Philip Fisher: When To Sell

From Fisher's book, Common Stock And Uncommon Profits. Chapter 6.

WHEN TO SELL

Fisher is very precise about when to sell. “I believe there are three reasons, and three reasons only, for the sale of any common stock which has been originally selected according to the investment principles already discussed.”

They are:

1.) Upon realizing a mistake,

2.) When a stock no longer meets the 15 points, and

3.) If a substantially attractive investment arises and stock needs to be sold to finance that investment.



Interestingly, Buffett’s commonly told parable about investing in your classmates seems to have originated out of this chapter. Both describe a hypothetical scenario of buying a percentage of the future earnings of a classmate. The point being that we should rationally select people on the basis of their character rather than purely on their intellect. Fisher notes how foolish it would be to sell your lucrative future contract on classmate’s earnings for the sake of buying another, less proven, classmate’s earnings, simply because somebody offered to buy your original classmate investment at a high price.

Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well
4. Philip Fisher Articles: Switching Stocks
5. Philip Fisher: 15 Checklist When Buying A Stock
8. Philip Fisher: 10 Commandments That An Investor Must Not Do
9. Philip Fisher Articles: Over-Diversification
10. Philip Fisher Articles: Stocks To Avoid
11. Philip Fisher Articles: Competitive Advantage
12. Philip Fisher: More On 15 Checklist When Buying A Stock

Philip Fisher: More On 15 Checklist When Buying A Stock

Blogged previously: Philip Fisher: 15 Checklist When Buying A Stock

Here is another version: http://news.morningstar.com/classroom2/course.asp?docId=145662&page=3&CN=COM

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."

Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well
4. Philip Fisher Articles: Switching Stocks
5. Philip Fisher: 15 Checklist When Buying A Stock
8. Philip Fisher: 10 Commandments That An Investor Must Not Do
9. Philip Fisher Articles: Over-Diversification
10. Philip Fisher Articles: Stocks To Avoid
11. Philip Fisher Articles: Competitive Advantage

Philip Fisher Articles: Competitive Advantage

Posted on Wallstraits.com before.

FISHER ON COMPETITIVE ADVANTAGE

Philip Fisher is the father of growth investing. He looked to invest in companies with high growth potential, but also looked to buy at reasonable valuations. Even high earnings growth companies fall out of favor, become overlooked or are misunderstood from time to time. Fisher concentrated his considerable talent on finding a select handful of rapidly growing companies at attractive prices, which are rare finds but highly rewarding. As he held these rare gems, he continually tried to refine methods to assess their sustainable competitive advantage that would make them more and more valuable in future years.

A good company will be one with 'certain inherent characteristics that make possible an above-average profitability for as long as can be foreseen into the future'. Fisher looked for companies which consistently succeeded in doing things better than others in the industry. He never forgot to apply the advice of Dr. Dow (of Dow Chemical) to companies: 'If you can't do a thing better than others are doing it, don't do it at all.' Given the inherent risks of holding stocks you should only place money with companies that have both a strong competitive spirit and a strong competitive position.

Companies with high profit margins attract attention from other companies that start to regard that market segment as an 'open jar of honey owned by the prospering company. The money will inevitably attract a swarm of hungry insects bent on devouring it'. The company has to find a way of protecting its honey pot. One method is by outright monopoly. Fisher cautions against investing in this type of firm. Most monopolies are eventually curtailed by the authorities. Even those that are ignored by the regulatory bodies are liable to suddenly breakdown, and are therefore not safe to invest in.

The best way to keep the insects out is to be so efficient that present and future competition consider it futile to try to do battle. The implied threat is that they will have to commit themselves to huge expenditures, and the best they can hope for is parity in terms of output efficiency. The worst will be a damaging price war that will make their shareholders hop up and down in indignation at the irrational strategy.

Economies of scale are a potential source of competitive advantage. Fisher was very much aware of this, but said that, too often, as the organization becomes larger, the operating ocst benefit is offset by the inefficiencies produced by the additional bureaucratic layers of middle management. Senior executives become increasingly isolated from the activities of subdividions and far-flung complexes; decisions are delayed and ill informed.

The greatest advantages of being the largest firm in the industry are often to be found, not on the manufacturing side of the business, but on the marketing side. Fisher was particularly enthusiastic about this. If the company is first with a new product or service and backs this up with good marketing, servicing and product improvement it may be able to establish 'an atmosphere in which new customers will turn to the leader largely because the leader has established such a reputation for performance (or sound value) that no one is likely to criticize the buyer adversely for making this particular selection'.

When a company becomes the leader in its field it seldom gets displaced so long as its management remains competent. The notion that the purchasing of the stock of the number two or number three firm in the industry is a wise investment, because they have the potential to take the premier position, whereas the leader can only go down, is regarded by Fisher as not being borne out by evidence. A well-entrenched leader with dynamic, forward-looking vigilant managers is more likely to see off a challenge than to succumb to it.

Some companies possess the advantages of low production costs and a well-recognized brand name as well as a host of other key resources to swat those pesky insects. Fisher (in the 1970s) liked to quote the case of Campbell, the soup producer. It had cost reduction through scale and backward integration, a recognized product, the most prominent position in retail outlets and one of the largest display areas, and it could spread its marketing costs over billions of cans of soup.

The competitive advantage may not come from the core activity of the firm. For example, in some retail sectors the basic business of selling goods gives the firm competitive parity and no more. What gives the edge is the skill a firm might have in handling real estate issues, for example, the quality of its leases.

