Philip Fisher was an investor who began his career in the early 1930s. He is remembered as being one of the greatest investors of all time and he helped teach a young Warren Buffett. He is famous for his fifteen points to finding stocks. He is one of the founders of value investing, finding undervalued stocks and holding them for long periods of time.
One of his most famous quotes came about when he was approached and questioned on when the right time to sell a stock was. His simple reply was "almost never."
Fisher followed a fairly simple principle of investing in great companies that you understand with good prospects of growth and holding them for long periods of time. He bought Motorola in 1955 while it was still a radio company and kept it in his portfolio until he died in 2004, almost a half-century later. He believed in investing in growth stocks, which grow at high rates year after year. The small cap companies were his favorites because their potential for growth is enormous.
Fisher broke down his method in his book Common Stock and Uncommon Profits. He titles his method "Fifteen Points to Look For in a Common Stock."
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 must create great products or services that will grow in popularity for 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? Is the management of the company driven to continue expanding their company even if their current products have reached their full potential?
3. How effective are the company’s research-and-development efforts in relation to its size? In order to keep great products hitting the market, the company’s research and development must be active in creating new products.
4. Does the company have an above-average sales organization? No matter how great a product is, people need to know about it before they can buy it.
5. Does the company have a worthwhile profit margin? A company must be profiting of it’s growth in sales in order for the stock to be successful.
6. What is the company doing to maintain or improve profit margins? Companies must constantly be striving for high profit margins in order to make their company ultimately profitable.
7. Does the company have outstanding labor and personnel relations? How does the company treat it’s employees, happy employees will work better than unhappy ones.
8. Does the company have outstanding executive relations? How does the company treat it’s executives? Happy executives will run a company better than unhappy ones will.
9. Does the company have depth to its management? In order for a company to expand it is important that top officials delegate appropriate amounts of responsibility to lower level managers. Top executives cannot make every important decision in large companies and therefore must have depth in management.
10. How good are the company’s cost analysis and accounting controls? Businesses need to be able to closely monitor their costs in order to grow and improve. Although it is difficult to tell whether or not a company is doing well on this point, it is much easier to tell if a company is not.
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 requires that the investors know the industry of the company they are investing in. The company must have distinct industry advantages over competitors of the same industry.
12. Does the company have a short range or long range outlook in regards to profits? In the long run a company with a long range outlook on profits will be ultimately more successful. A short range company may make foolish decisions in order to raise earning on the short term but harm their growth in the long run.
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?As an investor you want to invest in a company that has the capacity to largely fund itself through cash or borrowing in order to create growth in a company.
14. Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur? Although it would be nice to find a company that never runs into pitfalls or occassional bad news, it rarely occurs. Investors should consider whether or not the management of the company will be honest with the public about what is going on in the company, good and bad.
15. Does the company have a management of unquestionable integrity? Fisher was atimate about not investing in a company whose integrity is even slightly questionnable. Enron is an excellent example of this, you do not want to be a victim of the next Enron scandle.
Along with Fisher’s fifteen points, he also illustrates a short list of warnings.
1. Don’t Over Stress Diversification. Fisher believed that if you picked great companies, you don’t have to worry about diversification. If you become too diversified, you will dilute any of your great earnings.
2. Don’t Follow the Crowd. In the late 1990s, everyone was buying tech stocks. The tech industry was booming and soon enough it crashed leaving many with disappointing losses. It is better to investigate companies on your own and invest in them wisely based on your own judgment.
3. Don’t Quibble Over Eights and Quarters. If a stock is 50 cents more than your desired buying price, don’t let the opportunity to buy a great stock pass you by. Warren Buffet once said "It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Fisher would have definitely agreed.
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