Grape's Fisher Kings
Fisher Put-Down

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By thedumbox
March 21, 2001

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Hi, all.

As the author of the message unfortunately (and I think incorrectly) characterized as "Fisher put down" I thought I'd respond, especially after TMFGrape gave me a thoughtful reply and a polite invitation to drop by.

My comments were not a criticism of Fisher. He's one of the titans of investing, and his method of evaluating quality companies is a very worthwhile exercise. I agree with the poster who said "it does not take an investment genius to make the transition from 1950 to 2001 using the Philip Fisher Principals." The art of evaluating a good business hasn't changed since 1929.

I think I do disagree, however, that "courtesy of the Internet, utilizing Mr. Fisher's ideas are easier than ever." That was, I think, the thrust of my comments. They were intended as a very specific response to what I perceived as a certain attitude held by some Fisher disciples, which is that quality company = good investment. Or to put it another way, "Watch Main Street and Wall Street will take care of itself." I think both of those attitudes reflect an idea that simmers in Fisher but never comes to the surface: that outstanding companies are systematically undervalued by the marketplace and therefore will deliver above-average returns. No, he never says this, but I think it's a lesson a lot of people take from the book. In his day that may have been true. I doubt it is today.

Systematic Undervaluation

The main reason I don't think it's true is that Fisher has won the war. His ideas permeate virtually every investing camp today, except the hard-line TA people. In a significant sense, almost everyone nowadays is a Fisher investor. Everyone is in love with quality. And growth.

Proof? You can't open a magazine without seeing something like "The secret to investment success is buying great companies." Or, "The key is to buy outstanding companies with a solid record of earnings growth and unlimited potential." How many people on these boards, for example, say, "It doesn't make any difference whether a company's management, products, or prospective growth is lousy or not"? (Well, maybe Datasnooper. But who else?) Who says, "What I'm looking for is an average company with ordinary management and unspectacular growth prospects?" A few hard-core value hounds, maybe. Even they would prefer quality if they could get it cheaply.

No, most people are sold on quality. People want to own Wal-Mart, not Penney's. I was reminded of this recently on another board when a highly intelligent poster whose comments I usually admire said, basically, "I wouldn't be interested in earning 5x my money in a lousy company."

Yet most of the companies out there are average. What percentage qualify as fabulously well-run companies with great growth potential? One percent? Well, everybody wants to own that one percent. Which means that the price gets bid up.

For example (to pinch one from Datasnooper), take Nokia. A Fisher analysis makes it easy to see that Nokia (at the moment, anyway) is superior to rivals Motorola and Ericsson. Given a choice at equal valuations, which would you rather own? Nokia, obviously. Just as, at even odds, you'd pick Duke to beat the Little Sisters of the Poor (or my own Missouri Tigers). Problem is, everybody else is looking for quality, and everybody else knows that Nokia is better than Motorola. So Nokia is already valued a whole lot higher than Motorola�Nokia's market cap is more than $40 billion higher than Motorola and Ericsson combined. That means Nokia is going to have to do a lot better than those two companies just to do as well as they do as an investment. To do better than they do, Nokia will have to be pretty spectacular. Where everyone is seeking well-run, high-growth companies, the price goes up, and the potential return goes down. The question isn't which is the better company. It's which investment will give me a better return on each dollar invested.

Scuttlebutt, or Information Advantage

As for the idea of scuttlebutt, the Internet makes gathering information a lot easier. But by definition this is public information, available to everyone. It's not the inside dope on unsuspected production problems at the factory, or the supposedly secret results of some new product test, or a report from a close friend at a vendor who says the company's doubled orders for a certain component. That's scuttlebutt. And much of that is illegal now. Calling a customer service rep and asking him how the new product works�as one NOK board poster did�isn't scuttlebutt. It's public information that the sales reps are actually paid to disseminate. Same with press releases�anything that comes out of the press office got to the media at least as soon as it got to you.

Thus, I believe the idea that an amateur investor can collect various bits and pieces of public information and use it to get an informational edge over the Street (which has access to even more information than we do) is a myth.

TMFGrape argues that "no matter how freely information is available in this day and age the vast majority of investors don't take the time to investigate companies in the manner that Fisher has prescribed." I agree, but I don't think that's the issue. So long as a sufficient number of people do this, the market will price in the results. There are, according to one Net site, 27 analysts employed to cover NOK, and 40 to cover CSCO. And those are just the sell-side people. How many more are working buy-side, and in mutual funds and other financial institutions? All of them are business-trained professionals, scouring every piece of available data, trying to answer most of the questions Fisher asked. Their earnings forecasts and their buy and sell recommendations, on which millions of others will rely to some extent, are going to reflect that data. And thus the market will reflect it. Only if you think you can get information that all these analysts will miss will you actually get an informational advantage.

So, is there any point to Fisher Analysis?

I believe so, although the Efficient Market Theory people will disagree. I think it's useful in giving you a thorough knowledge of the companies you're interested in investing in. It can give you a better idea of what you think the business is really worth, and give you some basis for comparing your views to those of the analysts and the market as a whole. It can help you make up your own mind whether the fears or enthusiasms of the moment are rational. Will the tobacco litigation kill Philip Morris? Will Oracle perish in the Y2K crash? Will CSCO ever really be worth a third of the American economy? Knowing companies intimately can help you make judgments on these issues. And those judgments are the key to deciding whether to buy or sell at any given price.