Philip Fisher
Who is Philip Fisher and why he his important
Born in September 1907, Philip Arthur Fisher is considered as
the father of Growth investment. Graduate from Stanford University in Business
Administration, he began his carrier as an analyst, in a firm of San-Francisco,
2 years later; he was the manager of the bank statistical department. He opened
his own investment company in 1931, two years after the crash of 1929. He had
said that it was the best moment to open his business because investors who
still have little money are probably not satisfied of their old broker. His
most famous book, «Common Stocks and uncommon profits» is still today
a reference for many growth investors. One of the most profitable investment he
ever made was to purchase stock of Motorola in 1955, he hold them until his
death in 2004.
As well as Graham for value investing, Philip fisher is
considering as the father of growth investing. His theory and strategy are
still used by many investors in the world. It's important that the reader
understand the basis of Fisher's contribution to the investment world because
the strategy develop later in this paper is for a part based on Fisher's view
of the market.
Main contribution of Fisher to the investment world
When Philip Fisher was a student at Stanford University, one
of his professors required him to come in order to visit companies together.
Each week, Fisher and his professor were going to visit a different company,
see how it works, and they have a discussion with the managers. After each
visit, during the way back, Fisher and his professor were talking about this
company, how they perceived it, its strength and weaknesses. Fisher will say
later about this discussion during the way back that «was the most useful
training I ever received32.» From these useful experiences
Fisher will develop the idea that companies with a higher return than the
average have 2 common points. The first one is that they have a potential of
growth higher than the average of their industry, the second one (probably link
to first one), is that they have a great management. Fisher will develop
criteria in order to select those companies which are able to generate higher
profit for investors.
Selection of good companies
Increasing of sales and profit during several years
For Philip Fisher the only way for a company to increase sales
and profits during several years is to have a product or service which has a
market potential growth. Fisher was looking for company with a future growth
higher than the average. He was also aware that an investor can judge a company
only through several years because a year of result is not representative of
the company potential.
Research and Development
One particular aspect which determines the potential of a
company for Fisher is its ability in research & development. Because he was
looking for a company with a future high potential, and because for him sales a
related to the product of the company, he knew that a company with a good
research and development department will generate future sales from their new
product. Fisher proposes that even companies which are not in a technical
industry have to possess a good R&D to implement new services, new process
and be more efficient.
32 G. Hagstrom The Essential Buffett: Timeless Principles for
the New Economy(65)
Sales organization
Although a Company can have an efficient Research and
Development department, it's not enough in Fisher's point of view. The R&D
create new product or services but they will be sold by the sales department,
if they are not, all the effort is useless. Fisher also believed that the
company has to generate profit from the sales in order to make new investments
and generate return for shareholders. Fisher wrote in Common stocks and
uncommon profits that «All the sales growth in the world won't produce
the right type of investment vehicle if, over the years, profits do not grow
correspondingly.33» He tries to explain to investors that
R&D generate good product that can be sold in the market. Those sales have
to produce a profit that can be reinvested in order to increase future sales
and future profit. He also says that a marginal company in a marginal industry
can generate profit but it will not be recurrent over the years. Fisher has
just created the growth strategy
.
No or few debt
For Fisher, all those condition are still not enough to invest
in a company. If a company wants to deserve his interest, it needs to fulfill
all those criteria, but without accumulating debt. Because companies with debt
are more fragile during period of bad economic conditions, Fisher was
interested only by company able to generate enough profit internally to be
self-financing.
Management honesty
The last advice that Fisher gives in order to select good
companies is in regard to the management. During the numerous company visits he
made with his professor, Fisher found that many managers are not honest with
shareholders. In his writing, Philip Fisher advices investors about the
absolute requirement of integrity and honesty of managers. Too many managers
are putting their own interest before the interest of shareholders. A good way
to determine a well-done management style for Fisher is the ability of a
manager to speak about bad news. All companies encounter problems, the honest
managers will not try to hide those, and will communicate to shareholders all
information concerning the situation. That's for Fisher the best way to see if
management is working in the best interest of the shareholders.
33 Philip Fisher Common stocks and uncommon profits and other
writings (126)
Investment in good companies
Focus portfolio in a circle of competence
Because the selection process of Philip Fisher is long and
time consuming, he was aware about that, he simply tells investors to limit the
number of companies in which they will they invest. In Fisher's point of view,
having a diversified portfolio will just diminish the return and increase the
risk, because selecting a few good companies with high return is more
profitable and less risky, Fisher's advice to have a focused portfolio.
The last advice Fisher gave to investors, is what he called
«the circle of competence». Investor shouldn't invest in industry
that they didn't know. He explained concerning a mistake he made «to
project my skill beyond the limits of experience. I began investing outside the
industries which I believed I thoroughly understood, in completely different
spheres of activity; situations where I did not have comparable background
knowledge.34»
In order to have an overall look on Fisher way of thinking there
is the fifteen point he advices any investors to look before investing a
company
.
34 G. Hagstrom The Essential Buffett: Timeless Principles for
the New Economy(67)
The fifteen points to look for in a common stock35
- Does the company have products or services with sufficient
market potential to make possible a sizable
increase in sales for at least several years?
- Does the management have a determination to continue to develop
products or processes that will still
further increase total sales potentials when the growth
potentials of currently attractive product lines have largely been
exploited?
- How effective are the company's research and development
efforts in relation to its size?
- Does the company have an above-average sales organization?
- Does the company have a worthwhile profit margin?
- What is the company doing to maintain or improve profit
margins?
- Does the company have outstanding labor and personnel
relations?
- Does the company have outstanding executive relations?
- Does the company have depth to its management?
- How good are the company's cost analysis and accounting
controls?
- Are there other aspects of the business, somewhat peculiar to
the industry involved, which will give the
investor important clues as to how outstanding the company may be
in relation to its competition?
- Does the company have a short-range or long-range outlook in
regard to profits?
- In the foreseeable future will the growth of the company
require sufficient equity financing so that the
larger number of shares then outstanding will largely cancel the
existing stockholder's benefit from this anticipated growth?
- Does the management talk freely to investors about its affairs
when things are going well but "clam up"
when troubles and disappointments occur?
- Does the company have a management of unquestionable
integrity?
35 Philip Fisher Common stocks and uncommon profits and other
writings(47)
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