Philip Fisherr, author of Common Stocks and Uncommon Profits

Philip Fisher (1907-2004), author of Common Stocks and Uncommon Profits, among many other books, began his investment career in 1931.

Like Ben Graham, he achieved impressive results over his lifetime, but Fisher did it with a markedly different approach.

Unlike Graham, who typically invested in statistically cheap "cigar-butts" (with the notable exception of GEICO), Fisher preferred to buy and hold the stocks of high-quality companies that could, "grow and grow and grow."

Shift to Quality

Graham was too focused on price at the expense of quality.  Of course, this is an oversimplification.   Graham also took account of other factors, such as growth or stable results, although he didn't put as much emphasis on them.  

Most investors today pay attention to other drivers, such as growth or business quality, assigning increasing weight to them over time.



Philip Fisher

Philip Fisher played a pivotal role in the transformation undergone by many investors.  It was under the influence of his partner, Charlie Munger, that Buffett first became attracted to Fisher's philosophy.

Fisher put his money on investing in long-term growth stocks, with very robust competitive advantages that were capable of being sustained and increased over time.  The price paid for them was not as important, since if the company performed well it would be able to sustain a high multiple.  

This idea is less intuitive and therefore harder to digest than simply buying something cheap; it means paying seemingly expensive prices for something that will only yield results after a period of time.

This is ultimately the road that Buffett has gone down.  Thus, most value investors are also indirectly indebted to Fisher to some degree or another.

For those who have maintained a certain unshakeable bias towards investing in cheap assets, whose quality was not always proven, it can be a challenge to change their ways, especially when this mix had produced good results.

Every investor develops at their own pace.  



Joel Greenblatt

Joel Greenblatt's short book, The Little Book That Beats the Market, gives empirical proof that quality shares bought at a good price will always outperform other stocks.  

To do so, he classifies each stock according to two criteria: 

• quality, measured by ROCE (return on capital employed) and 
• price, measured by the inverse P/E ratio (price to earnings, the price that we pay for each unit of earnings).  [You can also use FCF yield, that is, FCF/price, instead of inverse P/E].

Greenblatt uses a numerical classification for both return and price:  1, 2, 3,4,...., with 1 being the stock with the highest ROCE under the return criteria and 1 being the highest free cash flow under the price criteria.   He then adds the points obtained by each share in both rankings to produce a definitive classification, which he calls the 'magic formula'.  

• The companies with the lowest sum of both factors deliver the best long-term returns.  
• Furthermore, the same is true throughout the ranking; companies situated in the lowest 10% post a better return than the second 10%, the second decile outperforms the third, and so on until the last 10%.

The exceptional results obtained by Greenblatt is surprising, but logical:  good companies bought at reasonable prices should obtain better returns on the markets.

The problem with applying this approach is that the formulas deliver over the long term, but they can also underperform for relatively long periods, for example, three years  this makes it though for both professional and enthusiast investors to keep faith when things are not working.

Learning from Philip Fisher and Walter Schloss

A Dozen Things I’ve Learned from Philip Fisher and Walter Schloss About Investing By Tren Griffin

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1. “I had made what I believe was one of the more valuable decisions of my business life. This was to confine all efforts solely to making major gains in the long-run…. There are two fundamental approaches to  investment.  There’s the approach Ben Graham pioneered, which is to find  something intrinsically so cheap that there is little chance of it having a big  decline. He’s got financial safeguards to that. It isn’t going to go down much,  and sooner or later value will come into it.  Then there is my approach, which is to find  something so good–if you don’t pay too much for it–that it will have very,  very large growth. The advantage is that a bigger percentage of my stocks is apt  to perform in a smaller period of time–although it has taken several years for  some of these to even start, and you’re bound to make some mistakes at it. [But]  when a stock is really unusual, it makes the bulk of its moves in a relatively  short period of time.”  Phil Fisher understood (1) trying to predict the direction  of a market or stock in the short-term is not a game where one can have an advantage versus the house (especially after fees); and (2) his approach was different from Ben Graham.

2. “I don’t want a lot of good investments; I want a few outstanding ones…. I believe that the greatest long-range investment profits are never obtained by investing in marginal companies.”  Warren Buffett once said: “I’m 15%  Fisher and 85% Benjamin Graham.”  Warren Buffett is much more like Fisher in 2013 than the 15% he once specified, but only he knows how much. It was the influence of Charlie Munger which moved Buffet away from a Benjamin Graham approach and their investment in See’s Candy  was an early example in which Berkshire paid up for a “quality” company.  Part of the reason this shift happened is that the sorts of companies that Benjamin Graham liked no longer existed the further way the time period was from the depression.

3. “The wise investor can profit if he can think independently of the crowd and reach the rich answer when the majority of financial opinion is leaning the other way. This matter of training oneself not to go with the crowd but to  be able to zig when the crowd zags, in my opinion, is one of the most important fundamentals of investment success.”The inevitable math is that you can’t beat the crowd if you are the crowd, especially after fees are deducted.

4. “Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself. … Investors have been so oversold on diversification that fear of having too many eggs in one basket has caused  them to put far too little into companies they thoroughly know and far too much in others which they know nothing about.” For the “know-something” active investor like Phil Fisher, wide diversification is a form of closet indexing.  A “know-something”  active investor must focus on a relatively small number of stocks if he or she expects to outperform a market.  By contrast, “know-nothing” investors (i.e., muppets) should buy a low fee index fund.

5. “If the job has been correctly done when a common stock is purchased, the time to sell it is almost never.” Phil Fisher preferred a holding period of almost forever (e.g., Fisher bought Motorola in 1955 and held it until 2004). The word “almost” is important since every company is in danger of losing its moat.

6. “Great stocks are extremely hard to find. If they weren’t, then everyone would own them.  The record is crystal clear that fortune – producing growth stocks can be found. However, they cannot be found without hard work and they  cannot be found every day.”  Fisher believed that the “fat pitch” investment opportunity is delivered rarely and only to those investors who are willing to patiently work to find them.

