And like the earlier posting, I cannot recall the source of this article. Sigh!
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Investing Styles Thru History
Philip Fisher: Investing in Growth
Philip Fisher was a pioneer of growth investing. But more unique among growth investors, Fisher looked for growth companies only when they were selling at reasonable valuations. Even high earnings growth stocks fall out of favor, become overlooked and sell for less than their underlying worth from time to time. He was looking for low price relative to long-term prospects. Fisher's genius was to identify the fundamental factors behind a company's strength that led to above average earnings growth with the discipline to invest only in those showing extraordinary value.
Fisher learned about investing from Professor Boris Emmett at Stanford University's Graduate School of Business in the late 1920s. As a first-year student in 1927, Fisher was assigned to drive the Professor to the San Francisco Bay area once per week to visit real businesses. This assignment offered tremendous insights for Fisher, both from learning about real businesses, and from listening to Professor Emmett's insights during the weekly trips.
Fisher developed an ability to identify well-managed companies with a potential to grow beyond their current size, a concept of "growth investing" not yet formalized in the late 1920s. He also learned to focus on the importance of the sales and marketing role in these businesses. Previous investment focus had dwelled on inventions and manufacturing efficiency, but Fisher saw the need for good sales & marketing people to convince others of the value of their product and control its own growth destiny.
Fisher's first job was as a securities analyst with an independent San Francisco bank. He disliked selling securities to customers based on superficial analysis to increase bank commissions, and asked for a new assignment. Fisher was finally allowed to do some hands-on analysis of US radio stocks. He visited the radio departments of several retail outlets and sought opinions on the three major competitors in the industry. He was surprised by the high degree of consensus.
The radio maker favored by the stock market was viewed as the worst company in the eyes of radio company's customers (the retail store owners). Another popular company, RCA was just about holding its own. Philco, however was the clear winner. It had superior models, was winning market share and was highly efficient. He searched for a negative comment from a Wall Street analyst on the first company, the worst performer in retailers' eyes, but was unable to find any. It was his first lesson in what became his evolving investment philosophy: reading the printed financial records about a company is never enough to justify an investment. One of the major steps in prudent investment must be to find out about a company's affairs from those who have some direct familiarity with them.
Learn From Mistakes
In August 1929, Fisher wrote a report that predicted within the next 6 months a great bear market would start, the greatest in a quarter-century. He actually underestimated their fierceness of the Great Crash and following Great American Depression of the early 1930s. Unfortunately, Fisher failed to take his own advice. He was entrapped by the lure of the market with rising prices. He invested his life's savings of a few thousand dollars into stocks bought on the basis they were cheap versus other more overpriced stocks. In choosing investments, he did not bother making inquiries from people who either knew their products or employees. By 1932, he lost almost all his money.
Fisher was determined to learn from his experience: "The chief difference between a fool and a wise man is that the wise man learns from his mistakes, while the fool never does." One lesson was that a low price to historical earnings ratio was no guarantor of value. What the investor needs is a stock with a low price relative to earnings in a few years ahead. He started to think of ways to predict accurately (within fairly broad limits) the earnings of firms a few years from now.
Fisher began to search for companies with these qualities:
- 1. The people are outstanding;
- 2. A strong competitive position;
- 3. Operations and long-term planning were handled well;
- 4. Enough high-potential new products to continue growth for many years.
From Fisher's description of why he invested in Dow Chemical Company helps us understand his methodology more thoroughly:
As I began to know various people in the Dow organization, I found that the growth that had already occurred was in turn creating a very real sense of excitement at many levels of management. One of my favorite questions in talking to any top business executive for the first time is what he considers to be the most important long-range problem facing his company. When I asked this of the president of Dow, I was tremendously impressed with his answer: 'It is to resist the strong pressures to become a more military-like organization as we grow very much larger, and to maintain the informal relationship whereby people at quite different levels and in various departments continue to communicate with each other in a completely unstructured way and, at the same time, not create administrative chaos. I found myself in complete agreement with certain other basic company policies. Dow limited its involvement to those chemical product lines where it either was or had a reasonable chance of becoming the most efficient producer in the field as the result of greater volume, better chemical engineering and deeper understanding of the product or for some other reason. Dow was deeply aware of the need for creative research not just to be in front, but also to stay in front. There was also a strong appreciation of the 'people factor' at Dow. There was in particular a sense of need to identify people of unusual ability early, to indoctrinate them into policies and procedures unique to Dow, and to make real efforts to see if seemingly bright people were not doing well at one job, they be given a reasonable chance to try something else that might be more suitable to their characteristics.