Patents can provide defence against competition in the short and medium term. Fisher was cautious on this point: 'In our era of widespread technical know-how it is seldom that large companies can enjoy more than a small part of their activities in areas sheltered by patent protection. Patents are usually able to block off only a few rather than all the ways of accomplishing the same result'. He believed that even technologically led firms need other forms of protection to maintain competitive positions and succeed over the long term. These include manufacturing know-how, the quality of the sales and service organization, customer goodwill and knowledge of customer problems. 'In fact, when large companies depend chiefly on patent protection for the maintenance of their profit margin, it is usually more a sign of investment weakness than strength. Patents do not run on indefinitely. When the patent protection is no longer there, the company's profit may suffer badly'.

An alternative to patents is superiority in being able to bring together knowledge from more than one science. If you can find a firm that is way ahead of the field in this mastery of, not one, but two technologies and the interplay between these scientific disciplines, then you may have found a bonanza investment.

An excellent marketing team can create in its customers the habit of almost automatically specifying its product for reorder. Competitors find this position very difficult to weaken. For the dominant firm to achieve its position it has to do a number of things: first, build a reputation for quality and reliability; second, make sure the customer realizes the need for high quality and reliable inputs to its processes, so that it will not take the risk of buying an inferior product; third, ensure that competitors serve only small segments of the market so your brand becomes synonymous with the product item.

To achieve maximum profits the cost of the product has to be a small part of the customer's input costs. This means that a switch to a rival product from an unknown supplier will save only a small amount, but the risk of malfunction will play on the mind of the buyer. Finally, it is best to have a market structure where there are many small customers rather than a few large ones. If these customers are very specialized then all the better, because the dominant company will attune its marketing and distribution to the needs of its customers resulting in a close relationship, personal contact and targeted marketing (e.g., salesmen spending a great deal of time with customers trying to help them find solutions). These become important attributes that potential competitors would find almost impossible to emulate. It would take a major shift in technology or a decline in the firm's efficiency to lose its hold on the honey pot.

The company in possession of a strong competitive position needs to be aware of the dangers from overexploitation in the short run. It should not aim for returns on capital many times those available in the industry generally. A spectacular profit creates an irresistible inducement for a fantastic range of companies to try and compete and carry off some of the honey. Fisher suggests that a profit margin consistently 2 or 3% greater than the next best competitor is 'sufficient to ensure a quire outstanding investment'.

Credits: This article is compiled from writings of Philip Fisher and summaries found in Glen Arnold's Valuegrowth Investing, 2002.

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Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well
4. Philip Fisher Articles: Switching Stocks
5. Philip Fisher: 15 Checklist When Buying A Stock
8. Philip Fisher: 10 Commandments That An Investor Must Not Do
9. Philip Fisher Articles: Over-Diversification
10. Philip Fisher Articles: Stocks To Avoid

Philip Fisher Articles: Stocks To Avoid

Posted on Wallstraits.com before.


PHILIP FISHER: STOCKS TO AVOID

Philip Fisher, author of the classic Common Stocks and Uncommon Profits, is the doyen of growth investors. He sought companies with high growth potential, but he also looked to buy at a reasonable price that gave good value. Even high earnings growth stocks fall out of favor, become overlooked and sell for less than their underlying worth from time to time. Fisher is perhaps best known for his very early investment into Texas Instruments--in 1956!--on a hunch about a new technology called semiconductors. Today, let’s take a look at the nine warning signs outlined by Fisher for stocks to avoid.

Rejecting companies that have made mistakes

Fisher’s high-growth companies were generally involved in pioneering technologies. Failure, on occasion, is part and parcel of progress. Other stock pickers gave Fisher his chance to accumulate sotck in companies that had shown a good average success to average failure ratio in the past. The less informed investors tend to dump the stock when earnings drop sharply below previous estimates: ’time and again the investment community’s immediate consensus is to downgrade the quality of the management. As a result, the immediate year’s lower earnings produce a lower than historic price earnings ratio to magnify the effect of reduced earnings. The shares often reach truly bargain prices.’ If these companies are run by exceptionally capable people, and the mistakes are only transient, the investor will do better by placing money here than if he or she invested in a company with a management that tends to go along with the crowd, and doesn’t take the risk of pioneering.

Playing the ’in and out’ game

Despite Fisher’s extensive experience he rejected the idea that he could predict short-term price movements, and thereby benefit by selling a stock when it appeared to be too high with the expectation of buying it back again after a price correction. There is: ’A risk to those who follow the practice of selling shares that still have unusual growth prospects simply because they have realized a good gain and the stock appears temporarily overpriced.... These investors seldom buy back the stock at higher prices when they are wrong and lose further gains of dramatic proportions....I do not believe it possible to play the in and out game and still make the enormous profits that have accrued again and again to the truly long-term holder of the right stocks.’

Fisher was equally critical of those who relied on economic forecasts to time investments, which he regarded as ’silly.’ He likened the current state of our knowledge of economics (for forecasting future business trends) to the science of chemistry in the days of alchemy in the Middle Ages. There are rare occasions when speculative enthusiasm pushes stocks to ridiculous extremes (such as 1929, 1987, 2000) when an economic analysis will predict what is likely to occur. However, such analysis would be useful only one year in ten.

Fisher said, ’The amount of mental effort the financial community puts into this constant attempt to guess the economic future from a random and probabily incomplete series of facts makes one wonder what might have been acomplished if only a fraction of such mental effort had been applied to something with a better chance of providing useful... (the) investor should ignore guesses on the coming trend of general business or the stock markets. Instead he should invest the appropriate funds as soon as a suitable buying opportunity arises.’

