The Hindu Business Line : Fisher’s scuttlebutt

When it comes to effective long term investing, the quantitative aspects of a business are a great filter, however the intangible qualitative traits go a long way in deciding how the results turn out. Philip Fisher’s scuttlebutt technique is one that views a stock as a puzzle with pieces put together through questions on various qualitative aspects of a business. His approach points to the necessity for a strong marketing arm in a desirable investment candidate. Size is a major impediment to growth. The bigger a company gets, the harder it becomes for a new product release to have a major impact on sales growth.

This is the point where effective marketing plays a big role in deciding fortunes. For instance, agrochemicals major Rallis India has managed to fend off competition from several multinationals, with an extensive distribution network and a well-trained sales team that reaches out to the last mile in the rural areas. There are no metrics for an investor to measure an organisation’s sales and marketing capability. However, the marketing team’s work and feedback are crucial to keep consumers in the loop and to improve, develop and sell existing and new products and services.

Communicating to consumer

A company investing good time and money into building a knowledgeable sales team will be well rewarded for it. Communicating to the consumer the merits of a new product is crucial to its success. For instance, Cadbury India’s advertising campaigns in the 1990s worked to build very important ‘mindshare,’ which continues to benefit the product even today.

These apart, the idiosyncrasies of individual businesses, such as patents, intangible assets, unusual finance expenses, cutting-edge technology, and so on, require special consideration to gauge their impact on the corporate’s bottomline. Being prepared for possible surprises makes it easier to face them when they do come along. A management keeping a tight leash on expenses by monitoring costs gains a vital edge through margins, which are crucial to tide over bad times and increased competition. The operations aspect aside, one should always consider the effect of equity dilution through convertibles or additional fund-raising on their investments. A desirable investment should have appreciated to an extent where dilution is unlikely to hurt long-term returns for shareholders.

Traits to look for

In addition to providing a qualitative framework, Fisher provides simple tips for investors looking to build a portfolio:

Avoid companies with a very limited track record.

Annual reports should be complemented with research based on the ‘scuttlebutt’ technique.

A high price or P/E does not disqualify a company from being a good investment.

Diversification cannot protect you from reckless bets.

Avoid aping the crowd in making investment decisions; general market weakness provide opportunities to buy quality companies at reasonable prices.

To summarise Fisher’s investment thought in his own words “Technology is just one avenue to industry leadership. Developing a consumer ‘franchise’ is another. Service excellence is still another. Whatever the case, a strong ability to defend established markets against new competitors is essential for a sound investment.”

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