Sunday, December 27, 2009

Common Stocks And Uncommon Profits: Chapter 3, Part 2

Warren Buffett has called himself "85% Graham and 15% Fisher". While the works of Graham are often cited, Fisher's book "Common Stocks and Uncommon Profits" is not. Here follows a summary of this work by Philip Fisher, known as one of the greatest investors of all time.

Fisher continues to list off more of the 15 properties he believes investors should look for in order to identify the stocks with the potential for astronomical returns:

4) Does the company have an above-average sales organization?

Fisher calls the making of repeat sales to satisfied customers the first benchmark of success. But investors pay far less attention to whether a sales staff is efficient than they do to research, finance, production or other corporate activities. Fisher attributes the reason for this to the lack of financial ratios that can be applied in order to measure the quality of a sales staff. But the information is available in a qualitative sense using the "Scuttlebutt" method Fisher described earlier in the book. Competitors and customers know the efficiency of the sales staff, and they are often quite willing to express their views on the subject.

5) Does the company have a worthwhile profit margin?

Fisher believes that the greatest long-range investment profits are made by investing in the companies with the highest profit margins in the industry. There are some caveats to look out for though. Margins should be looked at over a period of many years, since temporary effects can abnormally lower or raise a company's margins. Furthermore, fundamental changes may be occurring in a company (new product, increase in efficiency) with low margins that will turn it into a company with high margins; these may be unusually attractive purchases. Finally, some companies have low margins because they plow a lot of their profits into research and sales, so they are actually building for the future. Investors counting on this to be the case must make absolutely certain that investing for the future is indeed the real reason for the low margins.

6) What is the company doing to improve margins?

Inflation will continue to increase the costs of most companies, but companies of different abilities will see varying results in their profit margins over time. Some companies have the ability to increase price in order to maintain or increase margins. Fisher argues that this only encourages new competitive capacity, and therefore only temporarily increases margins. But some companies use far more ingenious means to increase margins. Some corporations have departments whose sole function is to review procedures and methods in order to find savings. "Scuttlebutt" will not work as well as speaking to company personnel directly about the amount of work being done by the company in this area. Fisher argues that the investor is fortunate that most top executives are willing to talk in detail about such topics, however.

No comments:

Follow by Email