The Great Investors - Philip Fisher

Hello investors, welcome to my Substack, where I study the best investors and businesses from around the world. In this week’s article, we’ll be going over the late Phil Fisher, one of the greatest investors of all time. Keep reading to find out what made his career so successful, and what advice he had to share.

This article will be divided into five parts:

1. The career of Philip Fisher

2. Philip Fisher’s belief in small-cap growth stocks

3. Fisher’s advice on looking for companies to invest in

4. Fisher’s advice on how NOT to invest

Now that we’re ready, let’s get into the article with an overview of Philip Fisher’s life.

Part 1: Who was Philip Fisher?

American financial services firm Morningstar, has labeled him "one of the greatest investors of all time." He is noted for declaring that it is "almost never" the optimum moment to sell a stock. He was an early investor in semiconductor powerhouse Texas Instruments TXN, which recently had a market valuation of well over $40 billion. Fisher also bought Motorola MOT in 1955 and held it until his death in 2004 in a perfect demonstration of the value of long-term investing.

After dropping out of Stanford Graduate School of Business, Philip Fisher began his work as a securities analyst with the Anglo-London Bank in San Francisco in 1928. (he would later return to be one of only three people ever to teach the investment course). He worked for a stock exchange firm for a brief period before establishing Fisher & Co., a money management firm, in 1931. He was the company's CEO until 1999, when he retired at the age of 91, and he is claimed to have made exceptional financial profits for his clients.

Fisher, along with Thomas Rowe Price, Jr., was one of the first long-term investors to detect a stock's growth potential based on fundamental analysis, an investment talent that Berkshire Hathaway's legendary Warren Buffett picked up. Fisher suggested that enterprises with a growth mindset, strong profit margins, high return on capital, a commitment to research and development, a superior sales organization, a leading industry position, and proprietary products or services be targeted for investment.

Despite the fact that he began fifty years before the moniker Silicon Valley was coined, he specialized in innovative firms fueled by research and development. He was a long-term investor who sought out exceptional businesses at reasonable costs. He was a very quiet person who only gave a few interviews and was quite selective about the clientele he took on.

It wasn't until his debut book that he became well-known. His reputation soared after the publication of Common Stocks and Uncommon Profits in 1958. Common Stocks, as its called for short, is an investment book that teaches investors how to assess a company's quality and profitability potential. He was known for conducting extensive study on firms in which he planned to invest. In his book, he emphasizes the importance of networking and acquiring information through business contacts. Before buying shares, he depended on personal relationships (what he termed the "business grapevine") and talk to learn about companies. The book is still in print more than 60 years later, demonstrating that Fisher's lessons are still relevant today.

Phillip is also notable for creating and popularizing the "scuttlebutt" or "grape vine" tool, which he used to meticulously search for company information. This is where an investor acquires a superior base for analysis and value by compiling a comprehensive portfolio of a company. Warren Buffet started during Berkshire Hathaway's 2018 shareholders meeting that Fisher's "scuttlebutt" strategy, which is still adopted by Ted Weschler and Todd Combs at Berkshire Hathaway, is still a solid method to invest. According to John Train, Warren Buffett is influenced by Benjamin Graham 85 percent of the time and Philip Fisher 15 percent of the time.

Part 2: Philip Fisher’s belief in small-cap growth stocks

Fisher's investment philosophy may be summed up in a single sentence: Build a concentrated portfolio of great companies with compelling growth potential that you thoroughly understand and keep for the long term. On the surface, this line appears to be straightforward, but let us dissect it further to see the benefits of Fisher's approach.

Of course, every investor is faced with the dilemma of deciding what to buy. Fisher's solution is to buy shares in well-managed growth firms, and he devotes an entire chapter to this issue in Common Stocks and Uncommon Profits. The chapter begins with a comparison of "statistical bargains," or companies that appear inexpensive only on the basis of accounting data, and growth stocks, or equities with strong growth potential based on a thorough examination of the underlying business's features.

