The Hindu Business Line : Uncommon strategy of Philip Fisher

It is refreshing to read a book on investments where the word ’company’ is used more often than the word ’stock market’. Philip Fisher’s book Common Stocks and Uncommon Profits focuses on strategy and the economic prism through which we can view the stocks we buy. Fisher was one of the earliest exponents of what is now termed growth investing — identifying qualitative aspects of a business which drive growth. As an inv estment advisor to several clients, his thorough research resulted in picks such as Motorola, Dow Chemical, Texas Instruments in the 1950s. He held such stocks for decades, trouncing the index with minimum trading.

Fisher’s lucid articulation of the concept is sure to convince any hard-hearted quant into looking for signs of quality. In the end, that’s exactly what Fisher wants — investors looking out for companies with exceptional qualitative traits at a reasonable price rather than mediocre enterprises at bargain prices with limited scope for appreciation. His methodology received a thumbs-up from several venerable investors, with Warren Buffett famously describing his method as 15 per cent Fisher and 85 per cent Graham (Benjamin Graham). His method, unlike Benjamin Graham’s, involves building insight into a business by talking to all parties involved.

SCUTTLEBUTT

Fisher believes that, to gain a complete picture of a company’s worth as a truly long-term investment, one must look beyond just the company’s accounts. Investors must identify and explore the qualitative traits of a company which can propel growth. Towards this end, Fisher recommends investors talk to suppliers, customers, competitors, government officials, reliable former employees and researchers to gain insight into what a company is doing right. This method he calls ‘scuttlebutt’. Scuttlebutt, when applied with incisive questions, can provide answers which provide a great deal of insight into a company and the industry it operates in. As Fisher says, “the successful investor is an individual who is inherently interested in business problems”. Fisher therefore provides 15 points — a solid foundation investors can build on.

FISHER’S 15 POINTS

Now, these points can be painstakingly difficult, not to mention time-consuming to complete, but they come with a great deal of intellectual merit. They cover a gamut of issues such as the company’s products, management, employee relations, research and development (R&D), sales and financial systems.

The first two points deal with the company’s current and future product line. Can the company’s current product or service line continue to provide reasonable profits for the years to come, rather than a boost through unsustainable cost cutting or a single year’s extraordinary sales? The next question to ask is, “does the management have the foresight to create products or services to pick up when growth in the existing line tapers off?”

Apple Computers is an example of a company constantly innovating with periodical new product releases which keep consumers excited. To cite an industry example, drug pipeline development, though expensive to develop with huge gestation periods and low odds of success, is the sole determinant of future success for pharmaceutical companies.

Effective managements take the long term view, sometimes at the expense of short term profitability. The quality of the management in terms of integrity, clarity and depth are therefore crucial to the sustained growth of a company. An honest and able management which clearly states facts and long term expectations to shareholders can allay fears which may arise in the bumpy short term. A capable management also understands the need to nurture young and able managers.

Investing in processes such as R&D and sales force is absolutely vital. Without effective R&D and sales, a company which is just a low cost producer is a sitting duck. Motorola, whose cellular phone market share has been on the decline since the one-hit wonder ‘MotoRazr’ has not been followed up with products of the same class. Effective R&D can also help boost margins through improved operations. This leads to the next question as to how well planned and coordinated the R&D and sales are to each other and the rest of the organisation. The magnitude and relationship of ongoing R&D to existing and future lines needs to be considered to gauge the impact of the company’s product pipeline on future sales. Fisher’s take on sales capabilities, costs and markets, make for a comprehensive framework on investing. Stay tuned for more on Fisher…

More Stories on : Stock Markets | Investments | Books

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page