Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Cheap Is No Longer Good Enough

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

After a recent college reunion/homecoming, I had a chance to connect with fund manager Harry Long, the managing partner of Contrarian Industries. Long's company specializes in alternative asset management, algorithmic system research and development, and strategic consulting. Harry and I had a wide-ranging conversation about fundamental and systematic approaches to investing. Here's an edited portion of our exchange.

Toby Shute: You've described your investing approach as an attempt to marry the qualitative with the systematic. This reminds me of Warren Buffett's description of his investment strategy as 85% Benjamin Graham and 15% Philip Fisher. Let's start with Graham. What was his most important contribution to the investment field?

Harry Long: Graham's most important contribution to investing was the brilliant way he went about systematizing it. He gave very clear, mechanical rules, which outperform most discretionary human investors, even today.

If you look at services like, the American Institute for Individual Investors, and countless other services, they have taken his dictates from The Intelligent Investor and put them into a screen, which beats the pants off just about everything else developed since.

I think Joel Greenblatt is trying to follow in that tradition. We'll see how he stacks up to Graham. It's a noble pursuit.

Shute: Phil Fisher is known for focusing on the characteristics of a great growth franchise, some of which are impossible to quantify. Importantly, though, he weeded out potential investments using a 15-point checklist that he applied pretty strictly. Are checklists an effective way of systematizing a qualitatively oriented investment process?

Long: When it comes to checklists, I've seen many, but very few good ones. It's really multiple simple rules, when applied in combination, that get you performance. For instance, if investors automatically sold, or had a rule against investing in, any company with earnings decreases of greater than 14% in any quarter, they should have sold almost all bank stocks in 2008.

In practice, you'll find that a well-designed system, using objective data, will often key in on companies that Fisher would have appreciated qualitatively. You have to do both, but I would encourage your readers to find businesses with great metrics and then ask "why?" rather than trying to find great stories which may or may not be executing.

Shute: What else can investors learn from Phil Fisher?

Long: Most investors would do best to stick to Fisher's basic tenet -- buy businesses with strong competitive positions. As Fisher pointed out, if you avoid companies with unhealthy profit margins, you save yourself a lot of money, sleep, and heartache. On the other hand, there are occasionally companies such as Wal-Mart (NYSE: WMT  ) that have low margins on purpose.

As for his focus on R&D, it's pretty hit-or-miss. Apple (Nasdaq: AAPL  ) and Google (Nasdaq: GOOG  ) would be examples of great success stories. However, while the Intels (Nasdaq: INTC  ) of the world had great runs, they are still plowing billions into R&D and hitting a growth wall.

Investors should have a diversified portfolio of quality. Cheap is no longer good enough -- investors need to search for cheap and excellent. Competition is simply too brutal, unless you are in a position to take control of ailing firms.

Shute: Can you apply this advice to a particular sector?

Long: In the financial sector, rather than owning banks, which risk capital through lending and have infinite competition, [investors] could own something like MSCI, which gets fee income from its MSCI indices. It doesn't risk capital. Simple business -- you hand me money, I hand you information -- and it has very little strong competition in the index business. MasterCard (NYSE: MA  ) and Visa (NYSE: V  ) also don't have the same balance-sheet risk as an issuer like American Express.

I could go on and on. Just because you're investing in the financial sector, you don't have to be conventional.

[Michael] Bloomberg understood that the way to be successful is to sell the miners their picks and shovels. Why does everyone spend time studying banks, rather than his example? Why aren't people obsessed with studying FactSet Research Systems (NYSE: FDS  ) ? Maybe it's a tabloid phenomenon where success is simply too boring.

Stay tuned as Toby's conversation with Harry Long continues tomorrow. Harry Long's comments are purely his personal opinions and should not be construed as financial or investment advice.

So, Fool, how do you weigh the quantitative and qualitative aspects of a business in your own investing decisions? Share your philosophy in the comments section below.

Intel and Wal-Mart are Motley Fool Inside Value picks. Apple is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of FactSet Research Systems, which is a Motley Fool Rule Breakers selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (36)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1081655, ~/Articles/ArticleHandler.aspx, 10/24/2016 7:07:02 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:00 PM
AAPL $116.60 Down -0.46 -0.39%
Apple CAPS Rating: ****
FDS $154.92 Up +1.61 +1.05%
FactSet Research S… CAPS Rating: ****
GOOGL $824.06 Up +2.43 +0.30%
Alphabet (A shares… CAPS Rating: *****
INTC $35.15 Down -0.28 -0.79%
Intel CAPS Rating: ****
MA $102.85 Up +0.30 +0.29%
MasterCard CAPS Rating: *****
V $82.35 Down -0.15 -0.18%
Visa CAPS Rating: *****
WMT $68.34 Down -0.39 -0.57%
Wal-Mart Stores CAPS Rating: ***