Warren Buffett is quoted as saying he is 85% Graham and 15% Fisher. On the cover of my copy, there’s a Buffett quote which reads, “I am an eager reader of whatever Phil has to say, and I recommend him to you.” If Benjamin Graham is the father of value investing, Fisher is definitely the father of growth investing. Buffett was able to combine these styles and well… you know the rest. Big money!
Fisher’s investment style centered on:
1) Buying and holding for the long term. He says there is hardly any reason to sell a stock if you made a good decision in the first place.
2) Holding a concentrated portfolio. He tells investors not to overstress diversification and that many companies offer internal diversification and that the relationship between your chosen stocks is also a factor. Phil Fisher says, “I don’t want a lot of good investments; I want a few outstanding ones.”
3) Buying companies you understand very well. Peter Lynch was definitely influenced by this – read my, “Why You Don’t Need To Be A Professional To Beat The Market” blog below. I talk about this in detail.
4) Buying companies with growth prospects.
Arguably the best part of the book is his 15 points that investors should use as a common stock checklist. Investors should concern themselves with these points and take their time determining the answers. After all, “a company could well be an investment bonanza if it failed fully to qualify on a very few of them.”
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?
The first point boils down to… avoid fads! If a company has an astronomical increase in a short period, but with no potential to keep going, any time to invest is already too late. There is no long term, and without that, Fisher would not consider the stock. Crocs shoes were a huge fad, and the stock was over $60 at the high point of the fad, but it has never come close to that point since.
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?
A good example of this is the old Razr phone. It was a huge product and everyone had a Razr, but Motorola got too comfortable and didn’t develop new products. Along came Apple and Samsung and they totally dominated the smartphone market.
3) How effective are the company’s research and development efforts in relation to its size?
Research and development is what keeps companies ahead of the curve. Sure, you can have a patent, but someone could always make an improvement on the product and then the company’s out of luck. Just look at the company and see if it is over-spending or under-spending?
4) Does the company have an above average sales organization?
A company could have the greatest product in the world, but it’s absolutely worthless if it can’t be sold! Businesses live and die on cash flow, and sales generate this lifeblood. However, you can have tons of sales but not be viable without a good profit margin. That brings us to #5…
5) Does the company have a worthwhile profit margin?
Fisher points out that in good years, even bad companies increase their profit margins by a large amount. If a company has small margins to begin with, any additional increase makes a big difference in the percentages. Don’t listen to claims of huge percentage increases. Look for a company with big profit margins. The name of the game is capital preservation, and during bad times, their margins do not drop significantly. That’s a huge plus.
6) What is the company doing to maintain or improve profit margins?
This is pretty self-explanatory. If a company isn’t doing anything to keep up business, what’s the point of being invested? As the father of growth investing, Fisher isn’t interested in a company that isn’t looking to maintain or improve margins.
7) Does the company have outstanding labor and personnel relations?
Employees are the face of a company. If your sister works for Wal-Mart and is totally resentful, how would that make you feel about the company? Today, investors have an advantage over Fisher because of social media. It’s easy to just search a company and find out what people are saying. Look at employee reviews! Nobody is loyal to a compensation package – any company can just throw money at employees. What breeds true loyalty? Outstanding labor relations.
8) Does the company have outstanding executive relations?
Here is a fine balance – companies should treat their executives well, but compensation should not be excessive. Companies should focus on rewarding executive performance, because that is what fuels growth.
9) Does the company have depth to its management?
Fisher wants to know that the company can survive after the founder is gone. A company needs to be able to live through other managers. Imagine if Apple couldn’t function without Steve Jobs – would you have invested in it? You want to know that Apple can continue to grow in the years after his death with someone else.
10) How good are the company’s cost analysis and accounting controls?
The main thing to do here is to make sure that there are no huge red flags that scream “we’re cooking the books!” Evaluate financial statements and records to determine the business valuation and go from there. Also check out the CFO’S record - has he/she done well in the past?
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?
This point on the checklist requires you to know the industry in more detail than what annual reports provide. As you become more informed about a business or industry, you begin to pick up on certain trends that are key to investment decisions. As an example, Fisher says, “in most important operations involving retailing, the degree of skill a company has in handling real estate matters – the quality of its leases, for instance – is of great significance.”
12) Does the company have a short range or long range outlook in regards to profits?
A company should be focused on the long term. Because Fisher advocates buying and holding for the long term (provided you have made a sound decision), this is a must. Amazon does this pretty well – it focuses on the long term and ignores the noise of Wall Street. You want these visionary companies in your portfolio, because if they’re profiting in the long term, so are you.
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?
This essentially boils down to a strong balance sheet. If there is low debt and high cash, you can rest assured that the business isn’t likely to go bankrupt anytime soon. Also, beware of share dilution. If a company just pushes more shares into the abyss to raise money, you own less and less as a percentage.
14) Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?
Troubles and disappointments are part of every company – it is important to know that management can roll with the punches and make decisions. Speaking openly about issues is a big obligation to shareholders, because they literally own the company. Putting on rose-colored glasses when a company encounters rough seas is like putting lipstick on a pig and they’re not doing anybody any favors when they do it.
15) Does the company have a management of unquestionable integrity?
Nothing will send a company downhill than management ruining their reputation. Do you want to invest in another Enron?
Getting answers to these points is not easy. Don’t expect to just sit down for an evening and go through them one by one. It takes a lot of effort, but if you’re willing to put in the work, you’ll be greatly rewarded. Even a scuttlebutt can be a great investor. The key is finding great companies.