Philip Fisher is often revered as a pioneer in the area of technology and growth stocks. He was an inspiration to Warren Buffett, among many others, but while their styles have some common characteristics they also differ in many ways.
Fisher was born in 1907, and reportedly dropped out of the newly-created business school at Stanford University in California at the age of 21, to work as a securities analyst in San Francisco. In 1931, at a very troubled time on the stock market, he founded Fisher & Company, a money management business.
Common Stocks and Uncommon Profits
Keeping a relatively low profile for much of his career, he wrote his first book, Common Stocks and Uncommon Profits, in 1958. This was the first book on investment to make it onto the New York Times bestseller list.
The book has become a bible for growth-focused investors, and is particularly well known for the fifteen fundamental questions that we should ask about any potential investment:
1. Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?
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 labour 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 a 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 the 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?
Something that’s very obvious as you consider these questions is that the answers are rarely to be found in a company report or convenient database. They are qualitative questions with subjective answers. To some extent they can be answered by attending AGMs and meeting with the management.
Fisher’s main source of information, though, was a wide network of contacts that he could talk to about these issues. He regarded this sort of direct and unpublished information — what he termed ‘scuttlebutt’ — as an invaluable resource in investment decisions. What do employees think of management? How is the company viewed by its competitors? What new ideas is it working on?
This all goes to the heart of thoroughly understanding the company, and if you spot a good one, and especially a good small company, before the rest of the market you will do very well. Fisher was operating before the era of internet discussion boards, but these serve as a very useful way for investors to share first-hand knowledge, with the obvious caveats that not everyone on a discussion board is impartial or telling the truth.
It’s important to note that once he found a company that met his requirements, he didn’t flinch from paying a high multiple to own a piece of it. His investment horizon, ideally, was forever: “If the job has been correctly done when stock is purchased, the time to sell it is almost never.” So finding a company that could sustain exceptional growth over a long period would justify an initially ‘expensive’ purchase.
This policy proved profitable with companies like Motorola, which he bought in 1955 and never sold, and Texas Instruments, which he bought in 1956 long before it went public.
Finding these sorts of companies is not easy, of course. “Great stocks are extremely hard to find. If they weren’t, then everyone would own them.” And for that reason, Fisher saw no real benefit to diversification. His policy was to take the trouble to track down these gems, and then make meaningful investments in them when you find them.
Philip Fisher eventually retired in 1999, at the age of 91, and passed away in 2004. His son, Ken, is a very successful investor in his own right, and I’ll be taking a look at his career in a future Investment Greats article.