The difficulty with statistical bargains, according to Fisher, is that while there may be some true bargains to be obtained, many organizations confront formidable headwinds that cannot be recognized from accounting data, resulting in present "deal" pricing proving to be extremely costly in a few years. Furthermore, Fisher claims that a well-chosen growth stock will outperform a statistical bargain over a long period of time. The explanation for this discrepancy, according to Fisher, is that a growth stock, whose intrinsic value rises consistently over time, will appreciate "hundreds of percent each decade," whereas a statistical bargain will be "as much as 50% undervalued."

Fisher classified the universe of growth stocks into two categories: large and small. Large, financially sound businesses with significant growth prospects are on one extremity of the range. These companies at the time included IBM, Dow Chemical DOW, and DuPont DD, all of which grew fivefold between 1946 and 1956.

Although such returns are commendable, the real home runs are found in, quote, "small and frequently young companies… [with] products that might bring a sensational future." Fisher noted, "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 solution to the question of what to buy is simple: if all other factors are equal, investors with the time and willingness should focus their efforts on identifying young companies with strong growth prospects.

With this idea in mind, an investor may be ready to find a company to partner with. But with so many out there and more founded every year, how should an investor choose the right business to throw in their money with? Luckily, Fisher has some advice for that as well.

Part 3: What to look for in a company

Fisher's renowned "Fifteen Points to Look for in a Common Stock" from Common Stocks and Uncommon Profits are still as relevant today as they were when they were first published. The 15 criteria are a qualitative guide to identifying well-managed businesses with strong development prospects. A corporation must meet the majority of these 15 criteria, according to Fisher, in order to be regarded a worthwhile investment:

1. Does the company offer items or services with enough market potential to allow for a significant increase in revenue over a period of time?

Products that address big and expanding markets are essential for a firm seeking a sustained period of remarkable growth.

2. Is management committed to continuing to develop items or processes that will boost total sales potential once the current attractive product lines' development potentials have been completely exploited?

All markets eventually mature, and a firm must continually develop new goods to either expand existing markets or enter new ones in order to maintain above-average growth over decades.

3. In comparison to the company's size, how effective are the company's R&D efforts? 

A company's research-and-development (R&D) effort must be both efficient and successful in order to generate new goods.

4. Does the corporation have a sales force that is above average? 

Few items or services are so attractive in a competitive context, Fisher observed, that they will sell to their full potential without expert merchandising.

5. Does the company have a profit margin that is worthwhile? 

Charlie Munger, vice-chairman of Berkshire Hathaway, is fond of saying that - “if something isn't worth doing, it's not worth doing well.” Similarly, a company's development can be phenomenal, but the earnings must be worthwhile in order for investors to be rewarded.

6. How is the company maintaining or increasing profit margins? 

"It is not the profit margins of the past that are fundamentally significant to the investor," Fisher explained. Because inflation raises a company's expenses and competitors squeeze profit margins, you should pay attention to a company's long-term cost-cutting and profit-margin-improving plan. 

7. Is the company's labor and staff relations excellent? 

A company with good labor relations is more profitable than one with mediocre ones, according to Fisher, since happy employees are more productive. There is no single metric for assessing a company's labor relations, but there are a few things that investors should look into. To begin with, organizations with good labor relations make every effort to resolve employee problems as promptly as possible. Furthermore, a company that produces above-average profits while paying its employees above-average compensation is likely to have good labor relations. Finally, investors should consider top management's attitude toward employees.

8. Is there a good working relationship amongst the company's executives? 

A corporation must establish the correct atmosphere in its executive suite, just as it is crucial to have good staff interactions. Family members should not be promoted ahead of more capable leaders in organizations when the founding family retains control, according to Fisher. Furthermore, executive remuneration should be comparable to industry norms. Salaries should also be examined on a frequent basis so that warranted pay raises can be granted without the need to demand them.

9. Is the company's management team well-rounded? 

As a company grows over decades, it is critical that a deep pool of management talent is adequately created. Investors should avoid companies where senior management is hesitant to cede significant responsibility to lower-level managers, according to Fisher.

10. How good are the cost analysis and accounting controls in place at the company? 

If a corporation can't track costs in every step of its operations, it won't be able to generate excellent outcomes in the long run. According to Fisher, it's tough to acquire a perfect picture of a company's cost analysis, but an investor may spot which firms are particularly lacking—these are the ones to avoid.

