Great Investors: Philip Fisher

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Course 505


Great Investors: Philip Fisher

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. Fisher started his money management firm, Fisher & Co., in 1931 and over the next seven decades made tremendous amounts of money for his clients. For example, he was an early investor in semiconductor giant Texas Instruments TXN, whose market capitalization recently stood at well over $40 billion. Fisher also purchased Motorola MOT in 1955, and in a testament to long-term investing, held the stock until his death in 2004.

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. This sentence is clear on its face, but let us parse it carefully to understand the advantages of Fisher's approach. The question that every investor faces is, of course, what to buy? 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. 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.

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. Furthermore, Fisher stated that over a period of many years, a well-selected growth stock will substantially outperform a statistical bargain. 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 divided the universe of growth stocks into large and small companies. 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.

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." 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 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 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. 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:

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.

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.

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.

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.

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.

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 we've spoken about throughout the Investing Classroom series can be a big help.

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.

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.

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.

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.

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.

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.

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.

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.

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.

1. Don't overstress diversification.

Investment advisors and the financial media constantly expound the virtues of diversification with the help of a catchy cliche: "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.

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. 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. On the flip side, searching in areas the crowd has left behind can be extremely profitable. 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?

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.

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.




Quiz 505

There is only one correct answer to each question.
1 Fisher was the author of which classic investment book?
a. Security Analysis.
b. One Up on Wall Street.
c. Common Stocks and Uncommon Profits.

2 What sorts of companies did Fisher favor?
a. Young growth companies.
b. Companies with large dividends.
c. Companies in mature industries.

3 Fisher's time horizon for holding a well-selected stock can best be described as what?
a. Very long-term.
b. Short-term.
c. Three to five years.

4 Which statement would Fisher most agree with?
a. "I don't want a lot of good investments; I want a few outstanding ones."
b. "It is important to own a well-diversified portfolio of over 50 stocks to reduce risk."
c. "Large capitalization companies in mature and steady industries are the best investments."

5 According to Fisher, management quality:
a. Is irrelevent so long as the company is growing.
b. Should cause you to avoid a stock if there are serious stewardship issues.
c. Should not delegate to lower-level employees.


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Learning from the Long Men: The late Phil Carret and Phil Fisher invested the right way.

April 29, 2004, 8:18 a.m.
Learning from the Long Men
The late Phil Carret and Phil Fisher invested the right way.


When Philip A. Fisher died last month at the age of 96, it suddenly struck me that being a wise and patient stock market guru may be the best route to a long life.

"His career spanned 74 years," wrote his son, Kenneth Fisher, in a column in Forbes. "He did early venture capital and private equity, advised chief executives, wrote and taught." Every month, Phil would read "If," the Rudyard Kipling poem, to remind himself to stay calm and stick to the plan: "If you can keep your head when all about you / Are losing theirs. . . ."

Phil Fisher began managing money in 1931, immediately after Herbert Hoover promised prosperity was right around the corner. He was teaching at Stanford 70 years later. In between, 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.

Here are some other examples of how longevity comes with the financial territory:

Philip Carret was born in 1896, the year the Dow Jones industrial average was launched. He died almost six years ago at 101. In 1928, he founded the Pioneer Fund and ran it for 55 years, during which an investment of $10,000 became $8 million, even after withdrawing all dividends along the way. "Philip Carret," said super-investor Warren Buffett, "has the best truly long-term investment record of anyone I know."

Carret recognized the value of small companies before other experts caught on to them. His book The Art of Speculation, written in 1924 and reprinted several times, lays down a dozen investing commandments, including "seek facts diligently, advice never." Carret also wrote, "I don't have sense enough to figure out when to go into cash, so we're always fully invested [in stocks]." And, "More fortunes are made by sitting on good securities for years at a time than by active trading."

Sir John Templeton was born in 1912 in Tennessee, won a scholarship to Yale and went to Oxford as a Rhodes scholar. He started his own investment firm in the depths of the Depression, like Fisher. In 1939, with Hitler gaining in Europe, he bought every stock trading below $1 on the New York and American stock exchanges and quadrupled his money in four years. "Invest at the point of maximum pessimism," he says.

He launched Templeton Growth Fund (TEPLX) in 1954. The fund is still going strong as part of the Franklin Templeton Group, although Templeton no longer manages it. About half the fund's holdings are now in European stocks, 28 percent in American, with a heavy emphasis on energy and utilities. Over the past 10 years, Templeton Growth has returned 11 percent annually on average, six points ahead of the benchmark global stock index.

In 1962, Templeton (later knighted as a British subject) started buying Japanese stocks, which the rest of the world shunned, at prices of just two or three times their annual earnings. By 1970, with three-fifths of his holdings in Japan, he began selling as growth rates slowed. Now 91, Templeton is using his immense wealth to promote achievement in religion, and giving away a million-dollar prize each year.

When I met Roy Neuberger in 1997, he gave me a copy of his book So Far, So Good: The First 94 Years. Neuberger, also a brilliant art collector, celebrated his 100th birthday in July. In 1950, he came up with the idea of starting a no-load mutual fund (at the time, funds were charging 8.5 percent upfront), and Guardian (NGUAX) continues to thrive as part of Neuberger & Berman, which, with $55 billion under management, was bought by Lehman Brothers last year.

I like the way Neuberger started his book: "Some people waste their lives in the constant pursuit of great wealth. As a commodity, let's face it, money doesn't rate as high as good health — and it certainly isn't up there with great art." Still, it's nice to have money, in my humble opinion. And Neuberger clearly agrees. He also says older people gain perspective on finance that younger people lack. "What I learned in 1929 helped me immensely when the stock market collapsed again in 1987," he wrote. "I may well be the only person still active on Wall Street who was working there at the time of both panics . . . and didn't blink either time."