7. “Focus on buying these companies when they are out of favor, that is when, either because of general market conditions or because the financial community at the moment has misconceptions of its true worth, the stock is selling  at prices well under what it will be when it’s true merit is better understood.” Like Howard Marks, Fisher believed that (1) business cycles and (2) changes in Mr. Market’s attitude are inevitable.  By focusing on the value of individual stocks (rather than just price) the  investor can best profit from these inevitable swings.

8. “The successful investor is usually an individual who is inherently interested in business problems.” A stock is a part ownership of a business. If you do not understand the business you do not understand that stock.  If you  do not understand the business you are investing in you are a speculator, not an investor.

9. “The stock market is filled with individuals who know the price of everything, but the value of nothing.” Price is what you pay and value is what you get.  By focusing on value Fisher was able to outperform as an investor even  though he did not look for cigar butts.

10. “It is not the profit margins of the past but those of the future that are basically important to the investor.” Too often people believe that the best prediction about the future is that it is an extension of the recent past.

11. “There is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us. None of us likes to admit to himself that he has been wrong. If we have made a mistake in buying a stock  but can sell the stock at a small profit, we have somehow lost any sense of having been foolish. On the other hand, if we sell at a small loss we are quite unhappy about the whole matter. This reaction, while completely natural and normal, is probably one  of the most dangerous in which we can indulge ourselves in the entire investment process. More money has probably been lost by investors holding a stock they really did not want until they could ‘at least come out even’ than from any other single reason. If  to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous.”  Fisher  was very aware of the problems that loss aversion bias can cause.

12. “Conservative investors sleep well.”  If you are having trouble sleeping due to worrying about your portfolio, reducing risk is wise. Life is too short to not sleep well, but also fear can result in mistakes.

Walter Schloss

1. “I think investing is an art, and we tried to be as logical and unemotional as possible. Because we understood that investors are usually affected by the market, we could take advantage of the market by being rational. As [Benjamin]  Graham said, ‘The market is there to serve you, not to guide you!’.”  Walter Schloss was the closest possible match to the investing style of Benjamin Graham.  No one else more closely followed the “cigar butt” style of investing of Benjamin Graham.  In  other words, if being like Benjamin Graham was a game of golf, Walter Schloss was “closest to the pin.”  He was a man of his times and those times included the depression which had a profound impact on him.  While his exact style of investing is not possible  today, today’s investor’s still can learn from Walter Schloss.  It is by combining the best of investors like Phil Fisher and Walter Schloss and matching it to their unique skills and personality that investors will find the best results.  Warren  Buffet once wrote in a letter:  “Walter outperforms managers who work in temples filled with paintings, staff and computers… by rummaging among the cigar butts on the floor of capitalism.”   When Walter’s son told him no such cigar butt companies existed any  longer Walter told his son it was time to close the firm.  The other focus of Walter Schloos was low fees and costs. When it came to keeping overhead and investing expenses low, Walter Schloss was a zealot.

2. “I try to establish the value of the company.  Remember that a share of stock represents a part of a business and is not just a piece of paper. … Price is the most important factor to use in relation to value…. I believe stocks  should be evaluated based on intrinsic worth, NOT on whether they are under or over priced in relationship with each other…. The key to the purchase of an undervalued stock is its price COMPARED to its intrinsic worth.”

3.”I like Ben’s analogy that one should buy stocks the way you buy groceries not the way you buy perfume… keep it simple and try not to use higher mathematics in you analysis.” Keeping emotion out of the picture was a key part of  the Schloss style. Like Ben Graham he as first and foremost rational.

4. “If a stock is cheap, I start buying. I never put a stop loss on my holdings because if I like a stock in the first place, I like it more if it goes down. Somehow I find it difficult to buy a stock that has gone up.” 

5. “I don’t like stress and prefer to avoid it, I never focus too much on market news and economic data. They always worry investors!” Like all great investors in this series, the focus of Schloss was on individual companies not  the macro economy.  Simpler systems are orders of magnitude easier to understand for an investor.

6. “The key to successful investing is to relate value to price today.” Not only did Schloss not try to forecast the macro market, he did not really focus forecasting the future prospects of the company.  This was very different  than the Phil Fisher approach which was focused on future earnings.

7. “I like the idea of owning a number of stocks. Warren Buffet is happy owning a few stocks, and he is right if he is Warren….” Schloss was a value investor who also practiced diversification.  Because of his focus on obscure  companies and the period in which he was investing, Walter was able to avoid closet indexing.

8. “We don’t own stocks that we’d never sell.  I guess we are a kind of store that buys goods for inventory (stocks) and we’d like to sell them at a profit within 4 years if possible.”  This is very different from a Phil Fisher  approach where his favorite holding period is almost forever. Schloss once said in a Colombia Business school talk that he owned “some 60-75 stocks”.

9.  “Remember the word compounding.  For example, if you can make 12% a year and reinvest the money back, you will double your money in 6 years, taxes excluded.  Remember the rule of 72.  Your rate of return into 72 will tell you  the number of years to double your money.” Schloss felt that “compounding could offset [any advantage created by] the fellow who was running around visiting managements.”

10.  “The ability to think clearly in the investment field without the emotions that are attached to it is not an easy undertaking. Fear and greed tend to affect one’s judgment.” Schloss was very self-aware and matched his investment  style to his personality. He said once” We try to do what is comfortable for us.”

11. “Don’t buy on tips or for a quick move.”

12.  “In thinking about how one should invest, it is important to look at you strengths and weaknesses. …I’m not very good at judging people. So I found that it was much better to look at the figures rather than people.” Schloss knew  that Warren Buffett was a better judge of people than he was so Walter’s approach was almost completely quantitative.  Schloss knew to stay within his “circle of competence”.  Schloss said once: “Ben Graham didn’t visit management because he thought figure told  the story.”

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Oct27

Summary of Common Stocks and Uncommon Profits by Philip A. Fisher

Philip A. Fisher’s Stocks Selection Criteria - What to buy?

In his book, Common Stocks and Uncommon Profits, Philip A. Fisher listed down his 15 points on the criteria of selecting good stocks. These 15 points cover 4 areas on sales & growth, financial, management and leadership.

