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deepinsight
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Quote deepinsight Replybullet Topic: Buffett's other mentor: Philip Fisher
    Posted: 10/Aug/2007 at 4:48pm

Buffett’s other mentor

Most people would correctly say the biggest influence on billionaire investment legend Warren Buffett is Benjamin Graham, the author of the The Intelligent Investor, bible on value investing. But a lesser-known guru, Philip Fisher, could be given almost as much credit for influencing the greatest investor of all time.

His book,  Common Stocks and Uncommon Profits, helped Buffett shift from focussing purely on value to incorporating into his investment strategy the quality of businesses. Fisher is the ‘great business’ in Buffett’s philosophy of buying ‘great businesses at cheap prices.’

Like Buffett, Fisher has a buy-and-hold philosophy. He advocated buying growth stocks and sought companies which had products and management that generated long-term increases in sales and earnings.

Fisher had a battery of requirements. Though a rather shy and retiring type, he would still drill management to see if they lived up to his high expectations. His rigorous criteria are outlined in the chapter ‘Fifteen points to look for in a common stock’. It includes questions such as: Does management have a determination to continually innovate through new products? Does it have a short-range or long-range outlook in regard to profits? Does the company have a management of unquestionable integrity?

Fisher’s son, Kenneth Fisher, who described his father as “small, slight, almost guant, timid and forever fretful”, has written that his father’s most incisive question was simple. “What are you doing your competitors aren’t doing yet?” That question goes to the essence of great, innovative growth stocks and should be asked of any potential investment. Kenneth Fisher, a Forbes columnist, has himself gone on to make a fortune as a money manager.

The factors Fisher talks about are hard to measure, which is important to note in a time where everything needs to be measured and when judgement is less respected. But qualitative factors can be just as important as a company’s financials. As mentioned, Warren Buffett’s success has come from a synthesis of Fisher’s qualitative approach with the rigid quantitative methods of Graham. That’s why you’ll hear the Sage of Omaha placing so much emphasis on having honest, focused executives running the companies he invests in.

Fisher’s other insights could be seen as being at odds with the value investing school. He played down the importance of dividends and believed that high price-earnings (PE) ratios shouldn’t necessarily rule a stock out of consideration. He also eschewed diversification, believing investors should focus on a small number of stocks that they know a lot about. But he advocated buying good companies when the markets drop on fears of war.

Fisher brought a personal approach to finding great growth stocks, too. He limited the stocks he bought to areas he knew a lot about. He also made famous the ’scuttlebutt’ technique of getting the low down on a company by talking to suppliers, customers, competitors and employees.

Common Stocks and Uncommon Profits will require several readings to grasp the full impact of its message. But it sums up the characteristics of great growth stocks that generate superior returns over the long term.

Source: http://globalgrowthinvestor.com/38/buffetts-other-mentor/



Edited by deepinsight - 10/Aug/2007 at 5:15pm
"Investing is simple, but not easy." - Warren Buffet
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Quote deepinsight Replybullet Posted: 10/Aug/2007 at 4:50pm
From Morningstar
 
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.
"Investing is simple, but not easy." - Warren Buffet
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Quote deepinsight Replybullet Posted: 10/Aug/2007 at 4:53pm
The Investing Philosophy of Philip A. Fisher: Common Stocks and Uncommon Profits
by James K. Glassman (May 5, 2004)

Article website address: http://www.CapMag.com/article.asp?ID=3662
Summary: "How long should you hold a stock? As long as the good things that attracted you to the company are still there."

[CapMag.com]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.



About the Author: James K. Glassman is the host of TechCentralStation.com.
"Investing is simple, but not easy." - Warren Buffet
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Quote deepinsight Replybullet Posted: 10/Aug/2007 at 4:56pm

Common Stocks and Uncommon Profits
by Philip Fisher
 

INTRODUCTION

By Kenneth L. Fisher (Philip Fisher’s Son)

Ken Fisher credits his father for teaching him the "craft" of investing. He writes that, "It’s the difference between learning to play the piano (craft) and then composing (art)." Indeed Ken’s own investment practice—his art— deviates from his father’s preference for growth stocks; Ken prefers value-oriented investments. But the process Ken uses to arrive upon investment decisions is largely based on his father’s tenets of "scuttlebutt" and "the fifteen points." As the son now runs a large investment management company he uses these principles en mass. He also believes his father’s ideas about undue diversification, in particular, influenced Buffett.