T. Rowe Price, who built an even larger no-load fund empire than Neuberger, died in 1985 at 83. He didn't make it to 90, but he had a lot in common with the others: He spent his formative years struggling with the Depression, and the lesson he drew was not to stay out of stocks but to own them with equanimity.

I spent a morning in Baltimore with him a few years before his death, and he was particularly enthusiastic about all the depressed growth companies lying around for the picking. In his fine book Money Masters of Our Time, John Train wrote of Price, "His thesis, briefly, was that the investor's best hope of doing well is by seeking the 'fertile fields for growth' and then holding those stocks for long periods of time."

But back to the "If" man, Phil Fisher . . . 

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."

Ken Fisher writes that, in his prime, Phil Fisher actually owned about 30 stocks. One of them was Motorola Inc. (MOT), which Phil bought in 1955 and still owned at his death. Unfortunately, he missed the company's spectacular jump last week (up nearly 20 percent in a single day) when it announced earnings had tripled and revenue had risen 42 percent.

"Common Stocks and Uncommon Profits" was republished last year in a 45th-anniversary paperback edition by Wiley. 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:

First, don't worry too much about price. In the first chapter of his book Fisher wrote, "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. A good example is Starbucks Corp. (SBUX), the coffeehouse chain. In 1996, the price-to-earnings ratio of Starbucks averaged well over 50. Too high? Well, an investor who bought the stock then would have more than quintupled his money. Ever since it became a public company, Starbucks has sported P/E ratios in the forties and fifties (right now, it has a current P/E of 50 and a forward P/E, based on expected earnings for the next 12 months, of 36), but the firm has increased its earnings at a rate of more than 20 percent annually, so the price has risen sharply.

Second, Fisher says that investors must ask, "Does the company have a management of unquestionable integrity?" If not, stay away from the stock. The same goes for mutual fund companies. There are too many choices out there to bother with companies that aren't run by honest, diligent folks.

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! Like Buffett, but unlike most small investors, Fisher rarely got transfixed by the daily price, either high or low, of a stock he owned. Many investors sell because a stock has tumbled, getting out after they have lost, say, 20 percent of their stake; others sell because a stock has risen, hitting some kind of "target."

Fisher's view, instead, is to look to the business — the company itself, not the stock. Start with why you bought shares of the company in the first place (you can't know when to sell unless you know why you bought) — perhaps because you liked the management and the products and because you thought demand would be strong and competition wouldn't be bothersome.

Now determine whether something has changed for the worse. "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."

For example, as an owner of Starbucks, I would consider selling if the company decided to start opening fast-food hamburger shops or a pizza chain — businesses in which Starbucks has little expertise. I would consider selling if a powerful competitor began to take market share away from the company. I would put Starbucks on my watch list for a sale if there were significant management changes, but wouldn't sell unless I saw a clear change for the worse.

But I would hang on to Starbucks — following the Fisher strategy — if the stock price dropped 20 percent tomorrow. I might even buy more. 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. Starbucks doubled between mid-1999 and mid-2000. Time to sell? If you did, you missed another doubling.

Fisher's philosophy is not much different from Templeton's or Price's or Carret's. In fact, in what was probably his last interview, with Bottom Line Personal newsletter in Oct. 1, 1999, Carret may have said it best: "How long should you hold a stock? As long as the good things that attracted you to the company are still there."

And how long should you listen to long-lived market experts with the calm, grace and insight of Phil Carret and Phil Fisher? Approximately forever.

— James K. Glassman is a fellow at the American Enterprise Institute and host of TechCentralStation.com. He is also a member of Intel Corp.'s policy advisory board. Of the stocks mentioned in this article, he owns Starbucks and Berkshire Hathaway. This article originally appeared in the Washington Post.

http://old.nationalreview.com/nrof_glassman/glassman200404290818.asp 

Philip A. Fisher, 1907-2004

Portfolio Strategy
Philip A. Fisher, 1907-2004
Kenneth L. Fisher, 04.26.04, 12:00 AM ET

In your bones believe in capitalism and its basic ability, despite recessions and scandals, to better the human condition.

More From Kenneth L. Fisher

Phillip A. Fisher died Mar. 11 at 96 from old age. He was a great man. Not in his last years, ravaged by dementia. Then he was just a little old man. But he was my little old man. I will love him, forever! 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, inspiration or whatever.

His first book, Common Stocks and Uncommon Profits, appeared in 1958. It was the first investment book ever to make the New York Times bestseller list. It's still in print at Wiley.

Phil Fisher was one of only three people ever to teach the investment course at Stanford's Graduate School of Business. He taught Jack McDonald, the course's current professor. For 40 years Jack has seen to it that you can't get past that class without reading Phil Fisher. Dad last lectured at Stanford for Jack four years ago. He had a knack for getting great minds to think their own thoughts--but bigger than they would have conceived otherwise on their own. Many disciples described this experience to me.

People presume I learned lots about stocks from him. Not really! He got me started and then I fashioned my own notions, as did everyone else he influenced. Much more important in making me who I am were his early 1950s bedtime stories. He conceived stunning adventure tales of pirates, explorers, kings and crooks. The fictional hero was Jerry Clerenden. I couldn't fathom this at the time but I realized later that this character was created as the person Dad wanted me to be. His stories drove me to dream bigger visions than most children are allowed.

He was small, slight, almost gaunt, timid, forever fretful. But great minds drew insights out of him like water from a well.

His views are in his writings and those of others. I won't repeat. What remains unsaid? What would he think now if he were alive and in his right mind?

First, always think long term. A short-term horizon, if it is relevant at all, is a mere tactical tool to get to your long-term future. Thinking long term usually goes hand in hand with a low turnover of a portfolio. My father bought Motorola in 1955, when its main attraction was radio systems. He still owned it at his death.

Next, every single month read Phil Fisher's favorite poem, Rudyard Kipling's oft-quoted "If," to help you become Jerry Clerenden.

