Foolish Philip Fisher
by Phil Weiss
TOWACO, NJ (Sept. 15, 1998) -- A question that comes up from time to time here is whether or not the Cash-King investment philosophy has been back tested. I can't say that it has, but what I can say is that some of the basic tenets of the philosophy can be found in the writings of one of the most influential investors of all time ï¿½ Philip Fisher.
For those of you not familiar with Fisher, he was a champion of long-term investing and one who was much admired by Warren Buffett.
I once asked Tom if Fisher's writings were the basis for the Cash-King investment philosophy. He told me that they weren't, but they easily could have been. Fisher's best known book is Common Stocks and Uncommon Profits. The book also includes Conservative Investors Sleep Well and Developing an Investment Philosophy. I think that all three of these works should be part of every Cash-King investor's library. You will make few better investments than these.
One need to look no further than the first chapter of Common Stocks to come across a couple of statements that a Cash-King investor would readily believe. On page seven, Fisher writes, "Even in these earlier times , finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear."
Near the end of this chapter, Fisher also talks about how the greatest investment rewards are realized by those who, whether through good luck or good sense, are able to find the companies that over time can outgrow their industry in terms of both sales and profits. By just the 15th page of the book, Fisher has already unlocked the key to the public markets -- emphasizing great businesses for the long haul.
Many readers feel that the second chapter provides the most important three pages in the book. This chapter discusses the idea of scuttlebutt, a concept that Louis Corrigan covered very well in the Evening News last month (Corrigan on Scuttlebutt). As a result, I'm not going to spend a lot of time on scuttlebutt here, but I do believe it's important. As a matter of fact, I believe that the Fool's message boards offer a great way for today's investor to find some of the scuttlebutt on the companies in which they wish to invest. Fisher would love The Motley Fool boards. Another way in which an investor can get scuttlebutt is by placing a call to a company's investor relations department.
In the book's third chapter, Fisher lays out the fifteen qualities to look for in any potential investment. Although a company doesn't have to meet each of these points, it's unlikely that it would meet Fisher's definition of a worthwhile investment if it failed to qualify on more than a few. Similar points to those of our Cash-King criteria (Step 6) can be found by reading through Fisher's 15 points.
Although I believe each of Fisher's points are important, I'm just going to mention a little about those that relate most directly to our Cash-King criteria. Fisher's first two points are closely related to the fifth characteristic that we look for in a company -- i.e., a direction that exceeds the location. In these first two points, Fisher is concerned with the company's prospects for increased sales and management's willingness to continually look towards the future rather than resting on its laurels.
In Fisher's fifth and sixth points, he looks for a worthwhile profit margin as well as an indication that a company is looking to maintain or improve such margins. In the C-K portfolio, we've quantified this by searching for companies with a net profit margin of at least 7%.
Fisher saves his most important point until the end, however. In the 15th point, he asks the question: "Does the company have a management of unquestionable integrity?" He flatly states that no matter how high a company may rate with regards to all other matters, if management's trusteeship for its shareholders is questionable, then an investor should never seriously consider participating in such an enterprise. This is a point with which I agree completely. It's why when a company is found to have misrepresented earnings or had other accounting problems, I simply sell it immediately. No questions asked, no looking back.
The next topic that Fisher addresses is the application of these principles to the investor's needs. There's a point in this chapter with which I don't agree. Fisher comes down strongly in favor of the need for individual investors to obtain expert help with their investments. Of course, this book was written in the 1950s when it was much more difficult for individual investors to obtain information. So, I'm certainly willing to forgive Fisher for this one apparent transgression from Folly, especially because Fisher then makes note of the large number of incompetent advisors.
The most important issue that Fisher addresses in this chapter is his aversion to finding the best bargain. He believes that even the most skilled bargain hunter will end up with a profit that is much smaller than that of the investor that uses his intelligence to appraise the business characteristics of superbly-managed growth companies. I feel quite comfortable in saying that Fisher would come out on the same side of the Quality vs. Value equation (Step 7) as the managers of this portfolio.
One of the primary reasons that Fisher gives for this conclusion is that great growth stocks show gains in the hundreds of percent each decade while it is very rare that one finds a stock that is more than 50% on sale.
The next issue that Fisher addresses is timing. He comes out against the idea of market timing, as he believes that buying and holding the right stocks will always produce long-term profit. As a general rule, he believes such profit will be above average. Fisher comes down most strongly against the use of economic data as an aid in timing stock purchases. Why? Because of the lack of accountability applied to economists (then and today).
Fisher does believe, however, that there can be times when it is better to purchase a stock -- such as when it is bringing a new plant or product on line (read: Viagra). He says this because such events often lead to a company incurring some additional costs resulting in lower profits until economies of scale and efficiencies are realized.
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.
I'll be back tomorrow to discuss Fisher's thoughts on selling stocks as well a few of his don'ts for investors.
Phil Weiss, Fool
Stock Change Bid AXP +3 3/8 85.00 CHV + 1/8 82.63 CSCO +2 15/16 96.63 KO -2 5/16 61.00 GPS - 7/16 59.75 EK +1 1/2 81.81 XON + 13/16 71.31 GM - 9/16 58.88 INTC --- 85.81 MSFT +2 5/16 108.31 PFE - 11/16 102.56 SGP +1 3/4 99.38 TROW + 3/16 29.69
Day Month Year History C-K 0.75% 9.69% 8.09% 8.09% S&P 500 0.77% 8.37% 3.15% 3.15% Nasdaq 0.74% 11.93% 0.71% 0.71% Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 108.31 38.39% 2/3/98 22 Pfizer 82.30 102.56 24.62% 5/1/98 37 Gap Inc. 51.09 59.75 16.95% 6/23/98 23 Cisco Syst 86.35 96.63 11.90% 8/21/98 22 Schering P 95.99 99.38 3.53% 2/13/98 22 Intel 84.67 85.81 1.34% 2/27/98 27 Coca-Cola 69.11 61.00 -11.73% 2/6/98 56 T. Rowe Pr 33.67 29.69 -11.84% 5/26/98 18 AmExpress 104.07 85.00 -18.32% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 63.15 81.81 29.56% 3/12/98 20 Exxon 64.34 71.31 10.85% 3/12/98 15 Chevron 83.34 82.63 -0.86% 3/12/98 17 General Mo 72.41 58.88 -18.69% Cash-King Stocks Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 2599.50 $721.05 2/3/98 22 Pfizer 1810.58 2256.38 $445.80 5/1/98 37 Gap Inc. 1890.33 2210.75 $320.42 6/23/98 23 Cisco Syst 1985.95 2222.38 $236.43 8/21/98 22 Schering P 2111.7 2186.25 $74.55 2/13/98 22 Intel 1862.83 1887.88 $25.05 2/27/98 27 Coca-Cola 1865.89 1647.00 -$218.89 2/6/98 56 T. Rowe Pr 1885.70 1662.50 -$223.20 5/26/98 18 AmExpress 1873.20 1530.00 -$343.20 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 1262.95 1636.25 $373.30 3/12/98 20 Exxon 1286.70 1426.25 $139.55 3/12/98 15 Chevron 1250.14 1239.38 -$10.77 3/12/98 17 General Mo 1230.89 1000.88 -$230.02 CASH $48.07 TOTAL $23553.45 *Please note: On 8/4/98 $2,000 cash was added to the
portfolio for future investment. This will be reflected
in the numbers as soon as possible.
*The year for the S&P and Nasdaq will be as of 02/03/98