Impatience

This is a common issue, but one that merits repeating for emphasis. There is a need for ’patience if big profits are to be made from investment. Put another way, it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens.’

The urge to follow

’Doing what everybody eles is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all.’

Trying to ’come out even’ on a poor investment

The difficulty people have accepting that they made a mistake causes them to avoid taking a loss on an investment and thereby making explicit, for all the world to see, that they made a bad choice: ’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.’

Rejecting stocks trading on lesser markets

Generally the investor should confine buying to those stocks listed on stock markets which afford a reasonably high degree of liquidity and regulation. However, it is often the case that many stocks quoted on smaller exchanges are sufficiently liquid and regulated to be of interest to the investor. Indeed, wonderful opportunities can be missed if investors overlook these markets as potential hunting grounds.

Judging a stock on the basis of its previous price change

To evaluate a stock on the basis of the price ranges at which it sold in recent years puts the emphasis on ’what does not particularly matter, and diverts attention from what does matter.’ The crucial facts needed as an input to the appraisal are to be found in the current and future influences on the performance of the underlying business. What happened to the stock price a few months or years ago is irrelevant.

Speculators sometimes try to pleat that they are being rational: they might say, ’well, the price has traded in a range for many years, it is due for a rise.’ The hidden logical assumption is that stocks go up about the same amount, and it is just a matter of spotting when it is the turn of that particular stock. Equally nonsensical is the belief that because a stock has already ’risen a lot’ it will not go any further. Past movements are of little relevance to the future. What does matter is the background conditions leading to growth over the next few years, and whether they are already reflected in the price or not. To understand these you must understand the business, not how to read charts.

Start ups

Start-up companies, particularly in the high technology field, are often alluring. They may have an exciting new invention or are at the forefront in an industry with great growth prospects. It is very tempting to try to ’get in on the ground floor’ by buying into such companies. Fisher avoided companies that did not have an operating history of two or three years and at least one year of operating profit. His reasoning was that the investor needs to be able to evaluate the quality of the operations of the major functions of the business (production, sales, cost accounting, research, management teamwork, and so on) and this is very difficult to do for a very young company. The opinions of qualified observers on the matter of the company’s strengths and weaknesses will not yet be properly informed. Likely future difficulties or competitive threats can only be guessed at. In short, Fisher-type analysis is simply not possible, and the stock buyer is therefore gambling, unless they have highly specialized skills and knowledge.

Over-stressing diversification

Everyone is aware of the horrors of putting too many eggs into one basket. Few people consider the ’evils’ of the other extreme. ’This is the disadvantage of having eggs in so many baskets that a lot of the eggs do not end up in really attractive baskets, and it is impossible to keep watching all the baskets after the eggs get put in them.’ Fisher regarded it as appalling that investors were persuated to spread their funds between 25 or more stocks. The investor, or his advisor, is highly likely to be placing money in companies of which they know little. The result is that only a small proportion of the money is left for placement in companies of which they have a thorough understanding. ’It never seems to occur to them, much less to their advisers, that buying a company without having sufficient knowledge of it may be even more dangerous than having inadequate diversification.’

He draws an analogy with an infantryman stacking rifles to illustrate the degree of diversification needed. The ’stack’ would be unstable with just two rifles. Five or six, properly placed, would be much firmer. ’However, he can get just as secure a stack with five as he could with fifty.’ Fisher suggested that if the investor was focused on large well-entrenched growth stocks then the minimum degree of diversification should be five such stocks-- with no more than 20% in each.

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Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well
4. Philip Fisher Articles: Switching Stocks
5. Philip Fisher: 15 Checklist When Buying A Stock
8. Philip Fisher: 10 Commandments That An Investor Must Not Do
9. Philip Fisher Articles: Over-Diversification

Philip Fisher Articles: Over-Diversification

Posted on Wallstraits.

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PHILIP FISHER ON OVER-DIVERSIFICATION

Everyone is aware of the horrors of putting too many eggs into one basket. Few people consider the 'evils' of the other extreme-- the disadvantage of having eggs in so many baskets that a lot of the eggs do not end up in really attractive baskets, and it is impossible to keep watching all the baskets after the eggs get put into them.

Philip Fisher regarded it as appalling that investors were persuaded to spread their funds between 25 or more stocks. The investor, or his adviser, is highly likely to be placing money in companies of which they know little. The result is that only a small proportion of the money is left for placement in companies of which they have a thorough understanding. As Fisher said, 'It never seems to occur to them, much less to their advisers, that buying a company without having sufficient knowledge of it may be even more dangerous than having inadequate diversification.'

Fisher draws an analogy with an infantryman stacking rifles to illustrate the degree of diversification needed. The 'stack' would be unstable with just two rifles. Five or six, properly placed, would be much firmer. 'However, he can get just as secure a stack with five as he could with fifty.' The analogy is inadequate in one respect: the number needed for a stack does not depend on the type of rifles, but the number of stocks needed for adequate diversification does depend on the nature of the stocks in the portfolio.

For example, some chemical firms have a considerable degree of diversification within them-- serving different markets, industries and consumers. Another risk reducing factor is the extent to which the companies are run by a broadly based management team rather than a one-man management. Investing in a number of cyclical industry stocks will need to be balanced by investing a reasonably large proportion of the fund in stocks less subject to fluctuation. It would be unwise to invest a high proportion of the fund in stocks belonging to one industry, say bank stocks. On the other hand an investor who splits the fund equally between ten stocks in ten different industries may be over-diversified.

