Philip Fisher: Quality first, Price second

•Philip Fisher:
Quality first, Price second

•

•Fisher formulated a clear and sensible investing strategy (which I'll get to in a second), wrote one of the best investment books of all time, Common Stocks and Uncommon Profits, and made a good deal of money for himself and his clients.

•

•His son wrote that Phil's best advice was 

•to "always think long term," 

•to "buy what you understand," and 

•to own "not too many stocks." 

•

•Charles Munger, who is Buffett's partner, praised Fisher at the 1993 annual meeting of their company, Berkshire Hathaway Inc. (BRK/A): "Phil Fisher believed in concentrating in about 10 good investments and was happy with a limited number.

•

•That is very much in our playbook.

•And he believed in knowing a lot about the things he did invest in.  And that's in our playbook, too.

•And the reason why it's in our playbook is that to some extent, we learned it from him."

•

•In addition to the warning against over-diversification — or what Peter Lynch, the great Fidelity Magellan fund manager, calls "de-worse-ification" — the book makes three important points:

•

•(1)  First, don't worry too much about price.  (Quality first, Price second)

•(2)  Second, Fisher says that investors must ask, "Does the company have a management of unquestionable integrity?" 

•(3)  Finally, Fisher offered the best advice ever on selling stocks. "It is only occasionally," he wrote, "that there is any reason for selling at all."

•

•

•

•(1)  First, don't worry too much about price.  (Quality first, Price second)

•

•(1)  First, don't worry too much about price.  (Quality first, Price second)

•"Even in these earlier times [he's talking here about 1913], finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear.”

•(1)  First, don't worry too much about price.  (Quality first, Price second)

•In fretting about whether a stock is cheap or expensive, many investors miss out on owning great companies. 

•My own rule is: quality first, price second.

•

•

•(2)  Second, Fisher says that investors must ask, "Does the company have a management of unquestionable integrity?" 

•

•(3)  Finally, Fisher offered the best advice ever on selling stocks. "It is only occasionally," he wrote, "that there is any reason for selling at all."

•

•Yes, but what are those occasions?

•They come down to this: Sell if a company has deteriorated in some important way.  

•And I don't mean price! 

•

•Fisher's view, instead, is to look to the business — the company itself, not the stock. 

•

•"When companies deteriorate, they usually do so for one of two reasons: 

•Either there has been a deterioration of management, or 

•the company no longer has the prospect of increasing the markets for its product in the way it formerly did."

•

•A stock-price decline can be a key signal:  "Pay attention!  Something may be wrong!" 

•But the decline alone would not prompt me to sell.  

•Nor would a rise in price. 

•

•Time to sell? 

•If you did, you missed another doubling.

•

•"How long should you hold a stock? 

•As long as the good things that attracted you to the company are still there."

•  

Buffett’s Watershed Investment - From Graham to Fisher: See’s Candies:

• Buffett was initially "not sold" on purchasing See's Candies when presented with the opportunity in 1971.
• See's Candies was offered for $30 million and it was hardly a Graham style investment. See's had only $5 million in tangible asset value at the time.
• Berkshire shareholders can probably credit Charlie Munger, Berkshire's Vice Chairman, for convincing Buffett to make this investment.
• Buffett eventually agreed to a $25 million purchase of See's and based the logic of the purchase on See's earnings power and brand equity.
• The valuation paid was approximately 11.4 times trailing earnings.
• Buffett believed that See's had significant additional pricing power that was not being leveraged and could sell for premium prices compared to other candies.

This was what Buffett had to say about See’s Candies in his 2007 annual letter to shareholders:

We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories. Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses.

Lessons learned:

1.  Clearly See’s Candies is a business that is today worth many times the amount paid to acquire the company in 1971.
2.  It is not a business that requires a high level of invested capital.  
3.  The value of See’s is the earnings power of the business.
4.  That earnings power of See does not come from tangible equity.  It comes from intangible assets, and specifically from the brand equity of the business.



Comparing Benjamin Graham and Philip Fisher's Techniques

Practical Application of Fisher’s Techniques
What can value investors take away from Philip Fisher’s book and from Warren Buffett’s application of these concepts?  

The evidence is overwhelming that buying a business like See’s is far more attractive than buying “cigar butt” investments that are quantitatively cheap but either dying or offering average prospects for the future.  

However, the big caveat is that any investor seeking the higher payoffs accruing to intangible assets like brand power must be very sure in his analysis to avoid buying into the sort of promotional stocks that Fisher warned us to avoid. 

In short, knowing your “circle of competence” is critical to avoid paying up for illusory growth and taking the risk of permanent loss of capital. 

