The Greatest Investors: Philip Fisher

Philip A. Fisher

Born:	San Francisco, California in 1907; Died 2004
Affiliations:	Fisher & Company
Most Famous For:	Philip Fisher was one of the most influential investors of all time. His investment philosophies, recorded in his investment classic, "Common Stocks and Uncommon Profits" (1958) are still relevant today and are widely studied and applied by investment professionals. It was the first investment book ever to make the New York Times bestseller list.  Fisher's son, Kenneth L. Fisher, wrote a eulogy for his father in his regular column in Forbes magazine (March 11, 2004): "Among the pioneer, formative thinkers in the growth stock school of investing, he may have been the last professional witnessing the 1929 crash to go on to become a big name. His career spanned 74 years, but was more diverse than growth stock picking. He did early venture capital and private equity, advised chief executives, wrote and taught. He had an impact. For decades, big names in investing claimed Dad as a mentor, role model and inspiration."

Personal Profile

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

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

Investment Style 

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

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

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

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

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

Publications

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

Quotes

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

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

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

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

http://www.investopedia.com/university/greatest/philipfisher.asp

The Greatest Investors: Thomas Rowe Price, Jr.

Thomas Rowe Price, Jr.

Born:	Linwood, Maryland, in 1898; Died in 1983
Affiliations:	Mackubin Goodrich & Co. T. Rowe Price Associates, Inc.
Most Famous For:	Price is considered to be "the father of growth investing." He founded the investment firm T. Rowe Price Associates, Inc.

 
Personal Profile

Thomas Rowe Price spent his formative years struggling with the Depression, and the lesson he learned was not to stay out of stocks but to embrace them. Price viewed financial markets as cyclical. As a "crowd opposer," he took to investing in good companies for the long term, which was virtually unheard of at this time. His investment philosophy was that investors had to put more focus on individual stock-picking for the long term. Discipline, process consistency and fundamental research became the basis for his successful investing career. .

Price graduated from Swarthmore College with a degree in chemistry in 1919 before discovering that he liked working with numbers better than chemicals. He moved into a career in investments when he started working with the Baltimore-based brokerage firm of Mackubin Goodrich, which today is known as Legg Mason. Price eventually rose to become its chief investment officer.

Over time, Price became frustrated by the fact that "the firm did not fully comprehend his definition of growth stocks," so Price founded T. Rowe Price Associates in 1937. At that time, he defied convention by charging fees based on investments that clients had with the firm, not commissions, and always "putting the client's interests first." Price believed that as his clients prospered, the firm would too.

In 1950, he introduced his first mutual fund, the T. Rowe Price Growth Stock Fund. He was the company's CEO until his retirement in the late 1960s. He eventually sold the company in the early 1970s, but the firm retained his name and, today, one of the nation's premier investment houses.

Investment StyleThomas Rowe Price's investment management philosophy was based on investment discipline, process consistency and fundamental analysis. He pioneered the methodology of growth investing by focusing on well-managed companies in fertile fields whose earnings and dividends were expected to grow faster than inflation and the overall economy. John Train, author of "The Money Masters", says that Price looked for these characteristics in growth companies:

• Superior research to develop products and markets.
• A lack of cutthroat competition.
• A comparative immunity from government regulation.
• Low total labor costs, but well-paid employees.
• At least a 10%  return on invested capital, sustained high profit margins, and a superior growth of earnings per share.

Price and his firm became extremely successful employing the growth stock approach to buying stocks. By 1965, he had spent almost thirty years as a growth advocate. At that time, many of his favorite stocks became known in the market as "T. Rowe Price stocks." However, by the late '60s, he had become wary of the market's unquestioning enthusiasm for growth stocks – he felt the time had come for investors to change their orientation. He thought price multiples had become unreasonable and decided that the long bull market was over. This is when he began to sell his interests in T. Rowe Price Associates.

By 1973-1974, what Price's forecast took shape  and growth stocks fell hard and fast. Much to Price's dismay, his namesake firm barely managed to survive. Obviously, the term, "irrational exuberance" didn't exist in those days, but its destructive force was well appreciated by Thomas Rowe Price.