Fisher suggested that if the investor was focused on large well-entrenched growth stocks then the minimum degree of diversification should be five such stocks-- with no more than 20% in each. Also, there should be very little product line overlapping. If the focus is on companies that are more established than start-up technology stocks, but are not yet leading and well-entrenched growth stocks, then the investor should not put more than 8-10% of the fund in each. The final category is small companies, 'with staggering possibilities of gain for the successful, but complete or almost complete loss of investment for the unsuccessful.' Never put more money into these than you can afford to lose and never put more than 5% of the fund into one stock.

Investors should only add more securities to their portfolio if they can keep track of all the company events, strategic conditions, management quality and a host of other factors about each company. As Fisher puts it...

Practical investors usually learn their problem is finding enough outstanding investments, rather than choosing among too many... Usually a very long list of securities is not a sign of the brilliant investor, but one who is unsure of himself. If the investor owns stock in so many companies that he cannot keep in touch with their management directly or indirectly, he is rather sure to end up in worse shape than if he had owned stocks in too few companies. An investor should always realize that some mistakes are going to be made and will not prove crippling. However, beyond this point he should take extreme care to own not the most, but the best. In the field of common stocks, a little bit of a great many can never be more than a poor substitute for a few of the outstanding.

Credits: Much of this article is extracted from Valuegrowth Investing by Glen Arnold, Chapter 5: Philip Fisher's bonanza investing.

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Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well
4. Philip Fisher Articles: Switching Stocks
5. Philip Fisher: 15 Checklist When Buying A Stock
8. Philip Fisher: 10 Commandments That An Investor Must Not Do

Philip Fisher: 10 Commandments That An Investor Must Not Do

The following is taken from Philip Fisher's book Common Stocks and Uncommon Profits.

In chapter 8 & 9 of Fisher's book, he has listed out 10 commandments..hehe 10 things an investor must not do...

1. Don’t buy into promotional companies.

When a company is in a promotional stage…all an investor or anyone else can do is look at a blueprint and guess what the problems and strong points may be. There are enough spectacular opportunities among established companies that ordinary individual investors should make it a rule never to buy into a promotional enterprise. Fisher wants to see a firm with at least one year of operational profit and two to the three years of business before investing.

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.

The annual report may…reflect little more than the skill of the company’s public relations department in creating an impression about the company in the public mind.

4. Don’t assume that the high price at which a stock my be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been discounted already in the price. …why shouldn't this stock sell five years from now for twice the price-earnings ratio of these more ordinary stocks just as it is doing now and has done for many years past?

5. Don’t quibble over eights and quarters.

If the stock seems the right one and the price seems reasonably attractive at current levels, buy ‘at the market.

6. Don’t be afraid of buying on a war scare.

At the conclusion of all actual fighting—regardless of whether it was World War I, World War II, or Korea—most stocks were selling at levels vastly higher than prevailed before there was any thought of war at all. Furthermore, at least ten times in the last twenty-two years, news has come of other international crises which gave threat of major war. In every instance, stocks dipped sharply on the fear of war and rebounded sharply as the war scare subsided. War is always bearish on money. To sell a stock at the threatened or actual outbreak of hostilities so as to get into cash is extreme financial lunacy. Actually just the opposite should be done. If an investor has about decided to buy a particular common stock and the arrival of a full-blown war scare starts knocking down the price, he should ignore the scare psychology of the moment and definitely begin buying.

7. Don’t overstress diversification.

8. Don’t forget your Gilbert and Sullivan.

9. Don’t fail to consider time as well as price in buying a true growth stock.

10. Don’t follow the crowd.

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Some Comments:

How does one get a more accurate picture of the strength and weakness of a company?

Both Mary Buffett and P. Fisher talks about the scuttlebug approach.

Fisher : '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'.

This is an investigative technique in which the prospective investor calls the competition and customers of a business and asks them about the company in question.

Accordingly Buffett actually gets on the phone and calls the competition and asks them what they think of a particular company. All one would need to do is to spend some time in the library reading and make a few phone calls. Don't be shy. After all, it is your money, and if you are not willing to do at least a little work on your investment decisions, then it probably wouldn't be your money for very long. (M.Buffett, chapter 18, Buffettology)

According to Fisher, the business 'grapevine' is a remarkable thing. And most people, particularly if they feel sure there is no danger of their being quoted, like to talk about the field of work in which they are engaged in and will talk rather freely about their competitors. Go to five companies in a industry, ask each of them intelligent questions about the points of strength and weakness of the other four, and nine of ten a surprisingly detailed and accurate picture of all five will emerge.


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Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well
4. Philip Fisher Articles: Switching Stocks
5. Philip Fisher: 15 Checklist When Buying A Stock

Philip Fisher: 15 Checklist When Buying A Stock

The following is taken from Philip Fisher's book Common Stocks and Uncommon Profits.

Philip Fisher wrote about 15 points one should consider when buying a stock on Chapter 3.....


1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?

2. Does the management have a determination to continue to develop products or processes that will still further increase total sales 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 methods?

11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?

12. Does the company have a short-range or long-range outlook in regards to profits?

13. In the foreseeable future will the growth of the company require sufficient equity financing so that the large number of shares then outstanding will largely cancel the existing 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 and disappointments occur?

