Fisher's 8 Principles
by Phil Weiss
TOWACO, NJ (Sept. 18, 1998) -- Tonight I'm going to conclude my discussion of the works of Philip Fisher. I encourage each Cash-King investor to take the time to read Fisher's writings for themselves. They are filled with many more pearls of wisdom than I could possibly include in four nights of reports.
Last night we discussed Conservative Investors Sleep Well. Tonight we're going to discuss Developing an Investment Philosophy, which was written in 1979.
Fisher's overall philosophy revolves around being invested in a very small number of companies that, due to the characteristics of their management, should grow both sales and profits at a faster rate than their industry as a whole. This growth should be accomplished at a relatively small amount of risk to the investor.
The management of a company invested in by Fisher must have in place a policy that will enable it to meet Fisher's growth objectives and a willingness to forego short term profits in exchange for greater long-term gains. Additionally, its management must be able to recognize if and when mistakes are made and take remedial action to correct such mistakes.
The majority of Fisher's investments are also concentrated among manufacturing companies that use leading edge technology and superior business judgement to accomplish its goals. This was primarily because these were the businesses that Fisher believed he understood the best. He did, however, believe that his theories could be applied to other businesses as well.
Fisher devotes much of this book to explaining how his investment philosophy came into being. His interest in investing actually started when he was in grammar school. As a minor, Fisher was able to make some money during the roaring bull market of the middle 1920s.
Among the earliest lessons that Fisher learned was the importance of the marketing organization to the success of a business and the need to learn from those that had direct familiarity with the company and its affairs. Then, as the market began to recover from the crash of 1929, Fisher first learned that a company's current price earnings ratio was not nearly as important as the ratio of its price to earnings a few years into the future.
It was also in the early 1930s that Fisher came to realize that there are two "people" traits that are absolutely essential for successful investment. The first is business ability. The second is integrity, both in terms of the honesty and personal decency of the people that run the company. If the owners and managers of the business do not have a "genuine sense of trusteeship for the stockholders, sooner or later the stockholders may fail to receive a significant part of what is justly due to them."
When it comes to patience and performance, one thing that Fisher stressed to his clients was the importance of judging results based on a three-year period rather than a month or a year. His clients were told that if he had not produced worthwhile performance within three years (including all fees) then they should fire him. It's a shame that today's Wise analysts do not have such a stand up philosophy.
Fisher applied a similar three-year rule to his stock holdings. Fisher sold very rarely due solely to his three-year rule. He said that he was unable to recall a single instance where the performance of a stock he'd sold after three years had made him wish he'd held on. Close scrutiny over a period of a few years made the qualities (and lack thereof) of the business plainly evident to him. On those occasions where he sold in less than 3 years, it was primarily due to obtaining highly worrisome insights into the way the company was being run.
It was at the end of World War II that Fisher gave up on the idea of market timing and decided to focus his efforts solely on making major gains over the long haul.
Fisher summarized his investment philosophy into eight points:
1. Buy stocks of companies that have disciplined plans for achieving dramatic long-term growth in both profits and revenues. Such companies must also have inherent qualities that make it difficult for new entrants into that business to share in such growth.
2. Fisher prefers to focus on such companies when they are out of favor; i.e., market conditions are not favorable or the financial community does not properly perceive the true worth of such companies.
3. Hold the stocks that you buy until there has been either a fundamental change in the company's nature or it has grown to a point where it will no longer be growing at a faster rate than the economy as a whole. He also says that one should never sell his most attractive stocks for short-term reasons.
4. If your primary investment goal is long-term appreciation of capital, then you should de-emphasize the importance of dividends.
5. Recognize that making mistakes is an inherent cost of investing. The important thing is that the investor must be able to recognize such mistakes as soon as possible, understand their causes, and learn from them so that they are not repeated. A willingness to take small losses in some stocks while letting profits grow bigger and bigger in your more promising stocks is a sign of good investment management. Don't just take profits for the satisfaction of taking them.
6. Realize that there are a relatively small number of truly outstanding companies. Your funds should be concentrated in the most desirable opportunities. "For individuals (in possible contrast to institutions and certain types of funds), any holding of over twenty different stocks is a sign of financial incompetence. Ten or twelve is usually a better number."
7. An important ingredient of successful investing is to have more knowledge and apply your judgment after thoroughly evaluating specific situations. You should also have the moral courage to act against the crowd when your judgment tells you that you are right.
8. One of the basic rules of life also applies to successful investing -- success is highly dependent upon a combination of hard work, intelligence, and honesty.
Fisher concludes this book with the following paragraph:
"While good fortune will always play some part in managing common stock portfolios, luck tends to even out. Sustained success requires skill and consistent application of sound principles. Within the framework of my eight guidelines, I believe that the future will largely belong to those who, through self-discipline, make the effort to achieve it."
I hope that you have enjoyed sharing the wisdom of Philip Fisher with me during my reports this week. I believe that if we were to decide that there is a "Father of Cash-King Investing" Fisher would be among the prime candidates to take that title. If you'd like to continue this week's discussion or have any questions, please take them to our Cash-King Companies Message Folder linked below.
Have a Foolish weekend.
Stock Change Bid AXP + 5/8 84.50 CHV +1 7/8 83.38 CSCO - 7/16 61.06 KO + 9/16 61.38 GPS + 11/16 60.50 EK + 13/16 85.00 XON - 7/16 68.13 GM - 3/8 57.06 INTC --- 83.00 MSFT + 7/16 105.38 PFE -2 1/4 97.00 SGP + 3/8 97.81 TROW + 17/32 28.66
Day Month Year History C-K 0.06% 7.58% 6.01% 6.01% S&P 500 0.12% 6.53% 1.40% 1.40% Nasdaq 1.06% 10.98% (0.15%) (0.15%) Cash-King Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 105.38 34.63% 5/1/98 37 Gap Inc. 51.09 60.50 18.42% 2/3/98 22 Pfizer 82.30 97.00 17.86% 6/23/98 34.5 Cisco Syst 57.56 61.06 6.08% 8/21/98 22 Schering P 95.99 97.81 1.90% 2/13/98 22 Intel 84.67 83.00 -1.98% 2/27/98 27 Coca-Cola 69.11 61.38 -11.19% 2/6/98 56 T. Rowe Pr 33.67 28.66 -14.90% 5/26/98 18 AmExpress 104.07 84.50 -18.80% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 63.15 85.00 34.61% 3/12/98 20 Exxon 64.34 68.13 5.89% 3/12/98 15 Chevron 83.34 83.38 0.04% 3/12/98 17 General Mo 72.41 57.06 -21.19% Cash-King Stocks Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 2529.00 $650.55 5/1/98 37 Gap Inc. 1890.33 2238.50 $348.17 2/3/98 22 Pfizer 1810.58 2134.00 $323.42 6/23/98 34.5 Cisco Syst 1985.95 2106.66 $120.71 8/21/98 22 Schering P 2111.7 2151.88 $40.18 2/13/98 22 Intel 1862.83 1826.00 -$36.83 2/27/98 27 Coca-Cola 1865.89 1657.13 -$208.77 2/6/98 56 T. Rowe Pr 1885.70 1604.75 -$280.95 5/26/98 18 AmExpress 1873.20 1521.00 -$352.20 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 1262.95 1700.00 $437.05 3/12/98 20 Exxon 1286.70 1362.50 $75.80 3/12/98 15 Chevron 1250.14 1250.63 $0.48 3/12/98 17 General Mo 1230.89 970.06 -$260.83 CASH $48.07 TOTAL $23100.16 *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