Quotes

"It is better to be early than too late in recognizing the passing of one era, the waning of old investment favorites and the advent of a new era affording new opportunities for the investor."

"If we do well for the client, we'll be taken care of."

"Change is the investor's only certainty."

"No one can see ahead three years, let alone five or ten. Competition, new inventions - all kinds of things - can change the situation in twelve months."

Table of Contents

1) Greatest Investors: Introduction

2) The Greatest Investors: John (Jack) Bogle

3) The Greatest Investors: Warren Buffett

4) The Greatest Investors: David Dreman

5) The Greatest Investors: Philip Fisher

6) The Greatest Investors: Benjamin Graham

7) The Greatest Investors: William H. Gross

8) The Greatest Investors: Carl Icahn

9) The Greatest Investors: Jesse L. Livermore

10) The Greatest Investors: Peter Lynch

11) The Greatest Investors: Bill Miller

12) The Greatest Investors: John Neff

13) The Greatest Investors: William J. O'Neil

14) The Greatest Investors: Julian Robertson

15) The Greatest Investors: Thomas Rowe Price, Jr.

16) The Greatest Investors: James D. Slater

17) The Greatest Investors: George Soros

18) The Greatest Investors: Michael Steinhardt

19) The Greatest Investors: John Templeton

20) The Greatest Investors: Ralph Wanger

http://www.investopedia.com/university/greatest/thomasroweprice.asp

Growth investing

Growth investing is a style of investment strategy. Those who follow this style, known as growth investors, invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios. In typical usage, the term "growth investing" contrasts with the strategy known as value investing.

However, some notable investors such as Warren Buffett have stated that there is no theoretical difference between the concepts of value and growth ("Growth and Value Investing are joined at the hip"), in consideration of the concept of an asset's intrinsic value. In addition, when just investing in one style of stocks, diversification could be negatively impacted.

Thomas Rowe Price, Jr. has been called "the father of growth investing".^[1]

Contents 1 Growth at reasonable price 2 Growth investment vehicles 3 See also 4 References 5 External links

Growth at reasonable price

After the bursting of the dotcom bubble, "growth at any price" has fallen from favour. Attaching a high price to a security in the hope of high growth may be risky, since if the growth rate fails to live up to expectations, the price of the security can plummet. It is often more fashionable now to seek out stocks with high growth rates that are trading at reasonable valuations.

Growth investment vehicles

There are many ways to execute a growth investment strategy. Some of these include:

• Emerging markets
• Recovery shares
• Blue chips
• Internet and technology stock
• Smaller companies
• Special situations
• Second-hand life policies

See also

• Value investing
• Quality investing
• Philip Arthur Fisher and Kenneth L. Fisher
• David Dodd
• Warren Buffett
• Growth stock
• Magic Formula Investing

References

1. ^ Investopedia. The Greatest Investors: Thomas Rowe Price, Jr.

http://en.wikipedia.org/wiki/Growth_investing

Great Investors: Philip Fisher

Morningstar.com's Interactive Classroom

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.


http://news.morningstar.com/classroom2/course.asp?docId=145662&CN=COM&page=1
http://news.morningstar.com/classroom2/printlesson.asp?docId=145662&CN=COM

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

Money managers make money for themselves whilst losing money for their clients, This makes neither cents nor sense.