Losing capital permanently is much less likely with Graham’s quantitative approach, but that approach also entails higher turnover and lower potential returns compared to a successful application of Fisher’s techniques.


Read:
Roger Lowenstein’s excellent 1995 biography of Warren Buffett, The Making of an American Capitalist, the purchase of See’s in 1971.
Alice Schroeder’s recent Buffett biography, The Snowball,

Quality first, Price second

Philip Fisher: Quality first, Price second

Fisher formulated a clear and sensible investing strategy (which I'll get to in a second), wrote one of the best investment books of all time, Common Stocks and Uncommon Profits, and made a good deal of money for himself and his clients.

His son wrote that Phil's best advice was 
-to "always think long term," 
-to "buy what you understand," and 
-to own "not too many stocks." 

Charles Munger, who is Buffett's partner, praised Fisher at the 1993 annual meeting of their company, Berkshire Hathaway Inc. (BRK/A): "Phil Fisher believed in concentrating in about 10 good investments and was happy with a limited number.  That is very much in our playbook. And he believed in knowing a lot about the things he did invest in. And that's in our playbook, too. And the reason why it's in our playbook is that to some extent, we learned it from him."

In addition to the warning against over-diversification — or what Peter Lynch, the great Fidelity Magellan fund manager, calls "de-worse-ification" — the book makes three important points:

(1)  First, don't worry too much about price.  (Quality first, Price second)
-  "Even in these earlier times [he's talking here about 1913], finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear."
-  In fretting about whether a stock is cheap or expensive, many investors miss out on owning great companies. My own rule is: quality first, price second.
(2)  Second, Fisher says that investors must ask, "Does the company have a management of unquestionable integrity?" 

(3)  Finally, Fisher offered the best advice ever on selling stocks. "It is only occasionally," he wrote, "that there is any reason for selling at all."

Yes, but what are those occasions? They come down to this: Sell if a company hasdeteriorated in some important way. And I don't mean price! 

Fisher's view, instead, is to look to the business — the company itself, not the stock. 

"When companies deteriorate, they usually do so for one of two reasons: 
- Either there has been a deterioration of management, or 
- the company no longer has the prospect of increasing the markets for its product in the way it formerly did."

A stock-price decline can be a key signal: "Pay attention! Something may be wrong!" But the decline alone would not prompt me to sell. Nor would a rise in price. 

Time to sell? If you did, you missed another doubling.

"How long should you hold a stock? As long as the good things that attracted you to the company are still there."

Philip Fisher 15 Points for Growth Stocks

Fisher's advice: 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?

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.
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.

http://news.morningstar.com/classroom2/course.asp?docId=145662&page=4&CN=COM

The Evolution of Warren Buffett as an Investor

The Evolution of Warren Buffett as an Investor
June 16th, 2011

Before Warren Buffett became Chairman and CEO of Berkshire Hathaway, he ran a successful investment partnership. But his style of investing was not always the same, it gradually evolved over time. His high school jobs consisted of varied ventures including selling golf balls and delivering papers. The money he saved from these jobs was invested in the stock market using different investment styles.

Perhaps trying to find the best style for himself, Buffett had read every book related to finance in the Omaha Public Library by the time he graduated college.

His investment style up to this point was wide ranging. He had studied many different techniques including odd-lot investing and technical analysis.

Buffett’s Investing Framework Takes Shape

In 1950 he came across a copy of The Intelligent Investor by Benjamin Graham, his future mentor at Columbia. This book had a dramatic effect on Buffett’s investment style.

Graham’s investment style could be seen on a deeper level in his other book, Security Analysis, which was co-authored by David Dodd.

Within Graham’s two books, an investing framework was outlined that would shape Buffett’s stock selection for the rest of his career.

Graham favored looking at a stock as a piece of a business. He viewed volatility more as an opportunity and less as a risk.

Working for Graham

While also a professor at Columbia, Graham ran the investment partnership Graham-Newman Corporation. Through his investment partnership he invested using the Net Current Asset Value formula to identify companies. Using this formula he was able to find companies selling for below an estimation of liquidation value.

In the early 1950s, Buffet was piggybacking off of Graham’s ideas with his own money.

Through his partnership, Graham would sometimes buy large stakes in companies to influence managements and join the board of directors. Some examples include investments in Northern Pipeline, Philadelphia and Reading Coal & Iron Company, and Marshall-Wells.

It was at the Marshall-Wells annual stockholder meeting that Buffett first met Walter Schloss, whom he would later be colleagues with. It wasn’t until 1954 that Buffet finally convinced Graham to hire him at Graham-Newman.