Phil Fisher went to Stanford and started work as a security analyst in San Francisco in 1928. He formed his own firm, Fisher & Co., in 1931. After some years in the game he decided to write this book, "In studying the investment record of both myself and others, two matters were significant influences in causing this book to be written. One, which I mention several times elsewhere, is the 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 other is the inherently deceptive nature of the stock market. Doing what everybody else 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."

 

 

1:  CLUES FROM THE PAST

Fisher summarizes his conclusions from the past in the following paragraph, "Such a study indicates that the greatest investment reward comes to those who by good luck or good sense find the occasional company that over the years can grow in sales and profits far more than industry as a whole. It further shows that when we believe we have found such a company we had better stick with it for a long period of time. It gives us a strong hint that such companies need not necessarily be young and small. Instead, regardless of size, what really counts is a management having both a determination to attain further important growth and an ability to bring its plans to completion…It makes clear to us that a general characteristic of such companies is a management that does not let its preoccupation with long-range planning prevent it from exerting constant vigilance in performing the day-to-day tasks of ordinary business outstandingly well."

 

 

2:  WHAT SCUTTLEBUTT CAN DO

Merriam-Webster defines "scuttlebutt" as:
1, a : a cask on shipboard to contain freshwater for a day's use, b : a drinking fountain on a ship or at a naval or marine installation
2 : RUMOR, GOSSIP

Fisher makes use of definition 2 here in the second chapter. "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." Though he writes only three pages about scuttlebutt here, Fisher assures us the concept will be discussed in great detail all throughout the book.

 

 

3:  WHAT TO BUY, THE FIFTEEN POINTS…

Below you will find "The Fifteen points to look for in a common stock," Fisher’s famous checklist for the inquiring investor.

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?

 

 

4:  APPLYING THIS TO YOUR OWN NEEDS

"The typical investor has usually gathered a good deal of the half-truths, misconceptions, and just plain bunk that the general public has gradually accumulated about successful investing." Fisher posits that the average investor believes only a bookish genius is capable of superior returns. He doesn’t agree with this mean mentality. "The most skilled statistical bargain hunter ends up with a profit which is but a small part of the profit attained by those using reasonable intelligence in appraising the business characteristics of superbly managed growth companies," he further expounds upon his view of apparent expertise, "Even among some of the so-called authorities on investment, there is still enough lack of agreement on the basic principles involved that it is as yet impossible to have schools for training investment experts…"

 

 

5:  WHEN TO BUY

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

 

 

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.

 

 

7:  THE HULLABALOO ABOUT DIVIDENDS

Fisher warns us to be wary of two scenarios when earnings are retained and no dividends are paid. The first is when executives pile up liquid assets for a sense of security. The second occurs when "substandard managements can get only a subnormal return on the capital already in the business, yet use the retained earnings merely to enlarge the inefficient operation rather than to make it better."

Fisher posits that "regularity or dependability" is the most important characteristic of dividends. He illustrates his claim using the restaurant parable that Buffett so often cites. "There is perhaps a close parallel between setting policy in regard to dividends and setting policy on opening a restaurant. A good restaurant man might build up a splendid business with a high priced venture. He might also build up a splendid business with an attractive place selling the best possible meals at the lowest possible prices. Or he could make a success of Hungarian, Chinese, or Italian cuisine. Each would attract a following. People would come there expecting a certain kind of meal. However, with all his skill, he could not possibly build up a clientele if one day he served the costliest meals, the next day low-priced ones, and then without warning served nothing but exotic dishes. The corporation that keeps shifting its dividend policies becomes as unsuccessful in attracting a permanent shareholder following. Its shares do not make the best long-range investments."

 

 

8:  FIVE DON’TS FOR INVESTORS

"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.’"