Asinine approach to investing

John Collett

September 22, 2010

There should be an industry overhaul on how fund managers are paid.
Asset bubbles, investing manias and financial crises. In his 25-year career in fund management, Jonathan Pain has just about seen it all. After holding senior positions in funds management, he now runs his own consultancy and has fund managers in his sights for investing in a way that leads to frequent catastrophic results for investors.
There is little alignment of interests between fund managers and their investors, Pain says.
Fund managers earn bonuses even if they lose money for their investors. "The whole thing is a sham, a complete sham," Pain says.
What is needed is a major rethink on how managers are paid and how they measure their performance. As it stands, most fund managers get rewarded for investing in stocks that they do not like and would not put their own money in.
Pain says one of the best examples of this misalignment of interests was with News Corp, when its share price shot up during the last gasp of the technology boom at the end of the 1990s.
In March 2000, News Corp reached $28 and made up 18 per cent of the Australian sharemarket. Pain says that almost every fund manager at the time regarded the stock as very expensive.
Fund managers would never have bought the stock at those prices if it was their own money, yet almost every Australian share fund manager was investing in the stock.
When, in 2004, it became known that News was about to drop out of the Australian sharemarket indices, its share price fell by more than 5 per cent as managers started selling the stock, even though the financial fundamentals of News Corp had not changed.
Holding only the stocks they really believe in would run the risk of their fund's performance falling behind the market and peer funds. A fund manager who loses 15 per cent when the market is down 20 per cent can regard it as a commendable result.

"Money managers make money for themselves whilst losing money for their clients," Pain says. "This makes neither cents nor sense.

"An investor's objective when investing in a share fund is to make a return above what they could earn on the 'risk-free' cash rate available at the bank. Surely that, too, should be the money manager's investment objective."

Having the cash return as a benchmark against which performance is measured would encourage fund managers to invest only in the stocks they believe will be good investments, rather than owning stocks they do not like just because the stocks are a big part of the market.

Many managers are really "closet" indexers but charge their unitholders the higher investment management fees that are paid for "active" management, Pain says. The way most funds manage money has more to do with protecting the managers' fees than with managing the investment risks on behalf of unitholders. Managing money relative to an index exposes unitholders to unwarranted risks, Pain says.
For example, international share funds became heavily exposed to Japanese shares in 1990 when the real estate and equity bubble there meant that Japan comprised almost half of most global equity indices. Almost half of most international equity portfolios were invested in Japanese shares despite clear signs the prices of Japanese shares could not be justified, Pain says.
It was the same story with the tech boom of the late '90s, when tech stocks made up about one-third of the US S&P 500 index. Funds were buying shares in tech companies that were not much more than blue sky.
Pain says we are seeing the same thing now.
He divides the world by debt, not geography. The emerging world includes China, India, other Asian nations such as Vietnam and Indonesia and various South American economies, including Brazil.
Then there are what Pain calls the "submerging" nations, which include most of Europe, Britain and the US, with their indebtedness likely to hold back economic growth for years.
"Australia falls somewhere in the middle - a land with developed potential and infrastructure that, if we play our cards right, will continue to be underwritten by Asian growth and thus enjoy the best of both worlds," he says.
But the "submerging" nations dominate the global equity indices followed by fund managers.
Pain says that while fund administrators manage money relative to benchmarks, they will continue to buy overpriced stocks merely to mirror an increasingly bizarre and unrealistic benchmark.

Index huggers put themselves first

The reason that managers — particularly those owned by the financial institutions — can hold stocks they do not like is that fund managers’ performances are measured relative to the performance of the market indices.
Most have an incentive to keep growing their funds under management because their fees are based on a percentage of the investment pool.
The funds run by institutions also play it safe and stick to the indices, which means they deliver average returns. They generally rely on their big brands, marketing and financial planners to attract investors’ money into the funds.
In recent years, more ‘‘boutique’’ funds (owned by individual managers) have performance fees, which are only paid on reaching certain performance targets.
Boutiques will typically have a low, fixed percentage fee and a performance fee, which is usually 20 per cent of returns above the performance benchmark. They tend to invest in the stocks they like rather than those that will deliver returns that hug the index.

http://www.smh.com.au/money/investing/asinine-approach-to-investing-20100922-15ma9.html