15. Does the company have a management of unquestionable integrity?

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Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well
4. Philip Fisher Articles: Switching Stocks

Philip Fisher Articles: Switching Stocks

Posted on Wallstraits: Switching Stocks

Switching Stocks

Out with the old, In with the new

We seem to have several lively discussions (e-mail and forums) this week about selling stocks. One of the topics that I believe is particularly important is the idea of switching, or selling one stock in order to buy another, nearly simultaneously. The switch is usually predicated on the belief that the stock being sold is overvalued, while the stock about to be purchased (with sale proceeds) is more undervalued (and/or has brighter future prospects). I was writing a recent review of legendary growth stock investor Philip Fisher's little known book Conservative Investors Sleep Well, when I came across this quote about switching:

Philip Fisher (1975, as discussing when to sell stocks that meet his stringent screens): "In my opinion there are important reasons such stocks should usually be retained, even though their prices seem too high: If the fundamentals are genuinely strong, these companies will in time increase earnings not only enough to justify present prices but to justify considerably higher prices. Meanwhile, the number of truly attractive companies in regard to the first three dimensions is fairly small. Undervalued ones are not easy to find."

"The risk of making a mistake and switching into one that seems to meet all of the first three dimensions but actually does not is probably considerably greater for the average investor than the temporary risk of staying with a thoroughly sound but currently overvalued situation until genuine value catches up with current prices. Investors who agree with me on this particular point must be prepared for occasional sharp contractions in the market value of these temporarily overvalued stocks."

"On the other hand, it is my observation that those who sell such stocks to wait for a more suitable time to buy back these same shares seldom attain their objective. They usually wait for a decline to be bigger than it actually turns out to be. The result is that some years later when this fundamentally strong stock has reached peaks of value considerably higher than the point at which they sold, they have missed all of this later move and may have gone into a situation of considerably inferior intrinsic quality."

Fisher raises some interesting and important ideas. First, it is no easy task to find the perfect stock. Actually, there is no perfect stock, so when one comes anywhere close to perfection you should think long and hard before selling it, even when it appears temporarily richly valued after a strong price runup.

We have faced this issue in our Wallstraits 8 Portfolio with core holding Osim International. Our original (split-adjusted) May 2001 purchase price was 28 cents/share, with a total investment of about S$88,000. Today, Osim has risen to 72 cents/share, and our $88,000 has grown to $238,000, or a 168% total return (including dividends). That's an almost frightful gain in just a little over one year. Fisher's advice is... "even though their prices seem too high: If the fundamentals are genuinely strong, these companies will in time increase earnings not only enough to justify present prices but to justify considerably higher prices.

Thankfully, we avoided the sell instinct as Osim was rising over the last year. How? By taking Fisher's advice and going back to our 8 Screens. Osim's fundamentals were not only genuinely strong, but were improving quarter by quarter. Without this logical and rational switch-check process in place, I'm quite sure we would have been strongly tempted to bag a profit somewhere along the way... maybe 25%, maybe 50%, maybe 100%...

Fisher's second keen insight deals directly with switching from one stock already in your portfolio to another that looks attractive. He seems to advise against the switch with the reasoning: "The risk of making a mistake and switching into one that seems to meet all of the first three dimensions (Fisher's screens) but actually does not is probably considerably greater for the average investor than the temporary risk of staying with a thoroughly sound but currently overvalued situation until genuine value catches up with current prices."

Switching from a proven core holding to a unknown new holding is dangerous stuff according to Fisher (and he was drawing on decades of knowledge and a very strong track record). Not all holdings in your portfolio may be "core" holdings. Some of these minor holdings, or holdings that are showing a decay in fundamentals may reasonably be considered switching candidates when a newcomer scores very high on your screens. I think the key is to stay as unemotional as possible, rely on and trust your screens, and stick with your rare winners as long as they continue to show good business progress. Patience and logic.

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Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well

Philip Fisher Articles: Conservative Investors Sleep Well

Posted on Wallstraits: Conservative Investors Sleep Well

Today's Lesson: Philip Fisher
Conservative Investors Sleep Well

In 1975, growth investing pioneer Philip Fisher published a short investing manual called: Conservative Investors Sleep Well. It contained Fisher's ideas about selecting a focused portfolio of high growth potential businesses-- which, along with Fisher's 1958 book, Common Stocks and Uncommon Profits, is credited with influencing Warren Buffett and Charlie Munger as they moved from a pure Benjamin Graham net asset valuation method to include softer analysis of management quality, branding and franchise value, and earnings growth potential.

Conservative Investors Sleep Well gives equity investors an overview of Fisher's stock selection methods, which include the following business characteristics:

• 1. Superiority in production, marketing, research and financial skills
  
• 2. The people factor, outstanding managerial competence
  
• 3. Inherent characteristics of the business itself that offer above-average profitability
  
• 4. Price earnings ratios

How Does One Act Conservatively?

Philip Fisher defines 'conservative', as applied to stock investing as follows:

• 1. A conservative investment is one most likely to conserve (i.e., maintain) purchasing power at a minimum of risk.
  
• 2. Conservative investing is understanding of what a conservative investment consists and then, in regard to specific investments, following a procedural course of action needed properly to determine whether specific investment vehicles are, in fact, conservative investments.

Consequently, to be a conservative investor, not one but two things are required either of the investor or of those whose recommendations he is following. The qualities desired in a conservative investment must be understood. Then a course of inquiry must be made to see if a particular investment so qualifies. Without both conditions being present the buyer of common stocks may be fortunate or unfortunate, conventional in his approach or unconventional, but he is not being conservative.

SUPERIOR PRODUCTION, MARKETING, RESEARCH, AND FINANCIAL SKILLS

Low Cost Production

To be a truly conservative investment a company--for a majority if not for all of its product lines--must be the lowest-cost producer or about as low a cost producer as any competitor. It must also give promise of of continuing to be so in the future.

