promoted ahead of more able
executives. In addition, executive salaries
should be at least in line with industry norms. Salaries should
also be reviewed regularly so that merited pay increases
are given without having to be demanded.
•Fisher's 15 Points
•9. Does
the company have depth to its management?
•As a company continues
to grow over a span of decades, it is vital that a deep pool of
management talent be properly developed. Fisher warned investors to avoid companies where
top management is reluctant to delegate significant authority to lower-level
managers.
•Fisher's 15 Points
•10. How
good are the company's cost analysis and accounting controls?
•A company cannot
deliver outstanding results over the long term if it is unable to
closely track costs in each step of its operations. Fisher stated that
getting a precise handle on a company's cost analysis is difficult, but an
investor can discern which companies are exceptionally deficient--these are the
companies to avoid.
•Fisher's 15 Points
•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?
•Fisher described this point
as a catch-all because the "important
clues" will vary widely among industries. The skill with which
a retailer, like Wal-Mart (WMT) or Costco (COST), handles
its merchandising and inventory is of paramount importance. However, in an
industry such as insurance, a completely different
set of business factors is important. It is critical for an investor to understand
which industry factors determine the success of a company and how that company
stacks up in relation to its rivals.
•Fisher's 15 Points
•12. Does
the company have a short-range or long-range outlook in regard to profits?
•Fisher argued that investors
should take a long-range view, and thus should favor companies that take a long-range
view on profits. In addition, companies focused on
meeting Wall Street's quarterly earnings estimates may forgo beneficial
long-term actions if
they cause a short-term hit to earnings. Even worse, management may be tempted
to make aggressive accounting assumptions in order to
report an acceptable quarterly profit number.
•Fisher's 15 Points
•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?
•As an investor, you
should seek companies with sufficient cash or borrowing
capacity to fund growth without diluting the interests of its current owners with follow-on equity
offerings.
•Fisher's 15 Points
•14. Does
management talk freely to investors about its affairs when things are going
well but "clam up" when troubles and disappointments occur?
•Every business, no matter
how wonderful, will occasionally face disappointments. Investors should seek
out management that reports candidly to shareholders all aspects of the
business, good or bad.
•Fisher's 15 Points
•15. Does
the company have a management of unquestionable integrity?
•The accounting scandals
that led to the bankruptcies of Enron and WorldCom should highlight the
importance of investing only with management teams of unquestionable integrity.
Investors will be
well-served by following Fisher's warning that regardless of how
highly a company rates on the other 14 points, "If there is a serious
question of the lack of a strong management sense of trusteeship for
shareholders, the investor should never seriously consider participating in
such an enterprise.”
•Important
Don'ts for Investors
•In investing, the
actions you don't take are as important as the actions you do
take.
•Here is some of Fisher's
advice on what you should not do.
•Important
Don'ts for Investors
•1.
Don't overstress diversification.
•2.
Don't follow the crowd.
•3.
Don't quibble over eighths and quarters.
•
•
•
•1.
Don't overstress diversification.
•Investment advisors and the
financial media constantly expound the virtues of diversification with the help
of a catchy cliché: "Don't put all your eggs in one basket."
•However, as Fisher noted,
once you start putting your eggs in a multitude of baskets, not
all of them end up in attractive places, and it becomes difficult to keep
track of all your eggs.
•1.
Don't overstress diversification.
•Fisher, who owned at most
only 30 stocks at any point in his career, had a better solution.
•Spend
time thoroughly researching and understanding a company,
and if it clearly
meets the 15 points he set forth, you should make a meaningful
investment.
•1.
Don't overstress diversification.
•Fisher would agree with Mark
Twain when he said, "Put all your
eggs in one basket, and watch that basket!”
•2.
Don't follow the crowd.
•Following
the crowds into investment fads, such as the
"Nifty Fifty" in the early 1970s or tech stocks in the late 1990s,
can be dangerous to your financial health.
•2.
Don't follow the crowd.
•On the flip side, searching
in areas the crowd has left behind can be extremely profitable.
•2.
Don't follow the crowd.
•Sir Isaac Newton once
lamented that he could calculate the motion of heavenly bodies, but not the
madness of crowds. Fisher would heartily agree.
•3.
Don't quibble over eighths and quarters.
•After extensive research,
you've found a company that you think will prosper in the decades ahead, and
the stock is currently selling at a reasonable price.
•Should
you delay or forgo your investment to wait for a price a
few pennies below the current price?
•3.
Don't quibble over eighths and quarters.
•Fisher told the story of a
skilled investor who wanted to purchase shares in a particular company whose
stock closed that day at $35.50 per share.
•However, the investor
refused to pay more than $35.
•The stock never again sold at
$35 and over the next 25 years, increased in value to more than $500
per share.
•The
investor missed out on a tremendous gain in a vain
attempt to save 50 cents per share.
•3.
Don't quibble over eighths and quarters.
•Even Warren Buffett is
prone to this type of mental error.
•Buffett began purchasing
Wal-Mart many years ago, but stopped buying when the price moved up a little.
•Buffett admits that this
mistake cost Berkshire Hathaway shareholders about $10 billion.
•Even the Oracle of Omaha
could have benefited from Fisher's advice not
to quibble over eighths and quarters.
•The
Bottom Line
•Philip Fisher compiled a
sterling record during his seven-decade career by investing
in young companies with bright growth prospects.
•By applying Fisher's
methods, you, too, can uncover tomorrow's dominant companies.
•Q&A
•There is only one
correct answer to each question.
•Q&A
•Fisher was the author of
which classic investment book?
–Security Analysis.
–One Up on Wall
Street.
–Common Stocks and
Uncommon Profits.
•Q&A
•What sorts of companies
did Fisher favor?
–Young growth
companies.
–Companies with large
dividends.
–Companies in mature
industries.
•Q&A
•Fisher's time horizon for
holding a well-selected stock can best be described as what?
–Very long-term.
–Short-term.
–Three to five years.
•Q&A
•Which statement would
Fisher most agree with?
–"I don't want a
lot of good investments; I want a few outstanding ones."
–"It is important
to own a well-diversified portfolio of over 50 stocks to reduce risk."
–"Large
capitalization companies in mature and steady industries are the best
investments.”
•Q&A
•According to Fisher, management
quality:
–Is irrelevent so long as the
company is growing.
–Should cause you to
avoid a stock if there are serious stewardship issues.
–Should not delegate
to lower-level employees.
•
•http://www.safehaven.com/article/20772/investment-basics-course-505-wise-analysts-philip-fisher
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