Area 1: Sales & growth
Products and services that have market potential to increase and give sizable sales for few years (Point 1)
Management determination in develop new products and services for growth and sales potential (Point 2)
Effectiveness of research & development in relation to size (Point 3)
An above average sales organization (Point 4)

Area 2: Financial
A worthwhile profit margin (Point 5)
Effort in maintaining or increasing profit margin (Point 6)
Good cost analyses and accounting control (Point 10)
Will new equity funding require from growth subsequently cancel the existing stockholders’ benefit from this anticipated growth? (Point 13)

Area 3: Management
Outstanding labor and personnel relations (Point 7)
Outstanding executive relations (good executive climate for team work) (Point 8)
Development of proper management in depth. Delegation of authority to develop pool of talents (Point 9)

Area 4: Leadership: visions and characters
Peculiarity of the company in winning the competition (Point 11)
Management perspectives in regard to profits (short-range or long range) (Point 12)
Management attitude in conveying troubles and disappointments. “Clam up”? (Point 14)
Unquestionable integrity (Point 15)


Philip A. Fisher’s Stocks Strategies - When to buy? When to sell or not to sell?

In Common Stocks and Uncommon Profits, Philip Fisher provided guidelines on timing of buying and selling stocks. Once a company fits into the 15 points criteria of a good and growth stock, when should we start buying the stocks? When should we sell it?

When to buy a good stock?

The best time to buy a company’s shares is right before the improvement of its earning power and before its shares price reflects the anticipated earnings improvement.
When the company’s commercial plant for a new processes is about to begin production. Initially, growth drains profit and other resources of the business. The point in the development of a new process that worth considering as buying time is that at which the first full-scale commercial plant is about to begin production. (Extra cost will incur, benefit of the new production has not crept into EPS. But eventually profit will come.) This criteria can only apply to the companies that fit the 15 points
When the company Introduces new products
When the company faces problems of starting complex plants. Such troubles are temporary rather than permanent
Alternatively, we can just buy into outstanding companies, though our patient will be tested.

Another important strategy is that we should buy the shares in staggered way. Spread the timing of buying to avoid losses caused by major economic storm.


When to sell?

There are only 3 reasons to sell
When a mistake has been made in the original purchase
The company has no longer qualified in regard to the fifteen points, either through deterioration or exhaustion of growth prospects
Switch to a more attractive investment as our investment resources (money) are limited

When not to sell?
General stock market movement, as the good companies that fit the 15 points may defy business cycle
Overpriced, as you cannot know whether it is really overpriced. The companies that fit the 15 points have good growth prospects
The price of the stock has a huge advance

Ultimately, "If the job has been correctly done when a common stock is purchased, the time to sell it is – almost never." – Philip A Fisher


Philip A. Fisher’s "Ten Don'ts" For Investors

In his book, Common Stocks and Uncommon Profits, Philip Fisher also stated "Ten Don'ts" for investors.

Don’t buy into promotional companies
Don’t ignore a good stock just because it is traded “over the counter”
Don’t buy a stock just because you like the “tone” of its annual report
Don’t assume that the high price at which a stock may be selling in relation to earnings (PER) is necessarily an indication that further growth in those earnings has largely been already discounted in the price.
Don’t quibble over eights and quarters, i.e. few sens.
Don’t overstress diversification
Don’t be afraid of buying on a war scare
Don’t be influenced by what doesn’t matter, that statistic of former years’ earnings and particularly of per-share price ranges of these former years quite frequently “have nothing to do with the case”.
Don’t fail to consider time as well as price in buying a true growth stock. Based on time, rather than price, eg. a month before the commission of new plant, etc.
Don’t follow the crowd, ie. collective perception on the broad picture or particular industry, trend, outlook, favor of the months, etc. These investment fads and misinterpretation of facts may run for several months or several years. Given the same facts, change of such perceptions would lead to different conclusion.


Philip A. Fisher’s View on Dividend

According to Philip Fisher, in his book Common Stocks and Uncommon Profits, a company that fits the 15 points should retain its profits for better growth instead of distributing the profits to investors. There are more opportunities available to the management to get high yield investments than that available to the investors.

Argument on tax effects of dividend is not entirely relevant to Malaysian investors due to different tax system.

“Actually dividend considerations should be given the least, not the most, weight by those desiring to select outstanding stock.” – Philip A Fisher

“Worthy of repetition here is that over a span of five to ten years, the best dividend results will come not from the high-yield stocks but from those with the relatively low yield.” – Philip A Fisher

In a way I cannot entirely agree with Philip Fisher in his view on dividend. I always like to invest in company with opportunities of growth, financially strong with net cash and that distributes dividend consistently. By receiving dividends periodically, I can be patient even when the market falls for a long period of time.

Without dividend, I am not sure if I can maintain the discipline to hold on to good stocks in an economy downturn. It is such "discipline" (plus knowledge in the company) that ultimately decides our investment outcome of gain or loss.



Philip A. Fisher’s Method on Finding Growth Stocks

In Common Stocks and Uncommon Profits, Philip Fisher illustrated his method of finding growth stocks.

Step 1
Listen to investment men with great ability as a source of original leads on what to investigate. Typical public printed brokerage bulletin available to everyone is not a fertile source. Few hours conversation, with and outstanding investment man, occasionally with a business executives or scientist, would lead to a decision that a particular company might be exciting.


Step 2
He didn’t approach anyone in the management in this stage. He didn’t spend hours and hours going over old annual reports and making minutes studies of minor year-by-year balance sheet changes. He didn’t ask every stockbroker he knew what he thinks of the stock.

He would glance over
a. The balance sheets to determine general nature of the capitalization and financial positions.
b. Breakdown of total sales by product line
c. Competitions
d. Shareholdings
e. All earnings statement figures throwing light on depreciation, profit margins, extent of research activity and abnormal or non-recurring costs in prior years’ operations


Step 3
Using “scuttlebutt” method, he would try to see every key customer, supplier, competitor, ex-employee or scientist in a related field that he knew or whom he could approach through mutual friends.

If he did not know enough of people that could lead to such background information, he would stop and do something else.

He would go through commercial bankers to those businessmen who have the information.