Strong Marketing Organization

A strong marketer must be constantly alert to the changing desires of its customers so that the company is supplying what is desired today, not what used to be desired. In a competitive world of commerce it is vital to make the potential customer aware of the advantages of a product or service. This awareness can be created only by understanding what the potential buyer really wants (sometimes when the customer himself doesn't clearly recognize why these advantages appeal to him) and explaining it to him not in the seller's terms but in his terms.

Outstanding Research & Technical Effort

Previously, outstanding technical ability was vital only to highly scientific industries like electronics, pharmaceutical, aerospace and chemical manufacturing. However, today technological ability is as important to a shoe manufacturer, a bank, a retail, and even an insurance company. Technological efforts are now channeled in two directions: to produce new and better products, and to perform services in a better or lower-cost way. In research and technology, there is as much variation between efficiency of one company and another as there is in marketing.

Financial Skill

Companies with above-average financial talent have several significant advantages. Knowing accurately how much they make on each product, they can make their greatest efforts where these will produce maximum gains. Skillful budgeting and accounting can allow a truly outstanding company to create an early-warning system to detect threats to profitability.

THE PEOPLE FACTOR

Briefly summarized, the first dimension of a conservative investment consists of outstanding managerial competence in the basic areas of production, marketing, research, and financial controls. This first dimension describes a business as it is today, being essentially a matter of results. The second dimension deals with what produced these results and, more importantly, will continue to produce them in the future. The force that causes such things to happen, that creates one company in an industry that is an outstanding investment vehicle and another that is average, mediocre, or worse, is essentially people.

Here is an indication of the heart of the second dimension of a truly conservative investment: a corporate chief executive dedicated to long-range growth who has surrounded himself with and delegated considerable authority to an extremely competent team in charge of the various divisions and functions of the company. These people must be engaged not in an endless internal struggle for power but instead should be working together toward clearly outlined corporate goals. One of these goals, which is absolutely essential if the investment is to be a truly successful one, is that top management take the time to identify and train qualified and motivated juniors to succeed senior management whenever a replacement is necessary. Whenever possible the company should promote from within, not recruit from outside, except where special skills and diversity is required.

Fisher shares two examples of how companies can involve employees at all levels in both operations and managerial decision-making with great success-- Texas Instruments and Motorola. Each company designed systems to motivate and reward employees for contributions to efficiency and productivity. Fisher believed that companies able to perfect people-oriented policies and techniques--these special ways of approaching problems and solving them--are in a sense proprietary. For this reason they are of great importance to long range investors.

INVESTMENT CHARACTERISTICS OF BUSINESSES

The first dimension of a conservative stock investment is the degree of excellence in the company's activities that are most important to present and future profitability. The second dimension is the quality of the people controlling these activities and the policies they create. The third dimension deals with something quite different: the degree to which there does or does not exist within the nature of the business itself certain inherent characteristics that make possible an above-average profitability for as long as can be foreseen into the future.

Fisher seeks above-average profitability as a conservative investor, not only as a source of further gain but as a protection for what he already has. Sales growth has a cost attached, and without high profit margins growth is risky. A company with a high sales growth rate in relation to assets may be a more profitable company than one with higher profit margins but slow sales growth. For example, a company that has annual sales three times its assets can have a lower profit margin but make a lot more money than one that needs to employ a dollar of assets in order to obtain each dollar of sales.

However, while from the standpoint of profitability return on investment must be considered as well as profit margin on sales, from the standpoint of safety of investment all the emphasis is on profit margin on sales. Thus if two companies were each to experience a 2 percent increase in operating costs and were unable to raise prices, the one with a 1 percent margin of profit would be running at a loss and might be wiped out, while, if the other had a 10 percent margin, the increased costs would wipe out only one fifth of its profits.

Fisher compares high profit margins to an open jar of honey. The honey will inevitably attract a swarm of hungry insects bent on devouring it. In the business world, he points out, there are only two ways a company can protect the contents of its honey jar from being consumed by the insects of competition. One is by monopoly, and the other is efficiency. Efficiency is preferable, and is driven by economies of scale and establishing a leadership position.

Fisher uses the examples of IBM, General Electric and Sears to show how tough it is to topple the industry leader. He states how Montgomery Ward could never surpass Sears, Westinghouse could never catch GE, and dozens of computer companies always trailed far behind IBM. Today, Fisher may be having second thoughts as Dell has crushed IBM's PC dominance with a better distribution system, Wal-Mart blew away Sears with low prices and superior logistics systems, and, well, GE has just kept chugging along as a leader in several global markets for over 100 years.

Fisher looked for businesses that had created a perception in its customers minds that their product or service was the safe bet, and a competitive product or service was risky. He saw two sets of conditions necessary for this to happen. First, the company must build up a reputation for quality and reliability in a product (1) that the customer recognizes is very important for the proper conduct of his activities, (b) where an inferior or malfunctioning product would cause serious problems, (c) where no competitor is serving more than a minor segment of the market so that the dominant company is nearly synonymous in the public mind with the source of supply, and yet (d) the cost of product is only a quite small part of the customer's total cost of operations.

Second, it must have a product sold to many small customers rather than a few large ones. These customers must be sufficiently specialized in their nature that it would be unlikely for a potential competitor to feel they could be reached through advertising media. They constitute a market in which, as long as the dominant company maintains the quality and adequacy of its service, it can be displaced only by informed salesmen making individual calls, which is considered prohibitively expensive by competition. This sort of sustainable competitive advantage, in Fisher's mind, was to be most likely found in the high technology fields.

