Friday, January 1, 2010

Common Stocks And Uncommon Profits: Chapter 3, Part 3

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.

The list of criteria to look out for in order to find home-run stocks continues:

7) Does the company have outstanding labour relations?

Fisher believes that most investors do not fully appreciate the benefits of strong labour relations. While strikes clearly temporarily disrupt production, the benefit of excellent labour relations is far greater than the direct cost of strikes, for if workers feel fairly treated, the company is in a much better position to increase worker productivity.

Unfortunately, there is no easy way to identify whether a company has strong labour relations. But there are some insights an investor can gain. For example, if labour has not been unionized, this may be a clue that workers have not felt the need for union protection. Worker turnover, and the size of job applications relative to other firms can also be useful hints for the investor. The investor should also consider the behaviour of top management towards rank-and-file employees (e.g. are there mass layoffs whenever a small change in sales is anticipated?).

8) Does the company have outstanding executive relations?

The right atmosphere among executive personnel is vital, as the management team's ingenuity and judgement will make or break any venture. Executives should have confidence in their president and chairman. Promotions should be made on the basis of ability, not factionalism or family. Outsiders are brought in only if there is no possibility of finding someone who can be promoted into that position. The investor can usually learn about executive relations by chatting about the company with a few executives scattered across different levels of responsibility.

9) Does the company have management depth?

A one-man management can do very well for several years, but all humans are finite. A corporation with no plan in the event of a corporate disaster could find itself in trouble. Companies worthy of this type of investment are ones which will continue to grow for many years. To develop management depth, authority must be delegated so that managers down the line are given the real authority to apply themselves and grow as managers. Where top brass continually interfere in day-to-day operating matters, strong managers are unlikely to be developed.

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