“Scuttlebutt” method
This method provides the clues that are needed to find really outstanding investments.
Ask the
a. Competitors
b. Researchers of the competitors, government, universities, etc.
c. Vendors
d. Customers
e. Executives of trade association
f. Former employees

Step 4
He would gather at least 50% of all the knowledge he would need to make the investment before approaching the management.

He would choose to see the man who make the decisions, not the financial public relations officer. It is wise and important to go to considerable trouble to be introduced to a management by the right people, ie. key customers, major shareholders, investment banking connections, etc.

He bought one out of two or two-and- a-half companies he visited. He had done his scuttlebutt work well enough to be very certain even before he visited the company. Meeting management was merely to confirm hopes or to ease fears by answers that make sense.


“One of the ablest investment men I have ever known told me many years ago that in the stock market a good nervous system is even more important than a good head. Perhaps Shakespeare unintentionally summarized the process of successful common stock investment: There is a tide in the affairs of men which, taken at the flood, leads on to fortune.” – Philip A Fisher

http://stockinvesting.financialplanningmalaysia.com/2011/07/philip-fishers-stocks-selection.html

THE 10 BEST INVESTORS IN THE WORLD

Warren Buffett
Charlie Munger
Joel Greenblatt
John Templeton
Benjamin Graham
Philip Fisher
Mohnish Pabrai
Walter Schloss
Peter Lynch
Seth Klarman



Warren Buffett (1930)

"Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down."

Warren Buffett, born on August 30, 1930 in Omaha, Nebraska, is known as the world's best investor of all time. He is among the top three richest people in the world for several years in a row now, thanks to the consistent, mind-boggling returns he managed to earn with his investment vehicle Berkshire Hathaway. The funny thing is that Buffett does not even care that much about money. Investing is simply something he enjoys doing. Buffett still owns the same house he bought back in 1958, hates expensive suits, and still drives his secondhand car.

Investment philosophy:
 Focuses on individual companies, rather than macro-economic factors
 Invests in companies with sustainable competitive advantages
 Prefers becoming an expert on a few companies over major diversification
 Does not believe in technical analysis
 Bases his investment decisions on the operational performance of the underlying businesses
 Holds on to stocks for an extremely long period, some stocks he never sells
 Uses price fluctuations to its advantage by buying when undervalued and selling when overvalued with respect to intrinsic value
 Puts much emphasis on the importance of shareholder friendly, capable management
 Beliefs margin of safety are the three most important words in investing


Charlie Munger (1924)

"All intelligent investing is value investing — acquiring more than you are paying for."

Charlie Munger is vice-chairman of Berkshire Hathaway, Warren Buffett's investment vehicle. Even though Buffett and Munger were born in Omaha, Nebraska, they did not meet until 1959. After graduating from Harvard Law School, Munger started a successful law firm which still exists today. In 1965 he started his own investment partnership, which returned 24.3% annually between 1965 and 1975, while the Dow Jones only returned 6.4% during the same period. In 1975 he joined forces with Warren Buffett, and ever since that moment Charlie Munger has played a massive role in the success of Berkshire Hathaway. While Buffett is extrovert and a pure investor, Munger is more introvert and a generalist with a broad range of interests. The fact that they differ so much from each other is probably why they complement each other so well.

Investment philosophy:
 Convinced Buffett that stocks trading at prices above their book value can still be interesting, as long as they trade below their intrinsic value
 Has a multidisciplinary approach to investing which he also applies to other parts of his life ("Know a little about a lot")
 Reads books continuously about varied topics like math, history, biology, physics, economy, psychology, you name it!
 Focuses on the strength and sustainability of competitive advantages
 Sticks to what he knows, in other words, companies within his "circle of competence"
 Beliefs it is better to hold on to cash than to invest it in mediocre opportunities
 Says it is better to be roughly right than precisely wrong with your predictions


Joel Greenblatt (1957)

“Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.”

Joel Greenblatt definitely knows how to invest. In 1985 he started his investment fund Gotham Capital, ten years later, in 1995, he had earned an incredible average return of 50% per year for its investors. He decided to pay his investors their money back and continued investing purely with his own capital. Many people know Joel Greenblatt for his investment classic The Little Book That Beats The Market* and his website magicformulainvesting.com. Greenblatt is also an adjunct-professor at the Columbia Business School.

Investment philosophy:
 Buys good stocks when they are on sale
 Prefers highly profitable companies
 Uses the Normalized Earnings Yield to assess whether a company is cheap
 Beliefs thorough research does more to reduce risk than excessive diversification (he often has no more than 8 companies in his portfolio)
 Largely ignores macro-economical developments and short term price movements


John Templeton (1912 -2008) 

"If you want to have a better performance than the crowd, you must do things differently from the crowd."

The late billionaire and legendary investor, John Templeton, was born in 1912 as a member of a poor family in a small village in Tennessee. He was the first of his village to attend University, and he made them proud by finishing economics at Yale and later a law degree at Oxford. Just before WWII, Templeton was working at the predecessor of the now infamous Merrill Lynch investment bank. While everyone was highly pessimistic during these times, Templeton was one of the few who foresaw that the war would give an impulse to the economy, rather than grind it to a halt. He borrowed $10.000 from his boss and invested this money in each of the 104 companies on the US stock market which traded at a price below $1. Four years later he had an average return of 400%! In 1937, in times of the Great Depression, Templeton started his own investment fund and several decennia later he managed the funds of over a million people. In 2000 he shorted 84 technology companies for $200.000, he called it his "easiest profit ever". The beauty is that despite all his wealth, John Templeton had an extremely modest lifestyle and gave much of it away to charitable causes.

Investment philosophy:
 Contrarian, always going against the crowd and buying at the point of maximum pessimism
 Has a global investment approach and looks for interesting stocks in every country, but preferably countries with limited inflation, high economical growth, and a movement toward liberalization and privatization
 Has a long term approach, he holds on to stocks for 6 to 7 years on average
 Focuses on extremely cheap stocks, not necessarily on "good" stocks with a sustainable competitive advantage, like Warren Buffett
 Beliefs in patience, an open-mind, and a skeptical attitude against conventional wisdom
 Warns investors for popular stocks everyone is buying
 Focuses on absolute performance rather than relative performance
 A strong believer in the wealth creating power of the free market economy



Benjamin Graham (1894 - 1976) 

"Price is what you pay, value is what you get."