Intelligent Investing

Ideas from Forbes Investor Team

Sep. 28 2010 - 3:01 pm

Global Value Stocks Buffett, Lynch and Graham Would Like

Posted by John Reese

The Oracle of Omaha

In the past few weeks, the market has bounced back nicely, and individual investors collectively appear to be as optimistic on stocks as they’ve been in a long time. In fact, in the two most recent weeks, 50.9% and 45.0% of respondents in the American Association of Individual Investors Sentiment Survey have reported being bullish on stocks in the coming six months—the highest back-to-back readings in more than a year.
It seems, however, that individual investors aren’t putting their money where their mouths are. Despite the improving sentiment numbers, total inflows to long-term U.S. mutual funds—a good proxy for individual investor behavior— were negative $5.8 billion in the two weeks ending Sept. 15, according to the Investment Company Institute. At the same time, investors were pumping more than $13 billion into the perceived safety of bond funds.
These numbers show just how much fear remains on Wall Street and Main Street. A double-dip recession, tax hikes, a U.S. budget crisis, a European debt contagion —these are just a few of the fears now dogging investors, many of whom are still reeling from the 2008 financial crisis and market crash.
But for good value investors—strategists like Warren Buffett, Benjamin Graham, and other greats upon whom I base my Guru Strategies—times of fear are also times of opportunity. And right now, thanks in part to overblown fears of oncoming disaster, my models are finding opportunities in U.S.-traded shares of companies from all around the globe.
With that in mind, I thought we’d take a look at what my models think are some of the best international value plays right now. To find them, I scoured the country and regional portfolios I track using the Professional feature on Validea.com. Here are some top value picks I found from Europe, India and China.
China Mobile Ltd. (CHL): Based in Hong Kong, China Mobile is China’s largest mobile phone network, having topped the 500-million-subscriber mark last year. The telecom giant has a market cap around $208 billion, and trailing 12-month sales of about $70 billion.

China Mobile is a member of my Validea Professional 10-stock Asia portfolio, which is up 15.8% this year while the MSCI EAFE index is in the red. One of the models that is high on the stock is the approach I base on the writings of James O’Shaughnessy. My O’Shaughnessy-based model targets large companies with strong cash flows and high dividend yields when looking for value stocks. China Mobile’s size, $7.49 in cash flow per share (vs. the market average of $1.13), and 3.5% yield all make the grade.
The model I base on the writings of mutual fund legend Peter Lynch is also high on China Mobile. Lynch famously used the P/E/Growth ratio (which divides a stock’s price/earnings ratio by its earnings per share growth rate) to find good stocks selling on the cheap, and the model I base on his writings likes P/E/Gs below 1.0. When we divide China Mobile’s 12.0 P/E ratio by its 19.9% growth rate (I use an average of the three-, four-, and five-year EPS growth rates to determine a long-term growth rate), we get a P/E/G of just 0.6. That indicates the stock is a bargain.
Lynch also liked conservatively financed companies, and with a debt/equity ratio of just 1.86%, China Mobile fits the bill.
Finally, my Warren Buffett-based model also sees a lot to like about CHL. It targets firms with lengthy histories of annual earnings increases, low debt, and high returns on equity. China Mobile has upped EPS in each year of the past decade; its debt is less than one-twentieth its annual earnings; and it has averaged a 23.7% ROE over the past decade, all passing muster with the Buffett-based approach.
Sanofi-Aventis (SNY): Headquartered in Paris with operations in more than 100 countries, Sanofi makes a wide array of drugs, including Allegra (allergies), Ambien CR (a prescription sleeping aid), and Nasacort (a nasal spray). The $87-billion-market-cap firm has taken in more than $42 billion in sales in the past year.
Sanofi is a member of my Validea Professional Europe portfolio. It passes three of my guru-based models, including the one inspired by the writings of the late, great Benjamin Graham. Known as the “Father of Value Investing,” Graham was an extremely conservative investor, and this model likes Sanofi’s strong balance sheet. The firm has a current ratio of 2.4, and its $19.6 billion in net current assets is more than twice its long-term debt ($9.5 billion). The Graham approach also thinks Sanofi’s shares are a bargain—the stock sells for just 10.7 trailing 12-month earnings and 1.24 times book value.
Sanofi also gets approval from my O’Shaughnessy- and Lynch-based models. My O’Shaughnessy value model likes the company’s size, strong cash flow ($4.51 per share, about four times the market mean), and 4.4% dividend yield.
For big, steady-growth “stalwarts” like Sanofi, Lynch adjusted the “G” portion of the P/E/G ratio to include dividend yield. When we factor in its 4.4% yield, Sanofi has a P/E/G of just 0.49, easily coming in under the model’s 1.0 upper limit. That’s a sign that the stock is a bargain at its current price. The Lynch-inspired model also likes that Sanofi’s debt/equity ratio is a manageable 18.3%.
Wipro Limited (WIT): This India-based information/technology firm is another favorite of my Validea Professional Asia portfolio. A big reason: The $35.4-billion-market cap firm gets a perfect 100% score from my Buffett-based model.
Buffett certainly isn’t known for his technology investments, though earlier this year his Berkshire Hathaway (BRK) did take a big new position in computer services firm Fiserv Inc. Wipro, however, has a lot of the fundamental characteristics that my Buffett-based model looks for. The firm has upped EPS in each year of the past decade; it has enough annual earnings ($1.1 billion) that it could pay off its $483 million in debt in less than a year if it so chose, which the Buffett-based model considers exceptional; and it has generated a 26.7% average return on equity over the past ten years, easily topping the model’s 15% target.
I’m long CHL, SNY and WIT.