 

 

9:  FIVE MORE DON’TS FOR INVESTORS

Given the recent terror and talk of war, we will focus on point two in this chapter.

"2. 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."

The other four points…
1. Don’t overstress diversification.
3. Don’t forget your Gilbert and Sullivan.
4. Don’t fail to consider time as well as price in buying a true growth stock.
5. Don’t follow the crowd.

 

 

10:  HOW I GO ABOUT FINDING A GROWTH STOCK

"Possibly one-fifth of my first investigations start from ideas gleaned from friends in industry and four-fifths from culling what I believe are the more attractive selections of a small number of able investment men. These decisions are frankly a fast snap judgment on which companies I should spend my time investigating and which I should ignore. Then after a brief scrutiny of a few key points in an SEC prospectus, I will seek ‘scuttlebutt’ aggressively, constantly working toward how close to our fifteen-point standard the company comes. I will discard one respective investment after another along the way. Some because the evidence piles up that they are just run of the mill. Others because I cannot get enough evidence to be reasonably sure one way or the other. Only in the occasional case when I have a great amount of favorable data do I then go to the final step of contacting the management. Then if after meeting with management I find my prior hopes pretty well confirmed and some of my previous fears eased by answers that to me make sense, at last I am ready to feel I may be rewarded for all my efforts."

Fisher also notes that he’ll invest in one stock out of two hundred fifty that he initially considers. For every two to two and a half visits he’ll buy into the company—this points to the fact that most of his work is done beforehand.

 

 

11:  SUMMARY AND CONCLUSION

Chapter eleven concludes the first part of Fisher’s book; it and the chapters leading to it comprise a book within a book. "This book has attempted to show what these basic principles are, what type of stock to buy, when to buy it, and most particularly, never to sell it—as long as the company behind the common stock maintains the characteristics of an unusually successful enterprise."

 

 

Part two is of the book is entitled, "Conservative Investors Sleep Well."

Fisher begins by defining two terms:
"1. A conservative *investment* is one most likely to conserve (i.e. maintain) purchasing power at a minimum 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."

At the time of writing, in mid-1974, Fisher noted that the morale of the investor was the lowest it had been in history since the Depression. Consequently there existed, "a magnificent opportunity for those with the ability and the self-discipline to think for themselves and to act independently of the popular emotions of the moment."

 

 

II. 1:  THE FIRST DIMENSION OF A CONSERVATIVE INVESTMENT

"The company that qualifies well in this first dimension of a conservative investment is a very low cost producer or operator in its field, has outstanding marketing and financial ability and a demonstrated above-average skill on the complex managerial problem of attaining worthwhile results for its research or technological organization. In a world where change is occurring at an ever increasing pace, it is (1) a company capable of developing a flow of new and profitable products or product lines that will more than balance older lines that maybe become obsolete by the technological innovations of the others; (2) a company able now and in the future to make these lines at costs sufficiently low so as to generate a profit stream that will grow at least as fast as sales and that even in the worst years of general business will not diminish to a point that threatens the safety of an investment in the business; and (3) a company able to sell its newer products and those which it may develop in the future at least as profitably as those with which it is involved today." - Fisher.

 

 

II. 2:  THE SECOND DIMENSION

The second dimension is the most important of the qualitative aspects of sound investing: the people factor. "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."

Fisher warns us of one-man shows and provides an insight into determining the managerial balance of an investment, "If the salary of the number-one man is very much larger than that of the next two or three, a warning flag is flying."

Fisher concludes with three points about the second dimension:
"1. The company must recognize that the world in which it is operating is changing at an ever increasing rate." Dow Chemical is looked at as an example.
"2. There must always be a conscious and continuous effort, based on fact, not propaganda, to have employees at every level, from the most newly hired blue-collar or white-collar worker to the highest levels of management, feel that their company is a good place to work." Texas Instruments is looked at as an example.
"3. Management must be willing to submit itself to the disciplines required for sound growth."