Columbia Business School professor Benjamin Graham is often called "The Father of Value Investing". He was also Warren Buffett's mentor and wrote the highly influential book The Intelligent Investor, which Buffett once described as the best book on investing ever written. Graham was born in England in 1894, but he and his family moved to the United States just one year later. His official name was Grossbaum, but the family decided to change this German sounding name to Graham during the time of the First World War. Graham was a brilliant student and got offered several teaching jobs on the University, but instead he decided to work for a trading firm and would later start his own investment fund. Due to the use of leverage, his fund lost a whopping 75% of its value between 1929 and 1932, but Graham managed to turn things around and managed to earn a 17% annualized return for the next 30 years. This was way higher than the average stock market return during that same period. In total, Graham taught economics for 28 years on Columbia Business School.

Investment philosophy:
 Focuses more on quantitative, rather than qualitative data
 First step is to look for stocks trading below 2/3rd of net current asset value (NCAV)*
 Prefers companies which pay dividends
 Looks for companies with a consistently profitable history
 Companies should not have too much long term debt
 Earnings should be growing
 Is willing to pay no more than 15 times the average earnings over the past three years
 Diversifies to spread the risk of individual positions
 Emphasizes the importance of a significant Margin of Safety
 Profits from irrational behavior caused by the manic-depressive "Mr. Market"
 Warns that emotions like fear and greed should play no role in your investment decisions

*NCAV = current assets - total liabilities



Philip Fisher (1907 - 2004) 

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

Philip Fisher became famous for successfully investing in growth stocks. After studying economics degree at Stanford University, Fisher worked as an investment analyst before starting his own firm, Fisher & Co. This was in 1931, during the times of the Great Depression. Fisher's insights have had a significant influence on both Warren Buffett and Charlie Munger. Philip Fisher is also author of the powerful investment book Common Stocks and Uncommon Profits, which has a quote from Buffett on its cover which reads: "I am an eager reader of whatever Phil has to say, and I recommend him to you."

Investment philosophy:
 Dislikes technical analysis
 Does not belief in "market timing"
 Prefers a concentrated portfolio with around 10 to 12 stocks
 Emphasizes the importance of honest and able management
 Beliefs you should only invest in companies which you can understand
 Warns that you should not follow the masses, but instead have patience and think for yourself
 Companies should have a strong business model, be innovative, highly profitable, and preferably a market leader
 Has a focus on growth potential of both companies and industries
 Buys companies at "reasonable prices" but does not specify what "reasonable" is to him
 A true "buy & hold" investor who often holds on to stocks for decades
 Beliefs great companies purchased at reasonable prices and held for a long time are better investments than reasonable companies bought at great prices
 Has a "scuttlebutt" approach to doing research by asking questions to customers, employees, competitors, analysts, suppliers, and management to find out more about the competitive position of a company and its management
 Only sells when a company starts experiencing issues with its business model, competitive positioning, or management



Mohnish Pabrai (1964)

“Heads, I win; tails, I don’t lose much. “

Mohnish Pabrai has once been heralded as "the new Warren Buffett" by the prestigious American business magazine Forbes. While this seems like big words, you might start to understand why Forbes wrote this when you look at the performance of Pabrai's hedge funds, Pabrai Investment Funds, which have outperformed all of the major indices and 99% of managed funds. At least, that was before his funds suffered significant losses during the recent financial crisis because of their exposure to financial institutions and construction companies. Still, there is much we can learn from his low-risk, high-reward approach to investing, which he describes in his brilliant book The Dhandho Investor: The Low-Risk Value Method to High Returns.

Investment philosophy:
 Points out that there is a big difference between risk and uncertainty
 Looks for low-risk, high-uncertainty opportunities with a significant upside potential
 Only practices minor diversification and usually has around 10 stocks in his portfolio
 Beliefs stock prices are merely "noise"
 Used to buy reasonable companies at great prices, but now wants to focus more on quality companies with a sustainable competitive advantage and shareholder friendly management



Walter Schloss (1916 - 2012) 

"If a stock is cheap, I start buying." While Walter Schloss might not be the most well-known investor of all time, he was definitely one of the best investors of all time. Just like Buffett, Walter Schloss was a student of Benjamin Graham. Schloss is also mentioned as one of the "Super Investors" by Buffett in his must-read essay The Super Investors of Graham-And-Doddsville. An interesting fact about Walter Schloss is that he never went to college. Instead, he took classes taught by Benjamin Graham after which he started working for the Graham-Newton Partnership. In 1955 Schloss started his own value investing fund, which he ran until 2000. During his 45 years managing the fund, Schloss earned an impressive 15.3% return versus a return of 10% for the S&P500 during that same period. Just like Warren Buffett and John Templeton, Walter Schloss was known to be frugal. Schloss died of leukemia in 2012 at age 95.

Investment philosophy:
 Practiced the pure Benjamin Graham style of value investing based on purchasing companies below NCAV
 Generally buys "cigar-butt" companies, or in other words companies in distress which are therefore trading at bargain prices
 Regularly used the Value Line Investment Survey to find attractive stocks
 Minimizes risk by requiring a significant Margin of Safety before investing
 Focuses on cheap stocks, rather than on the performance of the underlying business
 Diversified significantly and has owned around 100 stocks at a time
 Keeps an open mind and even sometimes shorts stocks, like he did with Yahoo and Amazon just before the Dot-Com crash
 Likes stocks which have a high percentage of insider ownership and which pay a dividend
 Is not afraid to hold cash
 Prefers companies which have tangible assets and little or no long-term debt 10



Peter Lynch (1944)

"Everyone has the brain power to make money in stocks. Not everyone has the stomach."

Peter Lynch holds a degree in Finance as well as in Business Administration. After University, Lynch started working for Fidelity Investments as an investment analyst, where he eventually got promoted to director of research. In 1977, Peter Lynch was appointed as manager of the Magellan Fund, where he earned fabled returns until his retirement in 1990. Just before his retirement he published the bestseller One Up On Wall Street: How To Use What You Already Know To Make Money In The Market. Just as many of the other great investors mentioned in this document, Lynch took up philanthropy after he amassed his fortune.