http://blogs.forbes.com/investor/2010/09/28/global-value-plays-buffett-lynch-and-graham-would-like/?boxes=HomepageII

Markets could correct in October-November: Marc Faber

28 Sep, 2010, 03.47PM IST,ET Now
Markets could correct in October-November: Marc Faber


Marc Faber, Publisher, Gloom, Boom & Doom Report, spoke to ET Now on a range of issues including the current market scenario, emerging markets, Fed’s policies and US bond markets, among others. Excerpts:

You are known as Mr Contrarian in India. You always like to advise the reverse of what the global consensus is. The current global consensus is ‘buy and sell US bonds’. What is your take?

That’s correct and there in general, I am still positive about economic growth in the emerging world. But what disturbs me at the present time is that in late August, sentiment was very negative worldwide and people said that Dow will drop to 1000 and so forth and so on. Suddenly now, the consensus is that you have to be in equities, you have to be in gold, you have to be in assets because central banks around the world will print money. That is correct, they will print money. But sentiment has become so universally bullish that about all assets, including especially emerging economies - in US dollar terms - are up. The Indian market this year is already up 19%, Malaysia 28%, the Philippines, Indonesia and Thailand each over 40%.

We already have big moves and I see all the brokers upgrading the earnings estimates and so forth. So I become a little bit apprehensive about this universal bullishness. I would rather think that after a strong month of September - when everybody was expecting September to be a horrible month - October and November may be bad months. In the past, October has frequently been a disastrous month like we had the October 1987 crash, we had the late September-early October 1929 crisis. In 1976 and 1978, we had very bad months in October and November. So who knows, out of this present bullishness, we could have some kind of a sharp developing.

Which markets are you particularly bullish on now and considering the fact that India is already quoting at high valuations, where does India stack up in your list?

In general, investors should one day have approximately 50% or more of their money in emerging economies. I have all my money in emerging economies for the money that they allocate to real estate and to equities. Of course I also have bonds in the developed world and also cash in on the developed world, but in general, I am very optimistic about the emerging economies. But that does not change the fact that over the last few months, in fact since April because I saw that April would be a high for the S&P at 1219, I have taken some money off the table because a correction is overdue.


Emerging markets are of two categories. One of the categories is emerging markets which are heavy on commodities. The second category has emerging markets like India which are heavy on consumption. Within the two categories, what is your preference?

In general, when emerging economies go up, also go up because the two are very closely related in the sense that most resources allocated in emerging economies have a very close correlation. Now, when commodity prices go up strongly in a country like India, it benefits some parts of the economy, some segments of the population. For example, if agricultural prices go up, then the rural sector does well. In India, the urbanisation rate is just 30%. So if rice prices, sugar prices, cotton price and so forth go up, the rural sector benefits whereby the urban centre is frequently squeezed by higher food prices.

So it’s a mixed picture. But in general I would say - if I look at rural areas in , in Indonesia, Malaysia, Thailand, the Philippines and also India - the rural areas are doing very well. So it’s a plus for their economies because by and large the urbanisation rate in the case of India is still relatively low.

