Saturday, January 30, 2010

Common Stocks And Uncommon Profits: Chapter 10

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.

In most of the letters Fisher receives, the public asks him how he goes about finding stocks that are worth investigation. As a result, in this the final chapter, Fisher discusses where his investment ideas come from.

Previously, Fisher used to believe that the best source for investment ideas came from his executive contacts. However, after doing a quick study, Fisher now realizes that only 1/5 of the ideas that he fully investigated and only 1/6 of his total investments came from this source. The rest of his ideas have mostly come from hearing about the investments of other investors whom Fisher respects. Very rarely will Fisher find ideas in the print media.

Once a company has been uncovered that is worth further investigation, Fisher applies the scuttlebutt method as discussed in Chapter 3. Fisher stresses that it is of the utmost importance to investigate the company in this manner before meeting with management. Since an investor will not get a useful reply, no matter how candid is the management, to the question "Is there anything else I should know about your company?", the investor must know what questions to ask about the company's weaknesses beforehand. Good managements will often speak candidly if the investor shows he has done his research and has judged the company well.

Fisher also argues that it is important to meet the key decision makers, but because the demands on the time of these people are so high, companies will only let investors who they feel are competent take up the time of these valued managers. Therefore, having done the research as per the previous paragraph, investors must approach management in a manner that makes them believe the investor is competent. An investor who shows up at the door unannounced, for example, is likely to meet a member of the investor relations department rather than a key decision maker. An introduction through the company's commercial bank, investment bank, or important customers or suppliers is a great way for the investor to ensure he will meet the right people.


Rayhaan said...

i agree, learnt this lesson the hard way when i called up the investor relations department of the company i was interested in and started asking tough questions.All it took was one inaccurate figure on my part for the company secretary to wiggle out of the interview how have ur experiences on this front been guys?

Ankit Gupta said...

Who were you interested in talking to? Many times the CFO is easier to get a hold of than the CEO, plus they know the details on accounting treatments and stuff anyway.

One tip - try giving them a reason to take your time. Consider writing investment reviews and posting it on a site like SeekingAlpha, that will give you leverage.

I know it's tough in the beginning, but keep at it. Do realize that you aren't asking the management team to do you a favor - you only really want them to take your time if it's going to help them. If they devote time to things that won't further the business, is that really the type of person you want to put money towards?

Also, read Chapter 3 on the scuttlebutt method - go talk to others in the industry before approaching management.

You can also try going to investment conferences where they'll be presenting and asking questions at the end of their presentation.

rayhaan said...

i was talking to the cs of temptation foods , a company listed on the bse
thx 4 d advice