Investment philosophy:
 You need to keep an open mind at all times, be willing to adapt, and learn from mistakes
 Leaves no stone unturned when it comes to doing due diligence and stock research
 Only invests in companies he understands
 Focuses on a company's fundamentals and pays little attention to market noise
 Has a long-term orientation
 Beliefs it is futile to predict interest rates and where the economy is heading
 Warns that you should avoid long shots
 Sees patience as a virtue when it comes to investing
 Emphasizes the importance of first-grade management
 Always formulates exactly why he wants to buy something before he actually buys something



Seth Klarman (1957) 

“Once you adopt a value-investment strategy, any other investment behavior starts to seem like gambling.“

Billionaire investor and founder of the Baupost Group partnership, Seth Klarman, grew up in Baltimore and graduated from both Cornell University (economics) and the Harvard Business School (MBA). In 2014 Forbes mentioned Seth Klarman as one of the 25 Highest-Earning hedge funds managers of 2013, a year in which he generated a whopping $350 million return. Klarman generally keeps a low profile, but in 1991 he wrote the wrote a book Margin of Safety: Risk Averse Investing Strategies for the Thoughtful Investor, which became an instant value investing classic. This book is now out of print, which has pushed the price up to over $1500 for a copy!

Investment philosophy:
 Is extremely risk-averse and focuses primarily on minimizing downside risk
 Does not just look for cheap stocks, but looks for the cheapest stocks of great companies
 Writes that conservative estimates, a significant margin of safety, and minor diversification allow investors to minimize risk despite imperfect information
 Warns that Wall Street, brokers, analysts, advisors, and even investment funds are not necessarily there to make you rich, but first and foremost to make themselves rich
 Often invests in "special situations", like stocks who filed for bankruptcy or risk-arbitrage situations
 Suggests to use several valuation methods simultaneously, since no method is perfect and since it is impossible to precisely calculate the intrinsic value of a company
 Is known for holding a big part of its portfolio in cash when no opportunities exist
 Beliefs investors should focus on absolute performance, rather than relative performance
 Emphasizes that you should find out not only if an asset is undervalued, but also why it is undervalued
 Is not afraid to bet against the crowd and oppose the prevailing investment winds
 Discourages investors to use stop-loss orders, because that way they can't buy more of a great thing when the price declines


Final words 

I hope you enjoyed reading how some the best investors in the world think about investing. You might have noticed some common themes, like buying companies for less than they are worth. And while they all practice this value investing approach, there are also notable differences between the strategies of these masters of investing. Where Warren Buffett runs a concentrated portfolio and focuses on "good" companies with a sustainable competitive advantage, Walter Schloss managed to earn impressive returns by simply buying a diverse set of extremely cheap companies. As Bruce Lee once said: "Adapt what is useful, reject what is useless, and add what is specifically your own.”


https://www.valuespreadsheet.com/best.pdf

When to Buy? FIVE powerful forces having extremely powerful influence on the general level of stock prices either by influencing mass psychology or by direct economic operation..

All types of common stock investors might well keep one basic thought in mind; otherwise, the financial community's constant worry about and preoccupation with the danger of downswings in the business cycle will paralyze much worthwhile investment action.

This thought is the current phase of the business cycle is but one of at least five powerful forces.  

All of these forces, either by influencing mass psychology or by a direct economic operation, can have an extremely powerful influence on the general level of stock prices.

The other four influences are:

1. the trend of interest rates,
2. the overall governmental attitude toward investment and private enterprise,
3. the long-range trend to more and more inflation, and 
4. possibly most powerful of all - new inventions and techniques as they affect old industries.

These forces are seldom all pulling stock prices in the same direction at the same time.

Nor is any one of them necessarily going to be of vastly greater importance than any other for long periods of time.

#  So complex and diverse are these influences that the safest course to follow will be the one that at first glance appears to be the most risky or riskiest.

#  This is to take investment action when matters you know about a specific company appear to warrant such action.

#  Be undeterred by fears or hopes based on conjectures, or conclusions based on surmises.

When to buy? You have some money to invest. Should you completely ignore the future trend of the business cycle?

Questions:

# Does this mean that if a person has some money to invest he should completely ignore what the future trend of the business cycle may be and invest 100% of this fund the moment he has found the right stocks and located a good buying point, as indicated above?

A depression might strike right after he has made his investment.

Since a decline of 40 to 50% from its peak is not at all uncommon for even the best stock in a normal business depression, is not completely ignoring the business cycle rather a risky policy?



1.   For those in the happy position of having a backlog of well-chosen investments bought comfortably below present prices.

Answers:  

This risk may be taken in stride by the investor who, for a considerable period of time, has already had the bulk of his stocks placed in well-chosen situations.

If properly chosen, these should by now have already shown him some fairly substantial capital gains.

But now, either because he believes one of his securities should be sold or because some new funds have come his way, such an investor has funds to purchase something new.

UNLESS it is one of those rare years when speculative buying is running riot in the stock market and major economic storm signals are virtually screaming their warnings (as happened in 1928 and 1929), this class of investor should ignore any guesses on the coming trend of general business or the stock market.

# Instead, he should invest the appropriate funds as soon as the suitable buying opportunity arises.



2.  For those NOT in the happy position of having a backlog of well-chosen investments bought comfortably below present prices.

Answers:

Perhaps this maybe the first time they have funds to invest.

Perhaps they may have a portfolio of bonds or relatively static non-growth stocks which at long last they desire to convert into shares that in the future will show them more worthwhile gains.

If such investors get possession of new funds or develop a desire to convert to growth stocks after a prolonged period of prosperity and many years of rising stock prices, should they, too, ignore the hazards of a possible business depression?

Such an investor would not be in a very happy position if, later on, he realized he had committed all or most of his assets near the top of a long rise or just prior to a major decline.

This does create a problem.  However, the solution to this problem is not especially difficult - as in so many other things connected with the stock market, it just requires an extra bit of patience.

# This group should start buying the appropriate type of common stocks just as they feel sure they have located one or more of them.