In your bones believe in capitalism and its basic ability, despite recessions and scandals, to better the human condition. From that belief you can conclude that, over the long term, the stock market works. It is better to come to this conclusion from faith than from studying a column of statistics.

Buy what you understand. You can hear Peter Lynch in that. And not too many stocks. You hear Warren Buffett in that. In his primeDad owned about 30 stocks. And diversify into different types, and not only your favorite types, so you have ones that work when your favorites fail.

Don't try to be Phil Fisher. Or Warren Buffett or Peter Lynch or anyone else. Be yourself, but be more energetic and imaginative than you thought you could be. Dream bigger.

I remember what my father said eight years ago to James W. Michaels, then the editor of this magazine: "What are you doing your competitors aren't doing yet?" At the time Jim Michaels had been in the job for 35 years, but he was no less imaginative than he had been at the start.

Try posing that question about some cherished company in your portfolio. What is the management doing that the competition is not doing? Great managements live the answer and in the process create great stocks.

Ignore the long-term doomsters. The future is just beginning and will be awesome. My father would say technology offers society a bounty in the decades ahead that is vastly underestimated even by technologists. Still, it is as powerful to invest in companies adopting technology as those creating it. With either, he would urge buying stocks of firms he called "fundamental." You don't buy assets or earnings but the overall endeavor. I'll have stocks for you next month.



Kenneth L. Fisher is a Woodside, Calif.-based money manager. Visit his homepage at www.forbes.com/fisher.

http://www.forbes.com/free_forbes/2004/0426/142.html

Thanks, Philip Fisher

By Bill Mann |
April 15, 2004 |

It's with sadness that we note that investing legend Philip A. Fisher died this past month at the age of 96. We had not seen it reported anywhere until his son, Kenneth, eulogized his father in his regular column in Forbes.

Fisher was an investment manager of the type that would never have been able to flourish in the brokerage industry's activity-driven model. He believed in long-term investing, in buying great companies at good prices, and then thumbing his nose at the taxman as he held, and held, and held. He gave very few interviews, was extremely choosy about his clients, and would not have been well known to the public but for his writings, most notably Common Stocks and Uncommon Profits and Conservative Investors Sleep Well.

His most famous investment was his purchase of Motorola (NYSE: MOT), a company he bought in 1955 when it was a radio manufacturer and held until his death last month. If you can bring up a chart on Motorola that runs 50 years, you'll see that Fisher's returns on this one investment were sufficient to make success of any investment career.

Fisher's stock-in-trade was the discipline to thoroughly understand a business before and after he bought it. His form of long-term investing was not the bastardized version that became vogue in the 1990s. Fisher was no passive investor who used the long-term buy-and-hold mantle to avoid paying attention to his investments. He was always willing to sell if he noted a negative change in the company's prospects, and, through painstaking attention to detail, he was generally well ahead of the crowd in ferreting out potential problems.

I own two copies of Common Stocks and Uncommon Profits. The first is dog-eared and highlighted, the second was a gift from an extremely generous longtime friend of The Motley Fool. It is signed by Mr. Fisher, and it is a prized possession.

Herewith are Fisher's "15 Points to Look for in a Common Stock," followed by "Five Don'ts for Investors." In these questions, without even seeing the supporting text, you'll see traits in many great companies, such as Pfizer (NYSE: PFE), Stryker (NYSE: SYK), Abercrombie & Fitch (NYSE: ANF), Procter & Gamble (NYSE: PG), Costco (Nasdaq: COST), United Technologies (NYSE: UTX), and others. You'll also see some things that lesser companies don't do well.

I can't think of a better tribute except to urge you to read Fisher's "15 Points" and "Five Don'ts" and their supporting documentation, in the original. You're guaranteed to learn something great every time you read his gift to investors.

15 Points to Look for in a Common Stock

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 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 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 will be in relation to its competition?
    
12. Does the company have a short-range or 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 or disappointments occur?
    
15. Does the company have a management of unquestionable integrity?

Five Don'ts for Investors

1. Don't buy into promotional companies.
   
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.
   
4. Don't assume that the high price at which a stock may be selling in relation to its earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price.
   
5. Don't quibble over eighths and quarters.

Rest well, Phil Fisher.

http://www.fool.com/investing/general/2004/04/15/thanks-philip-fisher.aspx

Philip Fisher Investing Legend, Founder of Fisher & Co.

Born in San Francisco in 1907, Philip Fisher was one of the first investment "philosophers" to focus almost exclusively on qualitative and growth factors. He is widely regarded as one of the early seminal thinkers in the evolution of growth stock investing.

Philip Fisher's career began in 1928, when he dropped out of the newly created Stanford Graduate Investment program to take a job as a securities analyst for the Anglo-London bank in San Francisco. Four years later, he founded Fisher & Co., the investment counseling firm he managed until retiring in 1999 at the age of 91.

The author of three books, a Financial Analysts Federation (now the CFA Institute) monograph and the subject of many articles, Philip Fisher's investment principles have been studied and used by countless contemporary finance professionals. Philip Fisher was the first to contribute an analytical framework within which to judge a growth stock and contemplate its potential in growth instead of just price trends and absolute value. He was also a seminal proponent of what are now called concentrated portfolios. His principles espoused identifying long-term growth stocks and their emerging value through the analysis of quality as opposed to choosing short-term trades for initial profit.

At a time when many investment professionals sought profits by betting on business cycles, Philip Fisher favored holding stocks of firms that were well-positioned for long-term growth. This positioning could best be determined by examining factors that are difficult to measure through ratios and other mathematical formulations - the quality of management, the potential for future long-term sales growth, and the firm's competitive advantage.