Fisher summarizes this ability to sustain above-average profit margins by saying a company should ask itself, "What can the particular company do that others would not be able to do about as well?" This sounds quite similar to Jim Collins (Good To Great) 'hedgehog concept', where companies that have transitioned from just good to really great were able to focus on simple business concepts or niche markets where they were capable of becoming the very best in the world.

PRICE EARNINGS RATIO

The fourth dimension of any stock investment involves the price-earnings ratio-- that is, the current share price divided by the earnings per share. When investors try to associate this ratio to the value of a business, trouble arises. Fisher believed, the common denominator among successful investors was their refusal to sell certain unusual high-quality stocks simply because each has had such a sharp fast rise that its price-earnings ratio suddenly looks high in relation to that which the investment community had become accustomed.

In view of the importance of all this, it is truly remarkable that so few have looked beneath the surface to understand exactly what causes these sharp price changes. Yet the law that governs them can be stated reasonably simple: Every significant price move of any individual common stock in relation to stocks as a whole occurs because of a changed appraisal of that stock by the financial community.

Fisher uses the example of a company with earnings of $1 per share trading at $10, thus a PE of 10. During the last 2 years most companies in its industry have been suffering, but this company has introduced innovative new products and earnings have grown to $1.40 and then to $1.82 during these 2 years, with promise of more strong growth ahead. Although the development of these new products was in the works for many years, the financial community had not appraised them well, but as results were observed the company was reappraised and the PE rose from 10 to 22, this the current stock price (22 X $1.82) of $40, a 400% gain in 2 years. Even moderate 15% annual growth from here will likely result in returns of thousands of percent over the next decade to early investors.

For Fisher, the matter of "appraisal" is the heart of understanding the seeming vagaries of PE ratios. But "appraisal" is a subjective thing, and may have more to do with what the appraiser thinks is going on that what is really going on. Thus, the current PE reflects not reality, but the consensus of the financial community's appraisals. Opportunity arises when the financial community is slow to make accurate appraisals, or is playing "follow-the-leader" down the wrong path.

Fisher advises against switching out of good stocks to chase better ones. The risk of making a mistake and switching into one that seems to meet all of the first three dimensions but actually does now is probably considerably greater for the average investor than the temporary risk of staying with a thoroughly sound but currently overvalued situation until genuine value catches up with current prices. Investors who agree with Fisher on this particular point must be prepared for occasional sharp contractions in the market value of these temporarily overvalued stocks.

On the other hand, it is Fisher's observation is that those who sell such stocks to wait for a more suitable time to buy back these same shares seldom attain their objective. They usually wait for a decline to be bigger than it actually turns out to be. The result is that some years later when this fundamentally strong stock has reached peaks of value considerably higher than the point at which they sold, they have missed all of this later move and may have gone into a situation of considerably inferior intrinsic quality.

In order of risk, Fisher advises staying away from stocks that may be appraised below or about at their proper value, but score low on the first three dimensions. But, most risky of all for investors, is chasing companies that are appraised far above what is currently justified by the immediate situation, regardless of scores on the first three dimensions. The patient investor seeking low risk (wanting to sleep well) must learn to discern between facts and appraisals.

Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth

Philip Fisher Articles: Investing in Growth

Here is another version of Philip Fisher Articles: Finding Growth Stock

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

Philip Fisher Articles: Finding Growth Stock

Here is my collection of articles collected from the web. Some are without source, hence I cannot give due credit.


Philip Fisher: Finding Growth Stocks

• I sought out Phil Fisher after reading his Common Stocks and Uncommon Profits and Other Writings. When I met him, I was as impressed by the man as by his ideas. A thorough understanding of the business, obtained by using Phil’s techniques... enables one to make intelligent investment commitments. --Warren Buffett

After Phil Fisher published the original 1958 edition of Common Stocks and Uncommon Profits, he received letters from readers all over the world---most asking for more detailed information about what an investor should do to find stocks with the potential to offer spectacular gains, that is, how to identify growth stocks. In later editions of the classic text, Fisher included a chapter (Chapter 10 in the latest 2003 edition published by John Wiley & Sons) on ’How I Go about Finding a Growth Stock’. This article is a summary of Fishers comments on this topic.

Fisher begins by stressing that finding growth stocks is a tedious process that must take time and energy, as well as skill and alertness. Small part-time investors may feel it is not worth the effort. While it would be nice if some shortcut could be found, Fisher doubts one ever will be. Fisher concludes, ’How much time should be spent on these matters is, of course, something each investor must decide for himself in relation to the sums he has available for investment, his interests, and his capabilities.’

Fisher further acknowledges that his method for searching for high-growth stocks is not the only possible method--and perhaps not even the best method--but it is the best method he has found and has worked well over many decades. Fisher organizes his growth stock search into two stages--the first stage being to narrow the field of possible stocks to investigate, and the second stage making a decision to buy or not to buy. Perhaps surprisingly, Fisher finds the first stage the most challenging.

Fisher states, ’This is the problem that confronts anyone about to start on a quest for a major growth security: there are literally thousands of stocks in dozens of industries that could conceivably qualify as worthy of the most intensively study. You cannot be sure about many of them until considerable work has been done. However, no one could possibly have the time to investigate more than a tiny percentage of the available field. How do you select the one or the very few stocks to the investigation of which you will devote such time as you have to spare?’