 

 

II. 3:  THE THIRD DIMENSION

Investment Characteristics of Some Businesses

Fisher’s third degree deals with "the degree to which there does or does not exist within the nature of the business itself certain inherent characteristics that make possible can above-average profitability for as log as can be foreseen into the future." Fisher’s views on profitability jibe with Buffett’s concerns about inflation, indeed Fisher may have influenced Buffett in this regard. "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 annual sales."

Fisher sides with industry leaders rather than number two and three players. "It has been our observation, that in many years of trying, Westinghouse has not surpassed General Electric, Montgomery Ward has not overtaken Sears, and---once IBM established early dominance in its areas of the computer market—even the extreme efforts of some of the largest companies in the country, including General Electric, did not succeed in displacing IBM from it’s overwhelming share of that market."

In short, along with good leadership, a company needs great economics for it to be truly a conservative investment.

 

 

II. 4 :  THE FOURTH DIMENSION

Price of a Conservative Investment

Fisher posits that many fortunes have been made when investors have refused to sell their position in a rapidly appreciating equity. If the company is of a high quality then selling it is rather foolish, at almost any price, because of the scarcity of high-quality investments. What will you do with the money?

"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," writes Fisher. He warns us about the vagaries of these "appraisals", emphasizing that they are not snapshots of true company performance but only opinions of fallible human minds—minds prone to herd behavior at that.

 

 

II. 5 :  MORE ABOUT THE FOURTH DIMENSION

To illustrate the willy-nilly stances common to analysts Fisher looks their views chemical industry from the 1950s to the 1970s. In the 50s chemical concerns were golden synthesizing wonder products like DDT and nylon. In the 60s they appeared to be commodity producers with seemingly the same business characteristics of steel mills. Then in the 70s, for whatever reason, chemical stocks became expensive again.

 

 

II. 6 :  STILL MORE ABOUT THE FOURTH DIMENSION

"The fourth dimension to stock investing might be summarized in this way: The price of any particular stock at any particular moment is determined by the current-financial community appraisal of the particular company, of the industry it is in, and to some degree of the general level of stock prices. Determining whether at that moment the price of a stock is attractive, unattractive or somewhere in between depends for the most part on the degree these appraisals vary from reality. However, to the extent that the general level of stock prices affects the total picture, it also depends somewhat on correctly estimating coming changes in certain purely financial factors, of which interest rates are by far the most important."

 

 

III. 1:  ORIGINS OF A PHILOSOPHY

--Part III is entitled "Developing an Investment Philosophy"--

This chapter reviews Fisher’s early hard-luck experiences and how they forged his philosophy. His interest in investing bubbled up as grammar school kid when he overheard his uncle explaining stocks to Fisher’s grandmother. Fifteen years or so later he had completed his first year at Stanford and went to work for a bank "writing" reports on companies which the bank was issuing high-yield debt for. (He noted that he wasn’t really originating the reports, as the standard practice was to paraphrase whatever was in Moody’s.) Encouraged by a supporting boss, Fisher began seeking out the management of the debt issuing companies and incorporating his inquiries into his reports.

In performing his due diligence Fisher came to a first principle, "Reading the printed financial records about a company is never enough to justify an investment."

Fisher went on to loose money during this period of time. He wasn’t alone: it was 1929. Another principle learned – "what really counts in determining whether a stock is cheap or overpriced is not the ratio to the current year’s earnings, but its ratio to the earnings a few years ahead"--, and one more job completed at an investment firm, Fisher struck out on his own. In 1933 he managed a monthly profit of $29 (rent was $25), but soon (1935) his practice was "extremely profitable."

 

 

III. 2 :  LEARNING FROM EXPERIENCE

Fisher begins by recounting his intrigue with Food Machinery Corporation; he started pay attention to the operations of this firm in 1928. Food Machinery Corporation was the product of a merger between three agricultural machinery companies. The company appealed to Fisher for three business reasons: it was a "world leader in size," it had cornered some pockets of the market, and it enjoyed the fruits of a "superbly creative research or engineering department." In addition to these favorable business economics Fisher trusted and admired the company’s management. There was a shotgun burst of IPOs in 1928, including that of Food Machinery Corporation. "Food Machinery was thought to be just another of the many ‘flaky’ which were sold to the public at the height of a speculative orgy…it was possible to buy these shares in quantity at the ridiculous price to which they had sunk." And that was what Fisher did for his clients. Unfortunately, Fisher doesn’t disclose the success of this investment in this chapter. He does gives us another principle, namely, "I established what I called my three-year rule. I have repeated again and again to my clients that when I purchase something for them, not to judge the results in a matter of a month or a year, but allow me a three year period." Fisher broke this rule one time, when he sold Rogers Corporation in the mid 1970s.