There, Buffet worked alongside Schloss in a spare room manually computing the liquidation value of companies. A signature trait of this investing was that little time was spent evaluating management. Buffet and Schloss merely filled out simple forms which would be used by Graham to make his investment decisions.

By ignoring the qualitative side, Graham’s method was largely quantitative.

The Early Partnership

After the Graham-Newman partnership was closed in 1956, Buffet formed his own investment partnership. He employed many of the same methods that he used while working for Graham.

Buffet followed in his mentor’s footsteps by buying companies selling below liquidation value and then proceeding to influence management. He did this with success at Sandborn Map, Dempster Mill Manufacturing, and Berkshire Hathaway.

The Birth of Berkshire Hathaway

Berkshire Hathaway did not start out as the conglomerate it is today, but as a textile mill selling below liquidation value. Buffett first began buying it in 1962 and by 1965 he had taken control of the company’s board and made himself Chairman.

During this time, Buffett’s investing style began to change again.

While he still favored buying companies that were selling below intrinsic value, how he came to a company‘s intrinsic value began to change.

While still managing his partnerships, Buffett was introduced to Charlie Munger. Munger felt better about buying a great business with high returns on capital than buying a struggling company selling below liquidation value.

Buffett’s Investing Style Today

Over time, Buffett and Munger both began to move further from the strict Graham approach and more towards buying great businesses. By placing a greater emphasis on the intrinsic value as determined by the operating company’s future cash flows (rather than the company’s assets) a company’s qualitative characteristics became more important.

Buffett views Phillip Fisher’s book Common Stocks and Uncommon Profits as the best guide to successful qualitative investing.

By 1970, Buffett’s partnerships had been wound down and Buffett concentrated his efforts on running Berkshire Hathaway.

Over the past 40 years Buffett has been able to combine the quantitative style of Graham with the qualitative style of Fisher, and in doing so has become arguably the greatest investor of all time.

About the Author: Daniel Rudewicz is a CFA charter holder and the managing member of the deep value investment company Furlong Financial, LLC. He will begin attending Georgetown Law in the evenings this fall. To contact him please send an email to dan@furlongfinancial.com .

http://www.oldschoolvalue.com/blog/featured/the-evolution-of-warren-buffett-as-an-investor/

What is Warren Buffett's investing philosophy?

Buffett's investment philosophy has changed over time and can generally be thought of in two parts:

• Early Buffett (pre-1970): buy at a significant discount to intrinsic value. "Fair business at a wonderful price."
• Late Buffett (post-1970): buy companies at a price at or near intrinsic value, that can consistently increase their intrinsic value,.  "Wonderful business at a fair price."

He has said that the latter philosophy is far superior to the former and that it took him far too long to realize it.  Buffett's investment philosophy certainly evolved over the course of his investing lifetime, and did shift towards more of a focus on quality rather than cheapness, in part due to his association with and learning from his business partner Charlie Munger.  The intellectual father - the "Benjamin Graham," if you will - of this quality focus was Phil Fisher.  Generally, Buffett is a value investor; he studied under and worked for Benjamin Graham, the author of The Intelligent Investor and Security Analysis and the man generally considered the father of modern-day value investing, and credits Graham for much of his investment philosophy and success.

The best way to truly understand Buffett's investment philosophy is to read the following (links below):

1. His letters to investors from his early investment partnerships

2. His letters to shareholders of Berkshire Hathaway

3. The Intelligent Investor by Benjamin Graham

4. Common Stocks and Uncommon Profits by Phil Fisher

Early Partnership Letters (1959-1969):

http://www.ticonline.com/buffett...

Berkshire Hathaway Letters (1977-2010):

http://www.berkshirehathaway.com...

Intelligent Investor:

http://amzn.to/fycq54

Common Stocks and Uncommon Profits:

http://amzn.to/dU2p1i

http://www.quora.com/Warren-Buffett/What-is-Warren-Buffetts-investing-philosophy

Long Term Growth and Value Stock Picks

A lot of people would love to know what is inside Warren Buffett’s portfolio because he is noted for his long term stock picks and his value stocks.  Obviously, a lot of his investment strategy comes from Benjamin Graham, the father of value stock investing but how does one judge value?  Sure, you can look through a company’s annual reports and their financial statements but there has got to be something to be said for how a company is run.  For this information, you need to ask the right questions to the right people and that is to management, competitors, suppliers and customers.  Buffett learned this from another famed investor named Philip Fisher.  Whereas Graham was noted for finding value stocks from fundamental analysis, Fisher was noted for finding growth stocks and hence his title for the father of growth stock investing.  Buffett has admitted that his stock pick strategy is 85% Graham and 15% Fisher.