You have been a strong critic of Fed’s policies. How do you see the highly leverage balance sheets of the Western world effecting the kind of dollar inflow that we are seeing in markets like India?

My principal criticism is that the Federal Reserve can drop dollar bills onto the United States from helicopters as Mr Bernanke says - not from helicopters but electronically they can print money. The criticism I have is that Fed can control the quantity of money quantity that it drops onto the United States. But they do not control where it will flow to and this money has flown through the American trade and current account deficit to emerging economies and this has boosted the growth rates in emerging economies and their currencies. So the benefit of expansionary monetary policies has not been felt in the United States, but in emerging economies and that is my main criticism.

Now what happens if so much money flows to emerging economies is that you get bubbles over time - currency bubbles, stock market bubbles, real estate bubbles. The question is then how do these emerging economies’ central banks react to that. The Brazilian Finance Minister has just said we are in the midst of a currency war, a foreign exchange war and the central banks of emerging economies have a choice to do nothing - then they have high domestic inflationary pressures with accompanying bubbles - or they tighten monetary policies and their currency becomes even stronger and you have a speculative bubble in the currency. So the Fed has put them actually in a very difficult position and I believe we are going to end up with bubbles in precious and to some extent in emerging economies’ real estate and equity markets and every bubble eventually bursts. It does not have to happen tomorrow. It could last another year, but the Fed is actually endangering emerging economies at the present time.



Which are the three commodities or sub-commodities that you are currently bullish on?

I still like the agricultural commodities, but they have had a very big move - in some cases 50% - over the last 3 months. So potentially, we will get kind of a setback here, a correction. But in general, I am still positive on agricultural commodities and I am still positive about precious metals whereby precious metals have become very popular lately and they have been very strong, including gold, silver, platinum, palladium and a correction is also overdue.

The whole world is now optimistic and positioned to take advantage of forever expansionary monetary policies by buying assets, precious metals, real estate, equities, and everybody believes that the central banks in the world will print and print and print and print. That is correct, they will do that, but they printed, printed and printed and we still saw a financial crisis in 2008. So I can print and print and print, and you can still have big corrections in the market. But I believe that if the S&P in the US drops 15-20% to around 900-950, the Fed would come out not with this quantitative easing No. 2, but with quantitative easing No. 2, 3, 4, 5, 6, 7, 8, 9, 10 until the asset markets go up again. They are going to print and print and print.


You just mentioned that October-November could see some correction. Do you really see the S&P falling about 10-15% like you just mentioned? How bad could it get?

We have high volatility in all markets, a 10% move is nothing now-a-days. We have very high intraday volatility in the markets. We had never before so many up days with volumes of 9 to 1 and down days with volumes of 9 to 1. The downward volume is 9 times the upward volume and on up days, the up volume is 9 times the down volume. This is most unusual. So we have this volatility and this volatility comes about because the private sector is basically still deleveraging while the government sector is leveraging up. So you have economic and financial volatility in markets that is very high.


What do you make of crude/oil? Over the years, we have interacted with you, you have always maintained a bullish outlook on crude and crude prices.

Yes, I am still positive about oil and I am aware that some analysts predict oil prices to drop to $30 and copper prices to drop 70%, but the fact is simply the oil demand now-a-days in emerging economies exceeds for the first time in the history of capitalism. The oil demand in the developed world and this oil demand in emerging economies will continue to go up. So the demand side looks quite strong.

On the other hand, you have prices between $70 and $80 and someone could argue well that that is a very high price and so maybe prices will temporarily decline - that may be the case. But I would like to point out that for any oil company to go and explore and drill for new oil, the oil price has to be around $70. Otherwise, they would not do it because the marginal cost of new production is around this level.

Secondly, unlike say a farmer who harvests, oil is a finite resource in the sense that once you pump it and you burn it, it is no longer there. The farmer can harvest his crop every year again and again and again. In the case of oil, once you pump it, it is gone and you use it. So in most countries, oil production is going down and oil reserves are going down. In other words, the world will hit one day peak oil, the way the US hit peak oil in 1970. So the dynamics between the demand and the supply side look actually quite promising in the long run.