 

 

III. 3 :  THE PHILOSOPHY MATURES

Fisher’s entrepreneurial efforts stalled when he served in the Air Force for three years starting in 1942. His assignments occasionally gave him time to plot his return to investing. Upon returning he decided to earnestly investigate the chemical industry, as Fisher was convinced of its post-war growth potential. His research culminated when, in 1947, he invested in Dow Chemical. Dow appealed to Fisher because of its efforts to become the lowest cost producer in each of its markets and because of its emphasis on the "people factor." When Fisher asked the president of Dow what he foresaw as Dow’s biggest problem in the future the president confessed that he worried about Dow becoming a more "military-like organization" – such concern for people sold Fisher.

One of Fisher’s key principles is repeated in this chapter: "Even if the stock of a particular company seems at or near a temporary peak and that a sizable decline may strike in the near future, I will not sell the firm’s shares provided I believe that its longer term future is sufficiently attractive."

 

 

III. 4:  IS THE MARKET EFFICIENT?

According to Fisher, the market is not efficient. "Efficient market theory grew out of the academic School of Random Walkers. These people found that it was difficult to identify technical trading strategies that worked well enough after transactions [sic] costs to provide an attractive profit an attractive profit relative to the risks taken. I don’t disagree with this. As you have seen, I believe it is very, very tough to make money with in and out trading based on short-term market forecasts. Perhaps the market is efficient in this narrow sense of the word…I do not believe that prices are efficient for the diligent, knowledgeable, long-term investor."

Fisher points out that the prevailing view, that is the fully informed professional perspective, has often been incorrect or inefficient. "With the possible exception of the 1960’s, there has not been a single decade in which there was not some period of time when the prevailing view was that external influences were so great and so much beyond the control of individual corporate managements that even the wisest common stock investments were foolhardy and not perhaps for the prudent…Yet everyone of these periods created investment opportunities that seemed almost incredible with all the advantages of hindsight."

 

 

Here are the points, abbreviated, Fisher gives as his conclusion:

1. Buy into companies that have disciplined plans for achieving dramatic long-range growth in profits and that have inherent qualities making it difficult for newcomers to share in that growth.

2. Focus on buying these companies when they are out of favor.

3. Hold the stock until either (a) there has been a fundamental change in its nature (such as a weakening of management through changed personal), or (b) it has grown to a point where it no longer will be growing faster than the economy as a whole.

4. For those primarily seeking major appreciation of their capital, de-emphasize the importance of dividends.

5. Taking small profits in good investments and letting losses grow in bad ones is a sign of abominable investment judgment. A profit should never be taken just for the satisfaction of taking it.

6. There are a relatively small number of truly outstanding companies. Their shares frequently can’t be bought at attractive prices. Therefore, when favorable prices exist, full advantage should be taken of the situation.

7. A basic ingredient of outstanding common stock management is the ability to neither accept blindly whatever may be the dominant opinion in the financial community at the moment nor to reject the prevailing view just to be contrary for the sake of being contrary.

8. In handling common stocks, as in most other fields of human activity, success depends greatly on a combination of hard work, intelligence, and honesty.

 

 

 

Source:steadygains

"Investing is simple, but not easy." - Warren Buffet
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Quote deepinsight Replybullet Posted: 10/Aug/2007 at 5:02pm

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.

 

 

 

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 prime Dad owned about 30 stocks. And diversify into different types, and not only your favourite types, so you have ones that work when your favourites 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.

"Investing is simple, but not easy." - Warren Buffet
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Quote deepinsight Replybullet Posted: 10/Aug/2007 at 5:05pm
Investing: The 'not to do' list...