Philip Fisher outlined his philosophy for the average investor in his book Common Stocks and Uncommon Profits, published in 1958, which became the first investment book to make the New York Times best seller list. He later expanded upon his work in Conservative Investors Sleep Well and Paths to Wealth through Common Stocks, and went on to write, Developing an Investment Philosophy. All his writings, with the exception of Paths to Wealth, have been republished in Common Stocks and Uncommon Profits and Other Writings by Philip Fisher, which is listed under the John Wiley & Sons Publishers Investment Classics publications.

Philip Fisher passed away in San Mateo, CA in March 2004 at the age of 96.

http://www.fisher-investments-press.com/authors/philip-fisher-biography.aspx

Philip A. Fisher: Wrote Key Investment Book

Philip A. Fisher, 96, Is Dead; Wrote Key Investment Book
By STUART LAVIETES
Published: April 19, 2004

Philip A. Fisher, who wrote one of the first investment books to appear on the New York Times best-seller list, ''Common Stocks and Uncommon Profits,'' a 1958 guide to growth-stock investing that the billionaire investor Warren E. Buffett has cited as a major influence on his career, died at his home in San Mateo, Calif., on March 11. He was 96.

His death was reported by his son Kenneth L. Fisher in a column in the current issue of Forbes magazine.

Still in print, ''Common Stocks and Uncommon Profits'' outlines Mr. Fisher's buy-and-hold approach to investing and his method for identifying stocks that have a strong potential for long-term growth. In the book's ''15 Points to Look for in a Common Stock,'' he advised readers to invest in innovative companies that are world leaders in their field, have a commitment to research and development and are led by executives of unquestioned quality and integrity.

He also told readers to limit the number of stocks in their portfolio and to limit turnover even further. ''If the job has been correctly done when a common stock is purchased,'' he wrote, ''the time to sell is almost never.''

Following his own advice, Mr. Fisher invested in technology companies like Texas Instruments and Motorola for the long haul. He bought Motorola stock in 1955, when the company was still a radio manufacturer, and held its shares until his death.

Philip Arthur Fisher was born in 1907 in San Francisco. A graduate of Stanford with a bachelor's degree in economics, and a veteran of the Army Air Corps, he started an investment counseling firm, Fisher & Company, in 1932. He retired in 1999 at 91.

Mr. Fisher's books, which also include ''Paths to Wealth Through Common Stocks''(1960) and ''Conservative Investors Sleep Well''(1975), influenced generations of investors, including Mr. Buffett.

''I sought out Phil Fisher after reading his 'Common Stocks and Uncommon Profits' and 'Paths to Wealth Through Common Stocks' in the early 1960's,'' Mr. Buffett wrote in a 1987 article in Forbes. ''From him I learned the value of the 'scuttlebutt' approach: Go out and talk to competitors, suppliers and customers to find out how an industry or a company really operates.''

In addition to his son Kenneth, of Woodside, Calif., Mr. Fisher is survived by his wife of 61 years, Dorothy; his sister, Caroline E. Fisher of Belmont, Calif.; two other sons, Arthur of Seattle and Donald of Lakeside, Ore.; 11 grandchildren; and 4 great-grandchildren.

Mr. Fisher also offered readers suggestions on finding a portfolio manager. In a 1987 interview with Forbes, he said that he always urged investors to ask for detailed transcripts from prospective advisers to scrutinize their record.

''If they take losses and small losses quickly and let their profits run, give them a gold star,'' he said. ''If they take their profits quickly and let their losses run, don't go near them.''

Photo: Philip A. Fisher (Photo by Forbes magazine, 1968)

http://www.nytimes.com/2004/04/19/business/philip-a-fisher-96-is-dead-wrote-key-investment-book.html

Common Stocks and Uncommon Profits and Other Writings

Common Stocks and Uncommon Profits and Other Writings
by Philip A. Fisher

You can ignore this book, but only at your PERIL!!!!, March 9, 2007

Having been associated with Wall Street for 35 years, I was lucky enough to have been in the same room with Philip Fisher on more than one occasion. He was a completely self-contained man, extremely comfortable in his own skin. He knew who he was, what he was, and what he could be. He possessed zero airs about him. These traits seem to run freely in many MASTER investors, including Warren Buffett .

Many have mentioned that Buffett considers himself to be 85% Benjamin Graham, and 15% Philip Fisher. This needs to be updated. If you spoke with Buffett today, he would tell you that those ratios are distorted, and the reason is Charlie Munger, Warren Buffett's investing partner at Berkshire Hathaway.

Charlie Munger is cut from the same cloth as Philip Fisher. They are growth players, and willing to pay up for a stock. For decades Buffett could NEVER PAY UP for a stock. He wanted them dirt cheap, so cheap in fact that some big plays got away from him forever. I don't know how many years ago, Buffett mentioned in a meeting I attended that he once owned a considerable amount of Disney. It would be a controlling amount in today's market; it got away from him, and tens of billions of dollars in that play alone.

In the old days when Buffett was strictly Graham and Dodd, he could not buy a GROWTH stock. He still cringes at the thought. Munger however taught Buffett to pay up. An example was Flight Safety International for which Buffett paid a previously unheard price-earning ratio. There are people around Buffett who know him well who will tell you that Munger is the superior investor. What you need to know is that sometimes stocks are DIRT CHEAP because they are DIRT, to use a Munger line.

Philip Fisher like Munger is a MASTER INVESTOR worthy of spending whatever time you can spare studying. If you want to walk in the footsteps of a MASTER, you must study the MASTER, and Fisher has a tremendous amount to offer.

I have managed billions of dollars in my lifetime. I am telling you this because you need to know that the SKUTTLEBUTT method that Fisher is famous for is something that anyone can used, starting today. Most of Wall Street research or any research that I have seen over the decades is not worth the paper it is printed on. On more than one occasion I have asked if the paper is soft enough to use for toilet paper.

With the scuttlebutt method, you talk to everyone but the company you are studying. Please allow me to illustrate. If you are thinking of investing in a car company, you start visiting car dealers. You learn the lingo, you read trade periodicals, maybe even a few car magazines, but be careful. Magazines and newspapers are completely jaded in their reporting by how much advertising dollars they receive from certain companies. You didn't know that because no one will ever dare print it.