If you were to today - with Sensex at 20000 levels - construct a portfolio across asset classes when it came to India, equities, commodities combined, what would it comprise of?

Basically I am not very keen to buy emerging economies at the present time and I would rather lighten up positions. As far as the equity allocation between equities, bonds, cash and precious metals, commodities and real estate is concerned, that depends on every individual. It is like if you go to the doctor and you tell him ‘oh, what kind of pills shall I take?’ That depends very much on the individual, on the status of his health, on his ailments and so you cannot generalise.

But for me, I like Asian real estate, I like equities in Asia, I still like precious metals and I like in particular physical precious metals. I also own gold shares because I am the chairman of several resource related companies, mining companies in the exploration domain and so I own them. But my preference is for physical gold and silver and then I own real estate and I have some bonds not because I particularly like bonds, but I look at corporate bonds as kind of an equity with a relatively high dividend.


I have cash and because I am in the investment business, I benefit when markets go up. So my asset allocation into equities does not have to be as high as, say, somebody else’s is.

If I put a gun to your head and if I tell you, ‘Marc, lock a trade for next three years, only one trade, long/short you take your pick but only one trade,’ which will you open and keep it open for next three years? Identify that golden trade for us.

In three years or 10 years time, precious metals will be higher than they are today. But we may have a correction coming in the next, say, three months. But in general, when I look at the risk and the reward, it is very likely that precious metals will continue to perform reasonably well. But if S&P drops to around 950, then the Fed will again massively ease and print money. So the surprise could actually be that in nominal terms, equity markets actually go up. They may not go up in gold terms, but they may go up quite strongly in nominal terms. So I would not be overly bearish about equities.

Last time when we interacted, you were bullish on wheat, you were bullish on orange juice and you were bullish on sugar. Do you still like all these 3 agri commodities?

Yes, I still like these commodities, but because they moved up so strongly, I would be a little bit careful about mortgaging my house and buying all these commodities. They will continue to move higher, but corrections can occur. What disturbs me is this kind of universal belief that you have to be in commodities, you have to be in precious metals, you have to be in equities and not in cash because governments - in others words central banks - will keep on printing money and the value of paper money will go down. I agree with that but as I pointed out, we can still get meaningful corrections as occurred in 2008.

You have often reiterated to S&P going back to 900-950 levels. By when do you really think that would happen?

I cannot tell you on which date the S&P will hit 950. But the case is simply that some people say the S&P will drop to 400. I have maintained since March 6, 2009 that 666 on the S&P was a major low and that we will not go below that level. This is still my view. I think a correction is still overdue, but not new lows and afterwards they will print and print and print and the equity prices will go higher. More than that, I do not know.

Talking about the US bond markets, the return in last 3 months from US bonds has been quite extraordinary. The general consensus is that US bonds currently are a bubble. What is your take?

Basically the bond market in the US has been in a bull market since 1981. In my view, the bull market ended on December 18th, 2008 when the 10 years treasury yield reached a low of 2.08% and the 30 years yield of 2.53%. But the bulls on bonds - the so-called deflationists - will maintain that bonds will continue to rally and that the 10 years yield and the 30 year yields will drop to between, say, one-one quarter per cent and two per cent.

I do not think that this will be the case because if the economy weakens again and you have deflation, that would be required to get these yields down there. You would have further massive fiscal stimulus and as a result of that, the deficit and the government’s debt go up and then the interest payments on the government debt go up. The ability of the government to pay the interest on its debt will diminish if the credit quality goes down. For that reason, I do believe that we will see new lows in interest rates.

So we had the bull market in bonds that lasted 1981 to 2008 - in other words 27 years - and now we are in a bear market for bonds that may last 20 years and bring yields to record highs that would mean on the 10 years note a yield of over 15%.


What is the call on currencies though any trade or investment that you would initiate at this point?

My preferred currencies are gold and silver.

http://economictimes.indiatimes.com/opinion/interviews/Markets-could-correct-in-October-November-Marc-Faber/articleshow/6643230.cms?curpg=2