Stocks, Forex and Other Money Matters

Philip Fisher began his investing career with a San Francisco bank, but in 1931 ventured out on his own confident that all investors would be looking for a new advisor with the 1929 Great Depression crash still fresh in their minds. Fisher built his early portfolio around just four stocks: FMC, Dow Chemical, Texas Instruments, and Motorola. He didn’t want a lot of investments, just a few outstanding ones.

Fisher’s general feeling about investments that are of interest to him is that the company in question should combine outstanding business management with a strong technological lead in most of what it does. Fisher’s key idea is that you can make a lot of money by investing in an outstanding enterprise and holding it for years and years as it becomes bigger and better. At the end your share in the enterprise is worth a great deal more than at the beginning. Almost certainly the market price of your share will rise to reflect its higher intrinsic worth. And certainly you should concentrate on growth in intrinsic worth: without that there’s no reason for the stock to go up at all.

He ridicules short-term thinking. Pursuing short-term goals Fisher regards as almost the worst possible mistake for a company. He therefore insists that management must first and foremost be working to build the company over the long-term. Growth happens because management is profoundly dedicated to bringing it about and directs all its activities to that objective, and as long as it does this successfully, the investor can stay on board.

One of Fisher’s most notable utterances is on this subject: If the job has been correctly done when a common stock is purchased, the time to sell it is– almost never. He gives two exceptions: first, if it turns out that you made a mistake in your original appraisal; second, if the company ceases to qualify under the same appraisal method. The old management may lose its drive or newer management may not be as able. Alternatively, a company may get so big in its own market that it cannot do much better than its industry, or indeed than the economy as a whole.

A third exception, which Fisher considers rarely valid, is that you discover a particularly attractive new opportunity– such as a company with great promise of a sustained 20% annual earnings gain– and, to buy it, you decide to cut back on a holding with lesser growth prospects. However, you probably know less about the new company than the old one, about which you have been learning more and more for years, so there is a risk of making a mistake. You cannot, after all, know almost everything that could be important about more than a few companies. Those years of progressively greater familiarity, Fisher urges, should not be thrown away.

He also argues that you should not sell because you think that a stock is too high-priced– has gotten ahead of itself– or because the whole market is due for a slide. Selling for either reason implies that you are clever enough to buy the stock back more cheaply later. And in addition you have the capital gains tax to pay. After all, if you have chosen the company properly in the first place, with a reasonable prospect that in ten years, say, the stock will have tripled or quadrupled, is it so important that it’s 35% overpriced today? And there’s always the possibility that the stock price reflects good news you don’t know about yet.

Silliest of all, says Fisher, is selling out just because a stock has gone up a lot. The truly great company– the only kind he is interested in buying– will grow indefinitely, and its stock likewise. That it has advanced substantially since purchase only means that everything is going just as it should.

Fisher redefines the word conservative around this concept. To him, a conservative investor is one who makes his capital grow in a practical, realizable way, not in a way that can’t succeed. People often describe large, well-known companies as conservative investments. But for Fisher, old and famous companies that have passed their prime and are losing ground in the jungle of international business are by no means conservative holdings. Rather, the conservative investor is one who owns winners: dynamic, well-managed enterprises that because they are well situated and do almost everything right continue to prosper, grow, and build value year after year. The owners of such companies don’t have to worry about market fluctuations, since the underlying assets are building: Things are going the right way. Market recognition will follow.

Fisher’s first substantive chapter in his classic text, Common Stocks and Uncommon Profits dwells on the importance of scuttlebut– which he also calls the business grapevine– in investing. The theme recurs throughout his writing. In fact, Fisher suggests no other source of information for a number of the points he says a prudent investor must consider, such as management integrity, long-range planning, cost controls, and the effectiveness of a company’s research program, all of which are hard to determine from the public figures.

Outstanding Companies

In his first book, Fisher describes fifteen characterists of an outstanding company, and in his second he touches on several more. I think one can discern about 20 in all, depending on what is considered a separate category. Though not presented consistently in Fisher’s two books, his criteria can be grouped under two main categories: qualities of management and characteristics of the business itself.

Characteristics of an attractive business include growth from existing products and from new ones; a high profit margin and return on capital, together with favorable trends for both; effective research; a superior sales organization; a leading industry position giving advantages of scale; and a valid franchise– proprietary products or services.

Management characteristics include integrity, implying conservative accounting; accessibility; an orientation toward long-range results, if necessary at the expense of this quarter’s bottom line, without equity dilution; a recognition of the pervasiveness of change; excellent financial controls; multidisciplinary skills where appropriate; the special skills associated with particular industries; and good personnel policies, including continuing management training.

In discussing profit margins, Fisher makes a point that investors sometimes forget: Exceptionally high profit margins can be a honeypot to attract hungry competitors. The safest position may be to have only a small edge on the competition in profit margins, plus a higher turnover, because that leaves little incentive for new competition to move in on you. Fisher ridicules the notion, sometimes put forward by brokerage reports, that a statistically cheaper number two company may be a more attractive investment because it has greater possibilities. A fully installed dominant company– a GE or Merck– is exceedingly hard to displace, as long as management remains alert.

Fisher insists on integrity in management. Insiders have any number of opportunities to benefit themselves at their shareholders’ expense, both in material terms and by deceiving them about the prospects for the company. A greedy management’s most common abuse is issuing itself overly generous stock options when the company’s stock happens to be at a low point– selling below book value, say. Time passes, the stock returns to a normal level, and through no merit of its own, management has extracted millions of dollars of value from the shareholders.

Fisher’s investing technique will be very difficult for most investors to emulate. He proposes three successive phases in analyzing a company properly: absorbing the available printed material, triangulating through business sources, and finally visits to management. Once convinced of the quality of the business and its management, Fisher further advises three buying points to accumulate shares: first, buy when the start-up period of a substantial new plant–which sometimes lasts for months and includes a special sales effort for the new product involved– has depressed earnings and discouraged investors. Second, is on bad corporate news: a strike, a marketing error, or some other temporary misfortune.

The third opportunity to buy on favorable terms arises in a capital intensive industry, such as chemicals, where an unusually large investment in plant is required. Sometimes after a product has been in production for a while engineers figure out how to increase their output substantially by spending a relatively modest amount of additional capital. This may produce a significant improvement in the company’s profits. Until the stock advances to reflect this prospect there should be a buying opportunity. Fisher also mentions that one should not hesitate to buy on a war scare. During this century, almost every time American forces have become engaged somewhere in the world, or there has been a serious danger that they would, the stock market has fallen, and every time it has recovered. Perhaps the same applies to a SARS scare.

Credits: Much of this article was extracted from the book, Money Masters of Our Time (John Train, 2000).

Popularity: 16% [?]