If a newspaper wants to bury an important story on a company that gives them tremendous advertising dollars, they will run the unfavorable story, but it will be in the Saturday morning edition, which is the least read edition of the week. You need to know these things. I used Scuttlebutt back in the 80's, to accumulate a massive position in Chrysler when it was near bankruptcy. The stock went from $6 to $200 after splits. It isn't hard. You don't need to be a big market player, anybody really can do it.

You do need an inquisitive mind, and I believe an innovative one as well. Fisher was a guy who thought outside the box, and that's why he was immensely rich, as is his son Ken. Philip Fisher is a guy that made a fortune in FMC Corporation, owned it for 30 or more years. He was a ground floor player in Texas Instruments, owned it and made thousands of percent on the stock. He was every bit Buffett's equal, and to Fisher's credit, he gave us the greatest gift of all. He wrote a book, and was open with his readers about how to attain great wealth in the market.

He takes the "Efficient Market Hypothesis" (EMT), and blows it out of the water. His returns and Buffett's are so many standard deviations away from the mean, that EMT can't survive an investigation based on their results.

He gives you a 15-point criteria list to identify the types of companies that meet his screening. He also gives you five don'ts, and then five more to protect you as an investor. What Fisher is really doing is giving you a TEMPLATE to used as an investor. This is what you need. This is no different than going into the Marine Corps, and spending 12 weeks in basic training. Once you're done, you have certain smart behaviors drilled into your psyche so deep that in combat, and investing is combat, you can fall back on these techniques to survive. They become automatic. No matter what investment turns up, you can put it through the filters that have stood the test of time.

In closing, I would like to say one more thing about the Scuttlebutt technique. Recently, I had to make a decision to invest a considerable amount of money in the auto sector. One of the people I consulted with, is a legend in his 90's, who is the greatest mutual fund investor of the 20th century, probably worth over a billion dollars. He says to me in passing, do you know whom Toyota, the greatest car company in the world fears? The answer is the South Korean car companies. That my friends is worth a fortune, and is a 20 year stock play that Philip Fisher would have envied.

http://www.stocksatbottom.com/common_stocks_and_uncommon_profits_philip_a_fisher.html

****Strategies of the Greats: Graham, Fisher, Buffett and Lynch

Benjamin Graham

Born in London in 1894 as Benjamin Grossbaum, Graham emigrated to the United States when he was one year old.  Graham graduated from Columbia University in 1914 and was offered a teaching position in three different Columbia departments.

Graham's Security Analysis, published in 1934, was the first book to articulate a framework for the systematic analysis of stocks and bonds.  Graham later wrote The Intelligent Investor to bring many of the same concepts to the lay investor.  Both books should be at the very top of the required reading list for serious value investors.

One of Graham's most successful investments was in the automobile insurer GEICO, where he served as chairman of the board.

One of Graham's favorite investment techniques was to purchase net-current-asset bargains, or net-nets.  Net-net were stocks that traded for less than the value of their current assets minus all liabilities.

Graham's students, such as Warren Buffett and Bill Ruane, are among some of the best investors of the past century.


Philip Fisher

Fisher's career spanned 74 years.  After training as an analyst, Fisher started his San Francisco-based investment advisory firm in 1931.  His classic book on investing, Common Stocks and Uncommon Profits, was first published in 1958.

Fisher said that, "If the job has been correctly done when a common stock is purchased, the time to sell it is almost never."  As an example, Fisher first purchased shares of Motorola in 1955 and held them until his death in 2004.

Fisher put all of his potentital investments through 15 step checklist in order to gauge the quality of a company.

According to Fisher, there are only three reasons to sell a stock: 
1) If you have made a serious mistake in your assessment of the company; 
2)  If the company no longer passes the 15 points as clearly as before; 
3) If you could reinvest the money in another, far more attractive company.


Warren Buffett

Buffett uses a discounted cash-flow analysis to estimate the fair value of companies.

Unless analysing a business falls within his circle of competence, Buffett does not try to value the business.

Buffett seeks companies with sustainable competitive advantages.  (Companies with economic moats.)

Though Buffett believes it's important to work with competent, honest managers, the economics of a business are the most important factor.

Buffett is not swayed by popular opinion.

Since no discounted cash-flow analysis is perfect, Buffett requires a margin of safety in his purchase price.

Rather than diversify and dilute his potential returns, Buffett conccentrates his investments on his best ideas.


Peter Lynch

Lynch obtained his legendary investor status managing the Fidelity Magellan Fund.  Under Lynch's leadership, the Magellan fund grew from $20 million in assets to $13 billion and achieved an average total return of 25% per year.

Despite his success as a professional money manager, Lynch believes that average investors have an edge over Wall Street experts and can outperform the market by looking for investment ideas in their daily lives.

The Lynch investment philosophy has four main components:
1.  Invest only in what you understand.
2.  Do your homework and research the company thoroughly.
3.  Focus only on the company's fundamentals and not the market as a whole.
4.  Invest only for the long run and discard short-term market gyrations.

Although he is best known for trend-spotting, Lynch's stock-picking approach mirrors that of Warren Buffett.

****Strategies of the Great Investors

Deep value - Benjamin Graham 

"An investment operation is one which, upon thorough analysis, promise safety of principal and an adequate return.  Operations not meeting these requirements are speculative."

The Principles of Value Investing
1.  Thorough analysis
2.  Safety of principal
3.  Adequate return

Intrinsic Value
To succeed as an investor, you must be able to estimate a business's true worth, or "intrinsic value."

Mr. Market
"Bascially, price fluctuations have only one significant meaning for the true investor.  They provide him with an opportunity to buy wisely when prices fall sharply and sell wisely when they advance a great deal.  At other times he will do better if he forgets about the stock market."