When it comes to stocks, everyone from your friend to your colleague to an acquaintance seems to be keen to offer you an advice. Ideally, these ought to be persuasive as well as cautionary. However, the advisors seldom delve on the latter. No matter how appealing the 'quick buck' tips might be the successful investor is one who practices a sufficient degree of vigilance. We point out few ways to ensure this.

Don't buy into companies without sufficient financial history
Financing of start up companies is best left to specialized groups (venture capitalists and the like). For a retail investor, it is prudent to glance over the key historical financials (minimum 3 to 5 years) and make a peer comparison or evaluate the correctness of the direction in which the company is progressing. Even in a long-term investment, one must not forget that the rule of 'ceteris paribus' (other things remaining constant) may not always hold true, and thus it is necessary to periodically evaluate whether the investment still holds the same 'value' as it once did. Historical evaluation also helps in judging the management's integrity and business principles.

Don't invest in the business that you do not understand
The best way to safeguard one's capital is to not invest in a 'stock' but to invest in a 'business'. Nevertheless, it makes better sense to invest in business that you understand. This will not only help the investor in comprehending new business initiatives, but also in diagnosing the 'health' of the business. An understanding of the industry dynamics will also go a long way in cautioning you about the sector prospects.

Don't stress on diversification or ignore competition
While the principle of diversification may apply to portfolios, the same may not hold true for all businesses, especially if the concerned management does not have the bandwidth. For investors who believe that pursuing multiple business interests is in sync with the principle of diversification, we would like to quote Warren Buffet, "Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing."

At the same time, involvement in the current business should not be at the cost of ignoring competition. Philip Fisher in his book 'Common Stocks and Uncommon Profits' says that every investor should judge his investment target by asking one formidable question - "What is it that the company is doing that its competitors aren't doing yet?" The company's awareness of its competitors' strengths and its own weaknesses gives an indication of the management's foresight and resolution to overcome competition.

Don't fail to consider price while buying a growth stock
Investors often make assumptions while selecting their targets. However, the businesses are subject to various internal and external risks, which may affect the earnings growth prospects of a company over the long-term. But if you have a portfolio of stocks selected with adequate margins of safety, you minimise your chances of losses over the long term. In this context, stock selection is of great importance. To quote Benjamin Graham, "Now, while losing some money is an inevitable part of investing, to be an 'intelligent investor,' you must take responsibility for ensuring that you never lose most of all of your money."

And finally, don't follow the herd
The herd mentality is oft associated to investors who wish to make a quick gain in a bull market, without being aware of the downsides. The high valuations of a company must never be directly correlated to better fundamentals and improved prospects, without adequate study. For, quoting Buffet again, "It's only when the tide goes out, that you learn who's been swimming naked."


source:equitymaster
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Quote deepinsight Replybullet Posted: 10/Aug/2007 at 5:10pm

Taking the Long View

http://www.fool.com/news/foth/2002/foth020604.htm

By Phil Weiss (TMF Grape)
06/04/2002

[At the recent Berkshire Hathaway annual meeting, Warren Buffett said, "I've seen nothing to improve on Graham and Fisher." With that in mind, today we present a review of Philip Fisher's 1979 investment classic, Developing an Investment Philosophy. For those of you not familiar with Fisher, he is a champion of long-term investing and one of the most influential investors of all time. His writings belong on every Foolish investor's bookshelf. This article was originally published on September 18, 1998.]

Fisher's overall philosophy revolves around being invested in a very small number of companies that, due to the characteristics of their management, should grow both sales and profits at a faster rate than their industry as a whole. This growth should be accomplished at a relatively small amount of risk to the investor.

The management of a company invested in by Fisher must have in place a policy that will enable it to meet Fisher's growth objectives and a willingness to forego short-term profits in exchange for greater long-term gains. Additionally, its management must be able to recognize if and when mistakes are made and take remedial action to correct such mistakes.

The majority of Fisher's investments are also concentrated among manufacturing companies that use leading-edge technology and superior business judgment to accomplish its goals. This was primarily because these were the businesses that Fisher believed he understood the best. He did, however, believe that his theories could be applied to other businesses as well.

