|
by Philip Fisher
reviewed by Marco den Ouden
This review was
originally published in The Break Out Report on 04/18/2004
Philip Fisher is one of two
key influences on the thinking of super-investor Warren Buffett, currently
closing in fast to replace Bill Gates as the richest man in the world. The other
influence, of course, was the founder of value investing, Benjamin Graham.
Buffett biographer Robert Hagstrom says that Buffett is 85% Graham and 15%
Fisher.
And Fisher’s
seminal work is his 1958 classic, Common Stocks and Uncommon Profits.
Where Graham focused on looking for under-valued stocks, Fisher focused on
searching for growth stocks.
The
book is relatively short – just over 150 pages, and is available in a recently
published compendium from Wiley Investment Classics that includes his later
works Conservative Investors Sleep Well and Developing an Investment
Philosophy.
The
core of the book is Fisher’s “Fifteen Points to Look for in a Common Stock”.
Fisher looks for two key things – what the company does and the quality of its
management. The first three of his fifteen points focus on the company’s
products and services.
A
growth company, says Fisher, must “have products or services with sufficient
market potential to make possible a sizable increase in sales for at least
several years”. An increase in profitability alone as a result of better cost
control and more efficient utilization of resources can lead to short term gains,
says Fisher, but this is speculation and not investing. Nor is putting
money into the go-go stock of the moment. Such companies may advance sales
considerably for a few years and then hit saturation, after which growth stops.
What Fisher is looking for is sustained growth. And he avers that this can be
accomplished because a company is “fortunate and able” or because it is
“fortunate because it is able”. The difference is that the former are
beneficiaries of changes in technology whereas the latter instigate changes in
technology. Which brings us to Fisher’s second point.
A
company’s management, say Fisher, “must 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”. In other words, the company must constantly re-invent
itself. And this ties in with the third point – research and development must be
effective in relation to the company’s size. In fact, Fisher is big on Research
and Development and looks for companies that invest heavily in this area. The
company’s profitability is sustained and advanced by successful R&D.
Fisher’s other twelve points relate to the management and finances of a company.
These include an above-average sales force, worthwhile profit margin,
outstanding labor relations, management depth, excellent cost and accounting
controls, a long-range outlook, adequate financing and management integrity.
Although he knocks it off in a short three pages, an important element of
Fisher’s strategy is his research methodology. He calls it “scuttlebutt”.
Scuttlebutt literally means gossip, but Fisher means much more than that. He’s
not talking online chat forums like Raging Bull or Silicon Investor which really
are just gossip and notoriously unreliable.
By
scuttlebutt, Fisher means talking to others than the investment community and
the management of a company. He avers that you can learn a lot about a company
by talking to employees, customers and competitors. If competitors, for example,
fear the company you’re checking out, that speaks volumes. And employees and
former employees are often more candid than management would be in revealing
problems. Fisher advises, however, that sources must be given strict
confidentiality or their reliability will be suspect.
Other elements in
this investment classic include a chapter on when to buy. Fisher pooh-poohs
market timing as “silly” because our ability to forecast future trends is
unreliable at best. He suggests looking over back issues of the Commercial
and Financial Chronicle to see how ineffective such predictions are.
But
he does suggest that one can time an investment based on the company itself. He
argues that when a company is developing a new process or product, it takes time
to get it off the ground. Investors may bid up the stock at first on speculative
hype. When profits fail to materialize during this establishment phase, these
same investors bail and send the stock price plummeting. The stock hits bottom
just as it is about to turn its investment into profits and that is the time to
buy.
The
book also includes a chapter on when to sell and when not to. “If the job has
been correctly done when a common stock is purchased,” says Fisher, “the time to
sell is – almost never”. Shades of Buffett!
The
book is chock full of good ideas including ten “Don’ts for Investors” which
include don’t worry about high P/E ratios, don’t quibble over price, don’t
over-diversify, don’t follow the crowd, and particularly apropos today, don’t be
afraid of buying on a war scare.
Almost fifty years later, Fisher’s book still packs a punch. Its ideas are solid
and, in the hustle bustle world of instant information on the Internet, all too
often forgotten. Everyone wants instant gratification and looks for short-term
gain. But investing in companies that have a growing market for their products,
strong and forward-looking management, and extensive research and development
and holding them is an investment strategy that has proven the test of time. The
fact that Warren Buffett is once again contending for top dog in Forbe’s
billionaires list is proof of that.
|