Margin of Safety
Graham distilled the secret of sound investing into three words, "margin of safety."  Any estimate of intrinsic value is based on numerous assumptions about the future, which are unlikely to be completely accurate.

Think Independently
You are neither right nor wrong because the crowd disagrees with you.  You are right because your data and reasoning are right."  Warren Buffett said the best advice he ever got from Graham was to think independently.

Ben's principles have remained sound- their value often enhanced and better understood in the wake of financial storms that demolished flimsier intellectual structures.  His counsel of soundness brought unfailing rewards to his followers - even to those with natural abilities inferior to more gifted practitioners who stumbled while following counsels of brilliance or fashion. Investing is most intelligent when it is most businesslike, and investors who follow Graham's principles will continue to reap rewards in the market.

Holding Superior Growth - Philip Fisher 

Fisher's Investment Philosophy
"Purchase and hold for the long term a concentrated porfolio of outstanding companies with compelling growth prospects that you understand very well."

Fisher's answer is to purchase the shares of superbly managed growth companies in his book, Common Stocks and Uncommon Profits.

"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."

"All else equal, investors with the time and inclination should concentrate their efforts on uncovering young companies with outstanding growth prospects."

Fisher's 15 Points - What does a growth stocks look like?
To uncover the business insights described by Fisher's 15 points, investors must do their research footwork, or "scuttlebutt."  You should ask questions of management, competitors, suppliers, customers, and anyone else who might have useful information.
"Go to five companies in the 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 surprising detailed and accurate picture of all five will emerge."

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 potential 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 organisation?
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 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 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 ahve a management of unquestionable integrity?

Important Don'ts for Investors
1.  Don't overstress diversification.
2.  Don't follow the crowd.
3.  Don't quibble over eighths and quarters.

By applying Fisher's methods, you too, can uncover tomorrow's dominant companies.


Great Companies at Reasonable Prices - Warren Buffett

"In our view, though, investment students need only two well-taught courses -  How to Value a Business, and How to Think About Market Prices."  -  Warren Buffett

Buffett's central Principles of his Investment Strategy
"We select our marketable equity securities in much the way we would evaluate a business for acquisition in its entirety.  We want the busines to be one:

• that we can understand;
• with favourable long-term prospects;
• operated by honest and competent people; and
• available at a very attractive price."

Determining Fair Value
To determine value, he estimates the company's future cash flows and discounts them at an appropriate rate.  This discounted cash-flow valuation is used by countless investment professionals, so Buffett's approach to valuation is not a competitive advantage. 

However, his ability to estimate future cash flows more accurately than other investors is an advantage.

Buffett succeeds largely because he focuses his efforts on companies with durable competitive advantages that fall within his circle of competence.  These are key features of his investing framework.

Understanding Your Circle of Competence
If Buffett cannot understand a company's business, then it lies beyond his circle of competence, and he won't attempt to value it.
Although it might seem obvious that investors should stick to what they know, the temptation to step outside one's circle of competence can be strong.
Buffett has written that he isn't bothered when he misses out on big returns in areas he doesn't understand, because investors can do very well (as he has) by simply avoiding big mistakes.

Buying Companies with Sustainable Competitive Advantages
Even if a business is easy to understand, Buffett won't attempt to value it if its future cash flows are unpredictable.  He wants to own simple, stable businesses that possess sustainable competitive advantages.  Companies with these characteristics are highly likely to generate materially higher cash flows with the passage of time.  Without these characteristics, valuation estimates become very uncertain.

Partnering with Admirable Managers
He has written that good managers are unlikely to triumph over a bad business, but given a business with decent economic characteristics - the only type that interests hime - good managers make a significant difference.  He looks for individuals who are more passionate about their work than their compensation and who exhibit energy, intelligence, and integrity.  That last quality is especially important to thim.  He believes that he has never made a good deal with a bad person.

An Approach to Market Prices
Once Buffetthas decided that he is competent to evaluate a company, that the company has sustainable advantages, and that it is run by commendable managers, then he still has to decide whether or not to buy it.  This step is the most crucial part of the process.

The decision process seems simple enough:  If the market price is below the discounted cash-flow calculation of fair value, then the security is a candidate for purchase.  The available securities that offer the greatest discounts to fair value estimates are the ones to buy.

However, what seems simple in theory is difficult in practice.  A company's stock price typically drops when investors shun it because of bad news, so a buyer of cheap securities is constantly swimming against the tide of popular sentiment.  Even investments that generate excellent long-term returns can perform poorly for years.  In fact, Buffett wrote an article in 1979 explaining that stocks were undervalued, yet the undervaluation only worsened for another three years.  Most investors find it difficult to buy when it seems that everyone is selling, and difficult to remain steadfast when returns are poor for several consecutive years.

Buffett credits his late friend and mentor, Benjamin Graham, with teaching him the appropriate attitude toward market prices.  The most important thing to remember about "Mr. Market" is that he offers you the potential to make a profit, but he does not offer useful guidance.  If an investor can't evaluate his business better than Mr. Market, then the investor doesn't belong in that business.  Thus, Buffett invests only in predictable businesses that he understands, and he ignores the judgement of Mr. Market (the daily market price) except to take advantage of Mr. Market's mistakes.

Requiring  a Margin of Safety
Although Buffett believes the market is frequently wrong about the fair value of stocks, he doesn't believe himself to be infallible.  If he estimates a company's fair value at $80 per share, and the company's stock sells for $77, he will refrain from buying despite the apparent undervaluation.  That small discrepancy does not provide an adequate margin of safety, another concept borrowed from Ben Graham.  No one can predict cash flows into the distant future with precision, not even for stable businesses with durable competitive advantges.  Therefore, any estimate of fair value must include substantial room for error.