Fisher devotes much of this book to explaining how his investment philosophy came into being. His interest in investing actually started when he was in grammar school. As a minor, Fisher was able to make some money during the roaring bull market of the middle 1920s.

Among the earliest lessons that Fisher learned was the importance of the marketing organization to the success of a business and the need to learn from those that had direct familiarity with the company and its affairs. Then, as the market began to recover from the crash of 1929, Fisher first learned that a company's current price earnings ratio was not nearly as important as the ratio of its price to earnings a few years into the future.

It was also in the early 1930s that Fisher came to realize that there are two "people" traits that are absolutely essential for successful investment. The first is business ability. The second is integrity, both in terms of the honesty and personal decency of the people that run the company. If the owners and managers of the business do not have a "genuine sense of trusteeship for the stockholders, sooner or later the stockholders may fail to receive a significant part of what is justly due to them."

When it comes to patience and performance, one thing that Fisher stressed to his clients was the importance of judging results based on a three-year period rather than a month or a year. His clients were told that if he had not produced worthwhile performance within three years (including all fees), then they should fire him. It's a shame that today's Wise analysts do not have such a stand-up philosophy.

Fisher applied a similar three-year rule to his stock holdings. Fisher sold very rarely due solely to his three-year rule. He said that he was unable to recall a single instance where the performance of a stock he'd sold after three years had made him wish he'd held on. Close scrutiny over a period of a few years made the qualities (and lack thereof) of the business plainly evident to him. On those occasions where he sold in less than three years, it was primarily due to obtaining highly worrisome insights into the way the company was being run.

It was at the end of World War II that Fisher gave up on the idea of market timing and decided to focus his efforts solely on making major gains over the long haul.

Fisher summarized his investment philosophy into eight points:

1. Buy stocks of companies that have disciplined plans for achieving dramatic long-term growth in both profits and revenues. Such companies must also have inherent qualities that make it difficult for new entrants into that business to share in such growth.

2. Fisher prefers to focus on such companies when they are out of favor; i.e., market conditions are not favorable or the financial community does not properly perceive the true worth of such companies.

3. Hold the stocks that you buy until there has been either a fundamental change in the company's nature or it has grown to a point where it will no longer be growing at a faster rate than the economy as a whole. He also says that one should never sell his most attractive stocks for short-term reasons.

4. If your primary investment goal is long-term appreciation of capital, then you should de-emphasize the importance of dividends.

5. Recognize that making mistakes is an inherent cost of investing. The important thing is that the investor must be able to recognize such mistakes as soon as possible, understand their causes, and learn from them so that they are not repeated. A willingness to take small losses in some stocks while letting profits grow bigger and bigger in your more promising stocks is a sign of good investment management. Don't just take profits for the satisfaction of taking them.

6. Realize that there are a relatively small number of truly outstanding companies. Your funds should be concentrated in the most desirable opportunities. "For individuals (in possible contrast to institutions and certain types of funds), any holding of over 20 different stocks is a sign of financial incompetence. Ten or 12 is usually a better number."

7. An important ingredient of successful investing is to have more knowledge and apply your judgment after thoroughly evaluating specific situations. You should also have the moral courage to act against the crowd when your judgment tells you that you are right.

8. One of the basic rules of life also applies to successful investing -- success is highly dependent upon a combination of hard work, intelligence, and honesty.

Fisher concludes this book with the following paragraph:

"While good fortune will always play some part in managing common stock portfolios, luck tends to even out. Sustained success requires skill and consistent application of sound principles. Within the framework of my eight guidelines, I believe that the future will largely belong to those who, through self-discipline, make the effort to achieve it."

The Motley Fool is investors writing for investors.



Edited by basant - 10/Aug/2007 at 5:36pm
"Investing is simple, but not easy." - Warren Buffet
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Quote kulman Replybullet Posted: 10/Aug/2007 at 5:11pm
Deepinsight
 
Thanks a lot for starting this discussion & these posts on Phil Fiher. I've saved this material on my PC for pondering over this weekend.
 
Thanks again...
 
 
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