More on Philip Fisher
by Phil Weiss
TOWACO, NJ (Sept. 16, 1998) -- Last night I began a discussion on the writings of preeminent buy and hold investor Philip Fisher. Tonight I'm going to continue the discussion with some of Fisher's thoughts on selling stocks as well as some of his don'ts for investors. Selling stocks is a subject that I briefly addressed in my report of March 11 (The Cash-King Portfolio: When to Sell). Some day soon an expanded version will appear here as the 12th Step to Cash-King investing.
In Common Stocks, Fisher does not discuss the personal reasons one may have for selling a stock. Instead he addresses only those reasons related to obtaining the greatest possible return from one's total investment dollars.
The first reason sounds simple, but is probably the hardest for most of us to come to terms with. That's because it involves admitting that a mistake was made when the stock was originally purchased. In trying to explain why we should be willing to admit our mistakes, Fisher says that "more money has probably been lost by investors holding a stock that they really did not want until they could 'at least come out even' than from any other single reason." If this is combined with the potential profits that are lost by not redeploying the funds into another better investment, then the cost of not admitting the mistake becomes even worse.
Fisher's second reason for selling occurs when, after the passage of time, the company no longer qualifies in terms of the fifteen points under which it was originally selected for purchase. The third reason is that due to the limited amount of funds one may have to invest, the investor believes that the potential growth that could be realized by selling a current holding and reinvesting the proceeds in another stock will result in a greater return. Fisher warns that one has to be very careful in making this third decision.
He sums up his thoughts on selling by saying that "if the job has been correctly done when a common stock is purchased, the time to sell it is � almost never."
Fisher also has a short chapter on dividends in which, like the managers of this portfolio, he downplays the value of dividends to the long-term investor. He does make the interesting point, however, that even though dividends are an ancillary consideration for most growth oriented investors, over time, the investor in growth stocks will see much greater dividend growth than the investor who purchases stocks focusing on the current yield. Pretty contrary thinking -- another passage that makes me shout out that if you're a regular reader of this portfolio, you really should read Fisher's work.
The next two chapters offer some of Fisher's thoughts on things about which investors should be wary. The first warning he issues is to stay away from companies that don't have a history of at least 2 to 3 years of commercial operations in the public markets and a year of operating profits. His reason for this is primarily based upon his belief that until then, all the major functions of its business are not fully operational. Even more importantly, until the company is running on all cylinders it is difficult to know what its strengths and weaknesses are. Although there are plenty of successful investments, like Amazon.com (Nasdaq: AMZN), which do not meet Fisher's operational criteria, there are numerous spectacular companies that are already established. An investor can buy them, while she waits for embryonic companies to grow up into leaders.
Fisher also counsels against buying stock in a company just because you like the tone of its annual report. It is quite possible that the glossy pages in an annual report are written by public relations people whose primary goal is to leave the reader with a positive impression about the company. Personally, when I read an annual report I usually skip over all the glossy pages and go right to the second half of the report, where lies the financial data and audited information.
Another warning that Fisher makes is that it is not wise (Foolish?) to assume that just because a stock has a high price-to-earnings ratio that further growth has already been discounted into the price. He offers an example where a fictitious company has been trading at twice the market's P/E for thirty years. He then goes on to say that if this company continues to perform in the future as it has in the past, there is no reason that the relationship of its P/E as compared to the market's P/E should change. This is something with which I agree (with some modification), as there are a number of real life examples of such stocks in our portfolio.
Additionally, Fisher reminds us that it is not worth quibbling over eighth and quarter points when buying a stock, particularly when we are investing for the long term. He provides an example where an investor's stubborn refusal to pay an extra $50 for 100 shares of stock cost him $46,500 in gains (or 930 times the $50 that he held out to save!).
Fisher also has some interesting thoughts on diversification. He reminds us that we can even diversify within the companies that we own. For example, a company that produces a number of different products may face different manufacturing issues, sell in different markets, and have different competitors depending upon which product is involved.
He talks about three types of diversification. The first relates to large company (A) stocks (Dow, DuPont and IBM are examples given in the book). Fisher says that the investor's minimum goal might be to own five such stocks in all; i.e., 20% of one's original investment could be in each.
The second portfolio that Fisher mentions is one made up of Cash-Kings and Cash-Princes (or A and B stocks). He feels that two B companies should be owned to balance each single A stock owned. Eight to ten percent of the total amount invested can be invested in each B stock, for a total of up to ten.
In his third portfolio, Fisher does allow for the possibility of owning small companies with potentially great futures. He has two caveats for owning such companies: Never invest any funds in such stocks that you cannot afford to lose and never at the time of investment put more than 5% of your available funds into any such company.
Fisher strongly believes that an investor should not own a very long list of stocks. He believes that such a list is more indicative of an investor that is unsure of himself than one that is brilliant. In Cash-King land, we expect to never hold more than twenty companies (a figure that includes our rotation of the four Foolish-Four companies).
That's all we have time for tonight. If you'd like to continue the discussion or have any questions, please take them to our Cash-King Companies Message Folder linked below. Tomorrow night I'll turn the discussion to Fisher's Conservative Investors Sleep Well.
Day Month Year History C-K 0.22% 9.93% 8.33% 8.33% S&P 500 0.75% 9.19% 3.92% 3.92% Nasdaq 0.70% 12.72% 1.41% 1.41% Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 108.19 38.23% 2/3/98 22 Pfizer 82.30 101.50 23.33% 5/1/98 37 Gap Inc. 51.09 59.63 16.71% 6/23/98 34.5 Cisco Syst 57.56 64.63 12.27% 8/21/98 22 Schering P 95.99 99.75 3.92% 2/13/98 22 Intel 84.67 85.06 0.46% 2/27/98 27 Coca-Cola 69.11 62.44 -9.65% 2/6/98 56 T. Rowe Pr 33.67 29.19 -13.32% 5/26/98 18 AmExpress 104.07 87.00 -16.40% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 63.15 84.88 34.41% 3/12/98 20 Exxon 64.34 69.81 8.51% 3/12/98 15 Chevron 83.34 82.75 -0.71% 3/12/98 17 General Mo 72.41 58.81 -18.77% Cash-King Stocks Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 2596.50 $718.05 2/3/98 22 Pfizer 1810.58 2233.00 $422.42 5/1/98 37 Gap Inc. 1890.33 2206.13 $315.80 6/23/98 34.5 Cisco Syst 1985.95 2229.56 $243.61 8/21/98 22 Schering P 2111.7 2194.50 $82.80 2/13/98 22 Intel 1862.83 1871.38 $8.55 2/27/98 27 Coca-Cola 1865.89 1685.81 -$180.08 2/6/98 56 T. Rowe Pr 1885.70 1634.50 -$251.20 5/26/98 18 AmExpress 1873.20 1566.00 -$307.20 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 1262.95 1697.50 $434.55 3/12/98 20 Exxon 1286.70 1396.25 $109.55 3/12/98 15 Chevron 1250.14 1241.25 -$8.89 3/12/98 17 General Mo 1230.89 999.81 -$231.08 CASH $48.07 TOTAL $23600.26 *Please note: On 8/4/98 $2,000 cash was added to the