For instance, if a stock's estimated value is $80 per share, then a purcahse at $60 allows an investor to be wrong by 25% but still achieve a satisfactory result.  The $20 difference between estimated fair value and purchase price is what Graham called the margin of safety.  Buffett considers this margin-of-safety principle to be the cornerstone of investment success.

Concentrating on Your Best Ideas
Buffett has difficulty finding understandable businesses with sustainable competitive advantages and excellent managers that also sell at discounts to their estimated fair values.  Therefore, his investment portfolio has often been concentrated in relatively few companies.  This practice is at odds with the Modern Portfolio Theory taught in business schools, but Buffett rejects the idea that diversification is helpful to informed investors.  On the contrary, he thinks the addition of an investor's 20th favorite holding is likely to lower returns and increase risk compared with simply adding the same amount of money to the investor's top choices.
You can greatly boost your investment returns if you invest like Buffett.  This means

• staying within your circle of competence,
• focusing on companies with wide economic moats,
• paying attention to company valuation and not market prices, and finally,
• requiring a margin of safety before buying.

Know What You Own - Peter Lynch

Lynch's mantra is that average investors have an edge over Wall Street experts.  The "Street lag" of large institutions gives average investors many advantages because they can find promising investments largely ahead of the professional investors. 

Lynch stated, "If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighbourhood shopping mall, and long before Wall Street discovers them." Therefore, individual investors can outperform the experts and the market in general by looking around for investment ideas in their everyday lives.

His book, One Up on Wall Street, articulates his investment philosophy.  The Lynch stock-picking approach has several key principles:

• First, you should invest only in what you understand.
• Second, you should do your homework and research an investment thoroughly.
• Third, you should focus more on a company's fundamentals and not the market as a whole.
• Last, you should invest only for the long run and discard short-term market gyrations. 

If you adhere to the basic principles of this investment philosophy, Lynch believes that you will be well on your way to "beating the street."

Stick to What You Know
Investing in what you know about and understand is at the core of Lynch's stock-picking approach.  This particular investment principle served Lynch very well in practice.

Lynch has pointed out that you find your best investment ideas close to home.  "An amateur investor can pick tomorrow's big winners by paying attention to new developments at the workplace, the mall, the auto showrooms, the restaurants, or anywhere a promising new enterprise makes its debut."

Things Lynch Looks For, and Avoid
Company Characteristics that Might Attract Lynch:

• It is boring.
• The industry is not growing.
• The business is specialized and entrenched.
• The business sounds silly.
• There is a lot of controversy surrounding the business.
• It has been spun out of a larger company.
• Wall Street doesn't follow it or care about it.
• The business supplies something people need to continually buy.
• Management is buying shares, or the company is repurchasing its stock.
• It uses technology to cut costs or add value for customers.

Company Characteristics that Might Repel Lynch:

• Company or its industry is grabbing a lot of headlines.
• It is the hot topic of conversation at happy hour.
• It is being touted as a revolutionary company that is the next great investment.
• It has a cool, futuristic name.
• It is diversifying too much, diluting its competitive strength.
• It is a middleman and has a limited number of clients.

Do Your Research and Set Reasonable Expectations
The second key principle in Lynch's investment philosophy is that you should do your homework and research the company thoroughly.  "Investing without research is like playing stud poker and never looking at the cards."  He recommends reading all prospectuses, quarterly reports (Form 10-Q), and annual reports (Form 10-K) that companies are required to file with the Securities and Exchange Commission. 

If any pertinent information is unavailable in the annual report, Lynch says that you will be able to find it by asking your broker, calling the company, visiting the company, or doing some grassroots research, also known as "kicking the tires."  After completing the research process, you should be familiar with the company's business and have developed some sense of its future potential.

Once you have done your research on a company, Lynch believes that it is important to set some realistic expectations about each stock's potential.  He usually ranks the companies by size and then places them into one of six categories:

• Slow Growers
• Stalwarts
• Fast Growers
• Cyclicals
• Turnarounds
• Asset Plays

Know the Fundamentals
The third main principle of Lynch's stock-picking approach is to focus only on the company's fundamentals and not the market as a whole.  Lynch doesn't believe in predicting markets, but he believes in buying great companies - especially companies that are undervalued and/or underappreciated.

Lynch advocates looking at companies one at a time using a "bottom up" approach rather trying to make difficult macroeconomic calls using a "top down" approach.

Lynch believes that investors can separate good companies from mediocre ones by sticking to the fundamentals and combing through financial statements.  He suggests looking at some of the following famous numbers:

• Percent of Sales
• Year-Over-Year Earnings
• Earnings Growth
• The P/E Ratio (Lynch's favorite metric)
• The Cash Position
• The Debt Factor
• Dividends
• Book Value
• Cash Flow
• Inventories
• Pension Plans 

Ignoring Mr. Market
The last key principle of Lynch's investment philosophy is that you should only invest for the long run and discard short-term market gyrations.  Lynch has said, "Absent a lot of surprises, stocks are relatively predictable over ten to twenty years.  As to whether they're going to be higher or lower int wo or three years, you might as well flip a coin to decide."  Nonetheless, Lynch sticks with his philosophy, adding:  "When it comes to the market, the important skill here is not listening, it's snoring.  The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them.  Stand by your stocks as long as the fundamental story has not changed."

Lynch's investment philosophy is very similar to Buffett's stock picking approach.  Lynch said, "And Warren Buffett, the greatest ivnestor of them all, looks for the same opportunities I do, except that when he finds them [great businesses at bargain prices], he buys the whole company."
Lynch said, "The basic story remains simple and never-ending.  Stocks aren't lottery tickets.  There's a company attached to every share.  Companies do better or they do worse.  If a company does worse than before, its stock will fall.  If a company does better, its stock will rise.  If you own good companies that continue to increase their earnings, you'll do well."

Cheap Is No Longer Good Enough, Company must be Excellent too.