# However, having made a start in this type of purchasing, they should stagger the timing of further buying.

# They should plan to allow several years before the final part of their available funds will have become invested.

By so doing, if the market has a severe decline somewhere in this period, they will still have purchasing power available to take advantage of such a decline.  

If no decline occurs and they have properly selected their earlier purchases, they should have at least a few substantial gains on such holdings.

This would provide a cushion so that if a severe decline happened to occur at the worst possible time for them - which would be just after the final part of their funds had become fully invested - the gains on the earlier purchases should largely, if not entirely, offset the declines on the more recent ones.

No severe loss of original capital would, therefore, be involved.


Additional notes:

There is an equally important reason why investors who have not already obtained a record of satisfactory investments, and who have enough funds to be able to stagger their purchases should do so.

#  This is that such investors will have had a practical demonstration, prior to using up all their funds, that they or their advisors are sufficient masters of investment technique to operate with reasonable efficiency.

In the event that such a record had not been attained, at least, all of an investor's assets would not be committed before he had had a warning signal to revive his investment technique or to get someone else to handle such matters for him.

When to Buy? When to Sell? Learning from Philip Fisher describing a fund's investment into American Cyanamid share.

When to Buy?

Philip Fisher wrote:

"Immediately prior to the 1954 congressional elections, certain investment funds took advantage of this type of situation.  For several years before this time, American Cyanamid shares had sold in the market at a considerably lower price-earnings ratio than most of the other major chemical companies.  I believe this was because the general feeling in the financial community was that, while the Lederle division represented one of the world's most outstanding pharmaceutical organizations, the relatively larger industrial and agricultural chemical activities constituted a hodge-podge of expensive and inefficient plants flung together in the typical "stock market" merger period of the  booming 1920's.  These properties were generally considered anything but a desirable investment."

"Largely unnoticed was the fact that a new management was steadily but without fanfare cutting production costs, eliminating dead wood, and streamlining the organization.  What was noticed was that this company was'making a huge bet' - making a major capital expenditure, for a company its size, in a giant new organic chemical plant at Fortier, Louisiana.  So much complex engineering was designed into this plant that it should have surprised no one when the plant lagged many months behind schedule in reaching the break-even point.  As the problems at Fortier continued, however, the situation added to the generally unfavourable light in which American Cyanamid shares were then being regarded.  At this stage, in the believe a buying point was at hand, the funds to which I have already referred acquired their holdings at an average price of 45 3/4.  This would be 22 7/8 on the present shares as a result of a 2 for 1 stock split which occurred in 1957."

"What has happened since?  Sufficient time has elapsed for the company to begin getting the benefits of some of the management activities that were creating abnormal costs in 1954.  Fortier is now profitable.  Earnings have increased from $1.48 per (present) common share in 1954 to $2.10 per share in 1956 and promise to be slightly higher in 1957, a year in which most chemical (though not pharmaceutical) profits have run behind those of the year before.  At least as important, 'Wall Street; has come to realize that American Cyanamid's industrial and agricultural chemical activities are worthy of institutional investment.  As a result, the price-earnings ratio of these shares has changed noticeably.  A 37 percent increase in earnings that has taken place in somewhat under 3 years has produced a gain in market value of approximately 85 percent."



Since writing these words, the financial community's steady upgrading of the status of American Cyanamid appears to have continued.  With earnings for 1959 promising to top the previous all-time peak of $2.42 in 1957, the market price of these shares has steadily advance.  It now is about 60, representing a gain of about 70 percent in earning power and 163 percent in market value in the five years since the shares referred to were acquired.


In 1954 Cyanamid stock was purchased by "certain funds" referred to by Philip Fisher in his original edition.  These funds are no longer retaining the shares, which were sold in the spring of 1959 at an average price of about 49.  This was of course significantly below the current market (60) but still represented a profit of about 110 percent.



When to Sell?

The size of the profit had nothing whatsoever to do with the decision to sell.

There were two motives behind the decision.

1.  One was that the long-range outlook for another company appeared even better.  While not enough time has yet passed to give conclusive proof one way or the other, so far comparative market quotations for both stocks appear to have warranted this move.

2.  There was a second motive behind this switch of investments which hindsight may prove to be less credible.  This was concern that in relation to the most outstanding of competitive companies, American Cyanamid's chemical (in contrast to its pharmaceutical) business was not making as much progress in broadening profit margins and establishing profitable new lines as had been hoped.  Concern over these factors was accentuated by uncertainty over the possible costs of the company's attempt to establish itself in the acrylic fiber business in the highly competitive textile industry.  This reasoning may prove to be correct and still could turn out to have been the wrong investment decision, because of bright prospects in the Lederle, or pharmaceutical division.  These prospects have become more apparent since the shares were sold.  The possibilities for a further sharp jump in Lederle earning power in the medium-term future center around (1) a new and quite promising antibiotic, and (2) in time a sizable market for an oral "live" polio vaccine, a field in which this company has been a leader.  These developments make it problematic and a matter that only the future will decide as to whether this decision to dispose of Cyanamid shares may not have been an investment mistake.  





-------------------------------------------------------





Additional Notes:

http://myinvestingnotes.blogspot.my/2010/09/common-stocks-and-uncommon-profits-by.html

WHEN TO BUY

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

Stock monitoring and when to sell
• Use a three-year rule for judging results if a stock is
underperforming but no fundamental changes have
occurred.
• Hold stock until there is a fundamental change in its
nature or it has grown to a point where it will no longer
be growing faster than the overall economy.
• Don’t sell for short-term reasons.
• Sell mistakes quickly, once they are recognized.
• Don’t overdiversify—10 or 12 larger companies is
sufficient, investing in a variety of industries with different
characteristics.

When to Buy? Economic forecasting business trends cannot be safely used as a basis for your investing action. Stay with superbly selected growth stocks.

The heart of successful investing is knowing how to find the minority of stocks that in the years ahead will have spectacular growth in their per-share earnings.

Is there any reason to divert time or mental effort from this main issue?

Does not the matter of when to buy become of relatively minor importance?

Once the investor is sure he has definitely found an outstanding stock, isn't any time at all a good time to buy it?

The answer to this depends somewhat on the investor's objective.

It also depends on his temperament.



The consequence of buying just before a big stock market crash.

