Wisdom from Philip A. Fisher

Philip A Fisher was an outstanding investor, he managed a small group of clients (around 10) in California. He died at 96 and is one of Charlie Munger’s heroes. Munger talked to him to Warren Buffet and had a big influence on his investing philosophy. He laid out 15 points to find outstanding companies and wrote the book “Common Stocks and Uncommon Profits” (which I recommend as probably one of the best ones about investing, if not the best).

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?
3. How effective are the company’s research-and-development efforts in relation to its size?
4. Does the company have an above-average sales organization?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company’s cost analysis and accounting controls?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth?
14. Does 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?

He used to define the technique he used to gather information as “scuttlebutt”. It’s a non traditional way of gathering information (so not like getting information from 10k’s, conference calls, company presentations etc…). It’s the method of gathering information from a diverse sample of opinions related to the company, more like crime investigators asking questions on main street, specifically asking about competitors, suppliers, customers, ex-employees and employees. Here is an excerpt of what he had to say about it:

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 their being quoted, like to talk about the field of work in which 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 strength and weakness of the other four, and nine times out of ten a surprisingly detailed and accurate picture of all five will emerge.
It is equally astonishing how much can be learned from both vendors and customers about the real nature of the people with whom they deal. Research scientists in universities, in government, and in competitive companies are another fertile source of worthwhile data. So are executives of trade associations.

Another important set of rules he clearly laid out was what NOT to do. I firmly believe that what you should not do is as important as what you do. For example what allowed me to multiply my investments was to be less than 10% and to NOT fall in the temptation to invest by mid 2008 (actually I could not find any company worth to invest a lot at the time), it allowed me to have a lot of cash waiting on the sidelines for better opportunities and deploy almost all of it during the crisis that followed. Ok but enough, so here are the investors’ DONT’S:

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.

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, or buying expensive houses in the 2000s can be dangerous to your financial health. On the flip side, searching in areas the crowd has left behind can be extremely profitable.

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 cents 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.

When to sell?

One of the most difficult things is when to sell. Fischer said that if you bought well you should almost NEVER sell, that he would be happy holding companies for ever. However if you did not due your study good enough or some external factors come along after you bought he laid out 3 rules that could justify your sell:

1) Wrong Facts : There are times after a security is purchased that the investor realizes the facts do not support the supposed rosy reasons of the original purchase. If the purchase thesis was initially built on a shaky foundation, then the shares should be sold.

2) Changing Facts : The facts of the original purchase may have been deemed correct, but facts can change negatively over the passage of time. Management deterioration and/or the exhaustion of growth opportunities are a few reasons why a security should be sold according to Fisher.

3) Scarcity of Cash : If there is a shortage of cash available, and if a unique opportunity presents itself, then Fisher advises the sale of other securities to fund the purchase.

Reasons Not to Sell

Prognostications or gut feelings about a potential market decline are not reasons to sell in Fisher’s eyes. Selling out of fear generally is a poor and costly idea. Fisher explains:

“When a bear market has come, I have not seen one time in ten when the investor actually got back into the same shares before they had gone up above his selling price.”
In Fisher’s mind, another reason not to sell stocks is solely based on valuation. Longer-term earnings power and comparable company ratios should be considered before spontaneous sales. What appears expensive today may look cheap tomorrow.

Conclusion:

Fischer had tremendous profits by investing in very few and truely outstanding companies and holding them for many many years. He followed his investing philosophy strictly, was a lonely person, liked three things, the three WWWs: worrying, walking and working. He worked studying for months before making a move, liked to walk kilometers and worried so much about everything that could go wrong that his sons said “that he worried the risk out”. A truly admirable person, one of my favorite characters.

Cheers !
jrv