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

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About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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6 Responses to Wisdom from Philip A. Fisher

  1. Pingback: Out of WDC (almost) | The Intelligent Investor Blog

  2. Pingback: Finding an outstanding company requires to invest lots of time. | The Intelligent Investor Blog

  3. jrv says:

    Another incredible investor also who died old like Fisher, was another Philip. The incredible Philip Carret, died at 101 and had the longuest record with incredible returns: see more about him here.

    Admired by Buffett also and he was even less famous than Fisher. He also wrote an interesting book: The art of speculating. (with quite a different meaning of speculation than what is widely accepted). Great investors like the 2 Philips or Walter Schloss are not popular, nor they wanted to be, on the contrary, all 3 were quite reclusive.

  4. Pingback: Philip Fisher’s Investment Series: Selecting Conservative Stocks to Buy and … | Stock To Buy

  5. Pingback: Philip Fisher’s Investment Series: Selecting Conservative Stocks to Buy and Hold | Stock To Buy

  6. Pingback: Walter Schloss, the essence of value investing | The Intelligent Investor Blog

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