An example of this would be the purchase of several superbly selected enterprises in the summer of 1929 or just before the greatest stock market crash of American history.

In time, such a purchase would have turned out well.

But 25 years later, it would provide a much smaller percentage gain than would have been the case if, having done the hardest part of the job in selecting his companies properly, an investor had made the small extra effort needed to understand a few simple principles about the timing of growth stocks.

In other words:

• if the right stocks are bought and held long enough they will always produce some profit.
• usually, they will produce a handsome profit.
•  however, to produce close to the maximum profit, the kind of spectacular profit one hoped for, some consideration must be given to timing.

The conventional method of timing when to buy stocks.

This is just as silly as it appears on the surface to be sensible.

This method is to marshal a vast mass of economic data.  From these data conclusions are reached as to the near- and medium-term course of general business.

More sophisticated investors will usually form opinions about the future course of money rates as well as business activity.

Then, if their forecasts for all these matters indicate no major worsening of background conditions, the conclusion is that the desired stock may be bought.   

It sometimes appears that dark clouds are forming on the horizon.  Then those who use this generally accepted method will postpone or cancel purchases they otherwise would make.


The objection to this conventional approach.

The conventional approach is not unreasonable in theory.  

The objection is that in the current state of human knowledge about the economics which deal with forecasting future business trends, it is impossible to apply this method in practice.

The chances of being right are not good enough to warrant such methods being used as a basis for risking the investment of savings.

This may not always be the case.


Economic forecasting business trends cannot be safely used as a basis for your investing action.

It might not even be the case five or ten years from now.  At present, able men are attempting to harness electronic computers to establish "input-output" series of sufficient intricacy that perhaps at some future date it may be possible to know with a fair degree of precision what the coming business trend will be.

When, if ever, such developments occur, the art of common stock investment may have to be radically revised.  Until they occur, however, the economics which deal with forecasting business trends may be considered to be about as far along as was the science of chemistry during the days of alchemy in the Middle Ages.

In chemistry then, as in business forecasting now, basic principles were just beginning to emerge from a mysterious mass of mumbo-jumbo.  However, chemistry had not reached a point where such principles could be safely used as a basis for choosing a course of action.


Rarely, economic forecasting is useful or safe.

Occasionally, as in 1929, the economy gets so out of line that speculative enthusiasm for the future runs to unprecedented proportions.

Even in our present state of economic ignorance, it is possible to make a pretty accurate guess as to what will occur.

However, it is doubtful if the years when it is safe to do this have averaged much more than one out of ten.

They may be even rarer in the future.

(Read:  Year 2008 - Buffett Calls The Market Again...And He's Never Been Wrong
http://myinvestingnotes.blogspot.my/2016/01/year-2008-buffett-calls-market-againand.html0



If, then, conventional studies of the near-term economic prospect do not provide the right method of approach to the proper timing of buying, what does provide it?

The answer lies in the very nature of growth stocks themselves.



Common Stocks and Uncommon Profits
Philip Fisher

Philip Fisher’s Approach in Brief

It’s Quality That Counts: The Fisher Approach to Stock Investing

Philosophy and style


Investment in “outstanding” companies that over the
years can grow in sales and profits more than industry
as a whole. The key features of “outstanding” companies
are: strong management that has a disciplined approach
designed to achieve dramatic long-term growth in profits,
with products or services that have the potential for
sizable sales long term, and with other inherent qualities
that would make it difficult for competitors and newcomers
to share in that potential growth.


Universe of stocks

No restrictions on universe of stocks from which to
select. Over-the-counter stocks should not be overlooked,
but “outstanding” companies are not necessarily
young and small.


Criteria for initial consideration

Prospective companies should pass most of the following
15 points, which can be divided into three main
dimensions:

Functional factors:
• Products or services with sufficient market potential for
sizable increase in sales for several years. Major sales
growth, judged over series of years.
• Superiority in production—lowest-cost production (for
manufacturing firms) or lowest-cost operation (for
service firms or retailers).
• Strong marketing organization—efficiency of sales, advertising,
and distributive organizations.
• Outstanding research and development efforts—amount
expended relative to its size, effectiveness of effort as
indicated by ability to bring research ideas to production
and to market and by how much research contributed
to net profits.
• Effectiveness of company’s cost analysis and accounting
controls, and choice of capital investments that will
bring the highest return.
• Financial strength or cash position—sufficient capital
to take care of needs to exploit prospects for next
several years without the need to raise equity capital.


Excellence in Management
• Attitude of management to continue to develop products
or services that will further increase sales.
• Development of good in-house management and teamwork.
• Management depth.
• Good labor and personnel relations: Affiliation with an
international union may be an indication of bad relations;
labor turnover relative to competitors.
• Long-range outlook by management even at the expense
of short-term profits.
• Good investor relations, and willingness to talk freely
about problems.
• Management of unquestionable integrity—salaries and
perks in line with those of other managers.


Business characteristics
• Above-average profitability: Compare profit margins
per dollar of sales—compare within industry and examine
for several years, not just single years. Older and
larger firms are usually the best in their industry.
Younger firms may elect to speed up growth by spending
all or a large part of profits on research or sales; for
these, make sure a narrow profit margin is due to
spending in these areas alone.
• Ability to maintain good profit margins: Good position
relative to competition—for instance, skill in a particular
line of business, or patent protection for a small
business.


Secondary factors
Once an “outstanding” company is found, purchase
stock when it is out-of-favor either because the market
has temporarily misjudged the true value of the company,
or because of general market conditions. “Outstanding”
companies can also be purchased at fair value, but
investor should expect a lower (but respectable) return.


Stock monitoring and when to sell
• Use a three-year rule for judging results if a stock is
underperforming but no fundamental changes have
occurred.
• Hold stock until there is a fundamental change in its
nature or it has grown to a point where it will no longer
be growing faster than the overall economy.
• Don’t sell for short-term reasons.
• Sell mistakes quickly, once they are recognized.
• Don’t overdiversify—10 or 12 larger companies is
sufficient, investing in a variety of industries with different
characteristics.


https://www.aaii.com/journal/article/it-s-quality-that-counts-the-fisher-approach-to-stock-investing