A Technology Focus
Fisher held relatively few companies in his portfolio at any one time, and was not afraid to concentrate his wealth on a few obscure businesses. In 1955, for example, he bought two stocks that were generally regarded as highly speculative. They were small companies and were technologically oriented; they were beneath the notice of conservative investors or big institutions. "A number of people criticized me for risking funds in a small speculative company which they felt was bound to suffer from the competition of the corporate giants." Both stocks eventually turned in spectacular returns. Their names? Texas Instruments and Motorola.
Fisher's view of the stock market was very rational. In reflecting on a lifetime of investing in 1980, Fisher noted that, with the exception of the 1960s, there has not been a decade in which the prevailing view was that common stock investment was foolhardy, because factors outside the control of corporate managers were too strong for them to control the destiny of their corporations. However, in every decade there were wonderful opportunities to buy stocks yielding returns of hundreds of percent. On the downside, in each of these decades there were also periods in which the 'speculative darlings' of the time became disastrous traps for the unwary, 'for those who blindly follow the crowd rather than who really knew what they were doing'. The next ten years will also present magnificent opportunities for those who know what to look for. They will also be littered with the same old traps for those unaware of the vital principles for good investing. Those who look for an intellectually cheap and easy way to fortune will find their path strewn with dangerous temptations.
Fisher chose to devote himself to the study of technology based companies. However, followers of Fisher do not have to confine themselves to this area-- as Warren Buffett so adeptly demonstrated with a Fisher-like quality focus outside technology industries, which he lacked the confidence for depth of understanding. Fisher intended to hold his investments for many years, if not decades. A great company, with highly motivated and able managers can continue to grow way beyond the investment horizon of conventional investors.
Selection Of Stocks
The most important elements of Fisher's analysis were:
1. Research and Development
2. Quality of People
3. The firm's competitive position
4. Marketing
5. Financial state and control
6. Scuttlebut
7. Price paid
Scuttlebut is a factor which surrounds all the others. It is through scuttlebut that Fisher discovered the vital facts about a firm, from the character of its managers to the effectiveness of its research. Scuttlebut is the use of the business grapevine to research companies. It is scavenging for information by obtaining the views and opinions of anybody associated with a company: customers, employees, x-employees, rivals, suppliers, academics, trade association officers, industry observers, etc.
The business 'grapevine' is a remarkable thing. It is amazing what an accurate picture of the relative points of strength and weakness of each company in an industry can be obtained from a representative cross-section of the opinions of those who in one way or another are concerned with any particular company. Most people, particularly if they feel sure there is no danger of being quoted, like to talk about the field they are engaged and will talk rather freely about their competitors. Go to five companies in an industry, ask each of them intelligent questions about the points of strengths and weaknesses of the other four, and nine times out of ten a surprisingly detailed and accurate picture of all five will emerge.
Suppliers and customers can provide an opinion that is as well informed and illuminating as that of competitors. They also provide a means of cross checking. The character of the people managing the firms should emerge. The impression formed can be reinforced by talking to former employees. However, when seeking opinions here, great care is needed to ensure allowance is made for the fact that views from this source may be tainted by feelings of resentment. It is very important that the person providing the information is reassured that their identity will never be revealed. The analyst must scrupulously observe this policy. Trade association personnel, especially, will need this reassurance, as will current employees. If there is the slightest doubt as to analyst's ability to observe the rules of confidentiality he or she will simply not get to hear unfavorable opinions.
In the case of really outstanding companies, the preponderant information is so crystal-clear that even a moderately experienced investor who knows what he is seeking will be able to tell which companies are likely to be of enough interest to him to warrant taking the next step in his investigation. This next step is to contact the officers of the company to try to fill out some of the gaps still existing in the investor's picture of the situation being studied.
Previous Philip Fisher articles
1. Philip Fisher Articles: Finding Growth Stock
