Thursday, October 30, 2008

The Warren Buffett Way: Chp 2 Part 2: The Two Wise Men

Philip Fisher

Philip Fisher graduated from the Stanford Graduate School of Business Administration. After a brief stint in industry, he started an investment counseling firm on March 1, 1931, just a few years after the market crash of 1929. Fisher perceptively understood that due to the market crash, most investors were unhappy with their current investment advisers and this would prove to be an advantage for in his new business.

As an investor, Fisher looked for companies that demonstrated a track record of above average growth and that possessed an above average management team. He believed that if you could find companies with these elements, that you could achieve above average investment returns by investing in the companies' stock.

Fisher was impressed by companies that were able to grow sales and profits at rates greater than the industry average, believing that those companies possessed superior products and or services that made the growth possible. Fisher recognized the importance of having an adequate research and development program in a company in order to sustain the growth.

Fisher also placed significant importance on a company's sales force, arguing that it was the link between the marketplace and a company's research and development efforts. It was the sales force that was in tune with the markets needs and could bring back valuable ideas from communication with customers.

According to Fisher, sales growth needed to be accompanied by sufficient profit margins. Profit margins of exceptional businesses did not collapse during tough economic times the way they did with marginal businesses. Fisher looked for companies with healthy and durable profit margins, which had the added benefit of being able to generate enough internal cash to fund projects.

To meet Fisher's investment standards, a company also needed to understand thoroughly its cost structure and be able to detect operational problems early by having adequate accounting controls in place. This ensured that a company could detect and correct problems at an early stage. Having a competent and capable management with sufficient depth ensured that long term plans could be implemented while still managing short term issues.

Fisher was concerned with the honesty and integrity of management. He investigated whether management was acting in the best interests of shareholders. One way that Fisher used to evaluate management was by inspecting the way they communicated with shareholders particularly during bad times. He looked to see if management was still forthcoming and open when communicating with shareholders during difficult times.

Fisher recommended that investors use "scuttlebutt investigation" as a way of determining the relative strengths and weaknesses of a company. Scuttlebutt investigation means you query former employees, managers, consultants and competitors of the company you are interested in. This investigation can paint a valuable profile of the company.

Fisher also believed that holding fewer companies in a portfolio was fine, as long as those companies were were thoroughly investigated and within ones "circle of competence".

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