Cheap Is No Longer Good Enough
By Toby Shute
January 11, 2010 |

After a recent college reunion/homecoming, I had a chance to connect with fund manager Harry Long, the managing partner of Contrarian Industries. Long's company specializes in alternative asset management, algorithmic system research and development, and strategic consulting. Harry and I had a wide-ranging conversation about fundamental and systematic approaches to investing. Here's an edited portion of our exchange.

Toby Shute: You've described your investing approach as an attempt to marry the qualitative with the systematic. This reminds me of Warren Buffett's description of his investment strategy as 85% Benjamin Graham and 15% Philip Fisher. Let's start with Graham. What was his most important contribution to the investment field?

Harry Long: Graham's most important contribution to investing was the brilliant way he went about systematizing it. He gave very clear, mechanical rules, which outperform most discretionary human investors, even today.

If you look at services like Validea.com, the American Institute for Individual Investors, and countless other services, they have taken his dictates from The Intelligent Investor and put them into a screen, which beats the pants off just about everything else developed since.

I think Joel Greenblatt is trying to follow in that tradition. We'll see how he stacks up to Graham. It's a noble pursuit.

Shute: Phil Fisher is known for focusing on the characteristics of a great growth franchise, some of which are impossible to quantify. Importantly, though, he weeded out potential investments using a 15-point checklist that he applied pretty strictly. Are checklists an effective way of systematizing a qualitatively oriented investment process?

Long: When it comes to checklists, I've seen many, but very few good ones. It's really multiple simple rules, when applied in combination, that get you performance. For instance, if investors automatically sold, or had a rule against investing in, any company with earnings decreases of greater than 14% in any quarter, they should have sold almost all bank stocks in 2008.

In practice, you'll find that a well-designed system, using objective data, will often key in on companies that Fisher would have appreciated qualitatively. You have to do both, but I would encourage your readers to find businesses with great metrics and then ask "why?" rather than trying to find great stories which may or may not be executing.

Shute: What else can investors learn from Phil Fisher?

Long: Most investors would do best to stick to Fisher's basic tenet -- buy businesses with strong competitive positions. As Fisher pointed out, if you avoid companies with unhealthy profit margins, you save yourself a lot of money, sleep, and heartache. On the other hand, there are occasionally companies such as Wal-Mart (NYSE: WMT) that have low margins on purpose.

As for his focus on R&D, it's pretty hit-or-miss. Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) would be examples of great success stories. However, while the Intels (Nasdaq: INTC) of the world had great runs, they are still plowing billions into R&D and hitting a growth wall.

Investors should have a diversified portfolio of quality. Cheap is no longer good enough -- investors need to search for cheap and excellent. Competition is simply too brutal, unless you are in a position to take control of ailing firms.

Shute: Can you apply this advice to a particular sector?

Long: In the financial sector, rather than owning banks, which risk capital through lending and have infinite competition, [investors] could own something like MSCI, which gets fee income from its MSCI indices. It doesn't risk capital. Simple business -- you hand me money, I hand you information -- and it has very little strong competition in the index business. MasterCard (NYSE: MA) and Visa (NYSE: V) also don't have the same balance-sheet risk as an issuer like American Express.

I could go on and on. Just because you're investing in the financial sector, you don't have to be conventional.

[Michael] Bloomberg understood that the way to be successful is to sell the miners their picks and shovels. Why does everyone spend time studying banks, rather than his example? Why aren't people obsessed with studying FactSet Research Systems (NYSE: FDS)? Maybe it's a tabloid phenomenon where success is simply too boring.

Stay tuned as Toby's conversation with Harry Long continues tomorrow. Harry Long's comments are purely his personal opinions and should not be construed as financial or investment advice.

So, Fool, how do you weigh the quantitative and qualitative aspects of a business in your own investing decisions? Share your philosophy in the comments section below.

http://www.fool.com/investing/value/2010/01/11/cheap-is-no-longer-good-enough.aspx

Philip Fisher: Growth Stock Investigator

Legendary Investor

Philip Fisher: Growth Stock Investigator

Matthew Schifrin, 02.23.09, 06:00 PM EST

His idea of buying growth stocks and holding them forever sounded good--even to Warren Buffett.

Philip Fisher




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 (nyse: MOT - news - people ) 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 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, Forbes.com 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 dividend 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 (nyse: AMX - news - people ) Communications Services
$31.05 $53.5 billion 0.2 39.1% 31.2%
NII Holdings (nasdaq: NIHD - news - people ) Communications Services
$20.56 $3.4 billion 0.9 33.4% 11.6%
Inverness Medical Innovations (amex: IMA - news - people ) Biotechnology & Drugs
$25.09 $2.0 billion 32.3% -4.2%
Sohu.com (nasdaq: SOHU - news - people ) Computer Services
$45.61 $1.8 billion 0.2 45.8% 31.4%
General Cable (nyse: BGC - news - people ) Communications Equipment
$19.61 $1.0 billion 26% 3.9%
Arena Resources (nyse: ARD - news - people ) Oil & Gas Operations
$26.8 $1.9 billion 0.1 125.9% 37.6%
EZCORP (nasdaq: EZPW - news - people ) Retail (Specialty Non-Apparel)
$13.87 $599.3 million 0.3 17.3% 11.5%
Cabela's (nyse: CAB - news - people ) Retail (Specialty Non-Apparel)
$6.32 $421.4 million 0.6 13.9% 3.2%
Team (nasdaq: TISI - news - people ) Business Services
$16.49 $310.5 million 0.3 39.1% 5.2%
Volcom (nasdaq: VLCM - news - people ) Apparel/Accessories
$9.52 $232.0 million 0.2 36.3% 11.2%
Continucare (amex: CNU - news - people ) Health Care Facilities
$1.96 $117.2 million 0.3 21.2% 5%

Source: AAII Stock Investor Pro.


http://www.forbes.com/2009/02/23/philip-fisher-growth-personal-finance_philip_fisher.html