11. Are there any additional features of the firm, perhaps unique to the industry, that can provide the investor with important hints as to how exceptional the company is in comparison to its competitors? 

Because the "relevant clues" will differ greatly between businesses, Fisher described this point as a catch-all. The ability of a retailer, such as Wal-Mart or Costco, to manage its merchandising and inventories is critical. In an industry like insurance, however, an entirely other set of business criteria is critical. It is vital for an investor to understand which industry aspects influence a firm's success and how that company compares to its competitors.

12. Does the company have a profit forecast for the short or long term? 

Fisher suggested that investors should have a long-term approach to investing, and that corporations that do so should be favored. Furthermore, organizations that are focused on fulfilling Wall Street's quarterly earnings expectations may forego long-term benefits if they result in a short-term earnings damage. Worse, management may be tempted to adopt too optimistic accounting assumptions in order to produce a satisfactory quarterly profit figure.

13. Will the company's growth in the near future necessitate adequate equity financing, such that existing stockholders' benefits from the anticipated increase will be essentially canceled out by the larger number of shares then outstanding? 

As an investor, you should look for businesses that have the cash or borrowing capacity to fund expansion without diminishing the present owners' interests through follow-on share issues.

14. When things are going well, does management engage openly with investors about its operations, but "clam up" when problems and disappointments arise? 

Every firm, no matter how successful, will experience setbacks from time to time. Investors should look for management that is open and honest about all aspects of the firm, both good and poor.

15. Does the company have indisputable honesty in its management? The accounting irregularities that led to Enron and WorldCom's bankruptcies should serve as a reminder of the significance of investing only with management teams that can be trusted. Investors would do well to heed Fisher's warning that "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," regardless of how well a company scores on the other 14 points.

As you can see, Fisher is very specific on what sort of up-and-comers are worthwhile. The world is your oyster--but Fisher has some last parting advice.

Part 4: What NOT to do

In investing, the actions you don't take are as important as the actions you do take. Here are three things Fisher warns investors not to do.

1. Don't put too much emphasis on diversification. 

With the help of a catchy cliche, investment gurus and the financial media continuously extol the merits of diversification: "Don't put all your eggs in one basket." However, as Fisher pointed out, if you start putting your eggs in a bunch of baskets, they don't all wind up in pretty places, and it's hard to keep track of them all. Fisher, who held only 30 equities in his portfolio at any given time in his career, had a better solution. Spend time investigating and learning about a firm, and if it clearly satisfies the 15 criteria he outlined, you should make a significant investment. Rather, follow the remarks of Mark Twain: "Put all your eggs in one basket, and watch that basket!"

2. Don't go with the crowds. 

Following the herd into investment fads like the "Nifty Fifty" in the early 1970s or tech stocks in the late 1990s can be hazardous to your finances. On the other hand, looking in places where the throng has gone can be incredibly beneficial. Sir Isaac Newton often remarked that while he could calculate the motion of celestial bodies, he couldn't quantify the chaos of crowds. Fisher would wholeheartedly agree.

3. Don't get too worked up about eighths and quarters. 

You've located a firm that you believe will grow in the decades ahead, and the stock is presently trading at a decent price, thanks to your comprehensive study. Should you postpone or cancel your investment in order to wait for a price that is a few pennies lower than the present price? Fisher narrated the story of a savvy investor who wanted to buy stock in a company whose stock ended at $35.50 per share that day. The investor, on the other hand, refused to pay more than $35. The stock never traded for $35 again, rising in value to more than $500 per share over the next 25 years. In a futile attempt to save 50 cents a share, the investor missed out on a huge profit. Even Warren Buffett is susceptible to this type of blunder. Buffett started buying Wal-Mart many years ago but quit when the price rose somewhat. This blunder cost Berkshire Hathaway shareholders around $10 billion, according to Buffett. Fisher's counsel to not argue over eighths and quarters could have helped even the Oracle of Omaha.

Philip Fisher built a sterling record investing in young firms with high development potential over the course of his seven-decade career by following his 15-step process to choosing an investment company and avoiding his three stated traps. Since Fisher, several notable investors have followed in his footsteps to a successful career.

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