Saturday, January 2, 2010

Common Stocks And Uncommon Profits: Chapter 3, Part 4

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:

10) How good is the company's cost analysis?

A company cannot have continued outstanding success unless it can accurately break down its costs by product and also at each step of its production process. If a company has weak product costing, products which the company thinks are wildly successful might actually be losing money. Fisher acknowledges that it is rather difficult for the investor to determine the efficiency of a company's costing, however. The "scuttlebutt" method (described in earlier chapters) will work only in identifying companies which are really deficient. Management will also sincerely believe the existing methodology is fine, and therefore little info can be gleaned on this subject from company personnel. Fisher suggests the best the investor can do is recognize the importance of this subject along with the limitations in making an accurate appraisal of the situation.

11) Are there other clues (perhaps industry related) which show the company to be outstanding relative to its peers?

This is a catch-all question, as items which are important in some industries are of no importance in others (e.g. for a retailer, real-estate management and/or leasing costs can make or break a company, but are of little importance in most industries). One useful barometer Fisher uses to compare companies within the same industry is insurance costs. Not only can lower insurance costs lead to larger profit margins in many industries, but they offer a clue as to how well management handles people, inventory and fixed assets in order to minimize waste, damage and accidents. The "scuttlebutt" method is useful in identifying such differences.

12) Does the company maximize long-term or short-term profits?

Some companies will try to gain the greatest possible profit right now, while others will build up good will and thereby gain more in the future. The "scuttlebutt" method is useful here in gleaning information from vendors and suppliers. Does the company force suppliers to offer the lowest possible price, or will it at times pay above contract in order to secure a strong partnership and a dependable source of future supply? Will it help out a customer in a jam, even when not required to do so? This may hurt current profits, but sets the company up for a strong future.

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