So perhaps the notion that Warren Buffett is only a value investor is a bit misleading.  Sure, there is nothing wrong with finding undervalued cheap stocks but Buffett usually doesn’t sell once his holdings have rebounded to fair value.  In fact, Buffett has stated numerous times that his favourite holding period is forever.  This is because his stock picks have growth potential as well.  To put it in Buffett’s terms, he wouldn’t care if the stock market closed for the next five years because he’s not concerned about the macroeconomics.  He’s concerned with the company itself in that if it is a good business, the stock will eventually follow.  That being said, “time is the friend of a wonderful company and the enemy of the mediocre”.

For beginning investors (and perhaps “sophisticated investors” as well) time and patience is perhaps the downfall of most.   It is great that technology has allowed investors to take control of their finances and invest for themselves with stock trading programs and stock filters.  However, while these can be very helpful tools and help drastically cut down research time, one has to ultimately apply the teachings of value and growth investing and add a human element.  If the stock market could be distilled into a perfect mathematical formula or if the market was truly efficient, then people like Warren Buffett would not be able to make so many winning stock picks in his career.  That being said, it only takes a few top stock picks to make one rich and investors don’t need to make so many trades with buy and sell commissions that eat away at the returns.

So if you want to be rich like Warren Buffett, you now know the formula to his success: invest in value stocks with long term growth potential.

http://warrenbuffettstockpicks.com/long-term-growth-value-stock-picks/

Philip Fisher: Quality first, Price second

Fisher formulated a clear and sensible investing strategy (which I'll get to in a second), wrote one of the best investment books of all time, Common Stocks and Uncommon Profits, and made a good deal of money for himself and his clients.


His son wrote that Phil's best advice was 

• to "always think long term," 
• to "buy what you understand," and 
• to own "not too many stocks." 

Charles Munger, who is Buffett's partner, praised Fisher at the 1993 annual meeting of their company, Berkshire Hathaway Inc. (BRK/A): "Phil Fisher believed in concentrating in about 10 good investments and was happy with a limited number.  That is very much in our playbook. And he believed in knowing a lot about the things he did invest in. And that's in our playbook, too. And the reason why it's in our playbook is that to some extent, we learned it from him."


In addition to the warning against over-diversification — or what Peter Lynch, the great Fidelity Magellan fund manager, calls "de-worse-ification" — the book makes three important points:


(1)  First, don't worry too much about price.  (Quality first, Price second)

• "Even in these earlier times [he's talking here about 1913], finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear."

• In fretting about whether a stock is cheap or expensive, many investors miss out on owning great companies. My own rule is: quality first, price second.

(2)  Second, Fisher says that investors must ask, "Does the company have a management of unquestionable integrity?" 

(3)  Finally, Fisher offered the best advice ever on selling stocks. "It is only occasionally," he wrote, "that there is any reason for selling at all."


Yes, but what are those occasions? They come down to this: Sell if a company has deteriorated in some important way. And I don't mean price! 


Fisher's view, instead, is to look to the business — the company itself, not the stock. 


"When companies deteriorate, they usually do so for one of two reasons: 

• Either there has been a deterioration of management, or 
• the company no longer has the prospect of increasing the markets for its product in the way it formerly did."

A stock-price decline can be a key signal: "Pay attention! Something may be wrong!" But the decline alone would not prompt me to sell. Nor would a rise in price. 


Time to sell? If you did, you missed another doubling.


"How long should you hold a stock? As long as the good things that attracted you to the company are still there."


http://myinvestingnotes.blogspot.com/2010/09/learning-from-long-men-late-phil-carret.html

Central to Benjamin Graham's teaching is the ability to calculate Intrinsic Value.

Investment Policy (Based on Benjamin Graham)
http://myinvestingnotes.blogspot.com/2008/08/investment-policies-based-on-benjamin.html

Central to Benjamin Graham's teaching is the ability to calculate Intrinsic Value.

His value investing approach: Buy at a discount to intrinsic value. Your gain comes from market realising the true intrinsic value given time.

Philip Fisher's growth investing approach: Buy at fair value, i.e. buy at intrinsic value. With earnings growth, you will realise a higher price for the shares.

In buying at a discount to intrinsic value, the value is in the bargain price, and the favourable upside reward / downside risk ratio.

In buying a growth stock at fair price, the value is in the earning power of the company. This creates the value in the stock although you are acquiring this at a fair price. Of course, if you can acquire it at a bargain price, the better.

Warren Buffett uses both strategies and cleverly grouped Philip Fisher's growth investing approach as value investing too, calling value investing and growth investing as sides of the same coin. He is pragmatic.

In either approaches, overpaying for a stock will be detrimental to your financial health.

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.

Source: http://globalgrowthinvestor.com/38/buffetts-other-mentor/