When Fisher began to assess his own personal investment screening process he was surprised to find out that his original ideas found by discussing businesses with scientists and management first-hand had only supplied about one-fifth of his eventual purchases in his portfolio. The lion’s share, about 80% of his stock purchases and an even greater share of portfolio profits over time had come from an entirely different source if stock ideas--recommendations from a small number of trusted sources.

Fisher says, ’I might not agree at all with the conclusions of any of these men as to a stock they particularly liked... however, because in each case I knew their financial minds were keen and their records impressive, I would be disposed to listen eagerly to details they might furnish concerning any company within my range of interests that they considered unusually attractive for major appreciation. Furthermore, since they were trained investment men, I could usually get rather quickly their opinion upon the key matters most important to me in my decision as to whether it might be a good gamble to investigate the company in question.’

What were Fisher’s key questions to his knowledgeable and trusted friends within his investing network? First, he wanted to know if the business, in general, had the potential for very high growth rates. Then he wanted to know how easily second and third industry entrants could compete with the first mover and take sales share or erode profit margins. Fisher found his network of investing friends a far richer source of good ideas than brokerage houses or newspaper journalists. One other useful source of original growth stock ideas would be business consultants, but the problem here is they are often reluctant to discuss details for fear of breaching client confidentiality.

Once Fisher has narrowed his search to a few candidates, what does he do next? He begins by explaining what he does not do. He does not approach anyone in the management at this stage. He does not spend hours and hours going over old annual reports and making minute studies of minor year-by-year changes in the balance sheet. He does not ask a stockbroker what they think of the stock. He does, however, glance over the balance sheet to determine the general nature of the capitalization and financial position. He also looks into breakdowns of sales by product lines, competition, degree of management or other major stockholders, and all earnings statement figures throwing light on depreciation, profit margins, research activities, and abnormal or non-recurring costs in prior years.

Now Fisher really goes to work. He uses the ’scuttlebutt’ method described throughout his book--interviewing scientists, engineers, suppliers, customers, competitors, and anyone else who might have important information about the business that is not common knowledge among public or institutional investors. At this point, if Fisher is hitting dead ends and struggling to get the information he needs--he will often give up and move on to investigate another business.

Fisher says, ’To make big money on investments it is unnecessary to get some answer to every investment that might be considered. What is necessary is to get the right answer a large proportion of the very small number of times actually purchases are made. For this reason, if way too little background is forthcoming and the prospects for a great deal more is bleak, I believe the intelligent thing to do is to put the matter aside and go on to something else.’

When Fisher uncovers interesting scuttlebutt on a business of interest--he usually needs to talk to one or two key people to gain additional information. He does NOT just walk up to them off the street and start asking questions. As he says, ’Most people, interested as they may be in the industry in which they are engaged, are not inclined to tell to total strangers what they really think about the strong and weak points of a customer, a competitor, or a supplier.’ Instead, Fisher goes to their commercial banker and explains openly how he is trying to gain information necessary to make an investment decision. Bankers are surprisingly helpful in making important introductions to open doors.

Only after all scuttlebutt has been accomplished are you ready to approach management of the company in interest. Fisher believes this is critical. Fisher states, ’Good managements, those most suitable for outstanding investment, are nearly all quite frank in answering questions about the company’s weak points as fully as about its strong points. However, no matter how punctilious a management may be in this respect, no corporate officer in his own self-interest can be expected, unasked, to volunteer some of the most significant matters to you, the investor, to know.’

In short, you need to do a tremendous amount of legwork prior to meeting management so you are in a position to ask probing questions about the business--strengths and weaknesses must be known prior to the meeting or you will still not know them after the meeting. Scuttlebutt is the essence of Fisher’s method. As he says, ’When it comes to selecting growth stocks, the rewards for proper action are so huge and the penalty for poor judgment is so great that it is hard to see why anyone would want to select a growth stock on the basis of superficial knowledge. If an investor or financial man wants to go about finding a growth stock properly, I believe one rule he should always follow is this: he should never visit the management of any company he is considering for investment until he has first gathered together at least 50% of all the knowledge he would need to make the investment.’

Fisher was once asked the ratio between companies visited and companies added to his portfolio. The banker asking the question guessed it was 250:1. Fisher answered, ’Actually it runs somewhere between one to every two and one to every two and one-half! This is not because one out of every two and one-half companies I look at measures up to what I believe are my rather rigorous standards for purchase. If he had substituted ’companies looked at’ for ’companies visited’ perhaps one in forty or fifty might be about right. If he had substituted ’companies considered as possibilities for investigation’ (whether I actually investigated them or not) then the original estimate of one stock bought for every two hundred and fifty considered would be rather close to the mark.’

Fisher added, ’What he had overlooked was that I believe it is impossible to get much benefit from a plant visit until a great deal of pertinent ’scuttlebutt’ work has been done first, and that I have found that ’scuttlebutt’ so many times furnishes an accurate forecast of how well a company will measure up to my fifteen points, that usually by the time I am ready to visit the management there will be at least a fair chance that I will want to buy into the company.’

Fisher finishes up by briefly addressing those who object to his method of spending such an amount of time and effort on each single investment decision. He says, ’I would ask those with this reaction to look at the world around them. In what other line of activity could you put $10,000 in one year and ten years later (with only occasional checking in the meantime to be sure management continues of high caliber) be able to have an asset worth from $40,000 to $150,000? This is the kind of reward gained from selecting growth stocks successfully. Is it either logical or reasonable that anyone could do this with an effort no harder than reading a few simply worded brokers’ free circulars in the comfort of an armchair one evening a week?’

Growth stocks cannot be found without hard work, and they cannot be found every day!