Sunday, February 21, 2010

Developing An Investment Philosophy: Chapter 1

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 the expanded version of this book, which includes 2 other works by Fisher including "Conservative Investors Sleep Well" and "Developing an Investment Philosophy".

An investment philosophy (unless copied from someone else) does not develop in a day or even a year. Instead, it evolves over time using logical reasoning, experience and research. In this the first chapter, Fisher describes how his investing philosophy evolved by taking the reader through the major experiences that influenced his interaction with the stock market.

Fisher first gained interest in the market as a young boy who witnessed his grandmother's discussions with her nephew about her stock investments. As the roaring 1920s continued, Fisher dabbled in the market and made a few dollars himself, but he realizes now that at that time he learned nothing of value when it came to investing.

Fisher learned more about evaluating business potential while at Stanford's Graduate School of Business. He would have weekly discussions with one professor in particular about specific companies that the class would visit in order to evaluate.

As the stock market continued to ramp up, financial firms were looking for warm bodies to sell securities. Fisher took a job at an investment bank doing something he now calls "intellectually dishonest". As a Wall Street statistician (which analysts were called back then, until the market crash made statisticians so unpopular that a name change was required), Fisher would pump out reports, without doing any proper research, about new security issues that would allow salesmen to push the issues on their customers. It was here that Fisher realized that there must be a better way to do this.

Fisher began to study companies more thoroughly to test if this was true. In one of his first experiments, he spoke to retailers about some of their radio products. Much to his surprise, everyone he spoke to across a number of different firms all had similar things to say. As a result, Fisher was able to predict the demise of a popular company on the basis that it's products were not doing very well.

Furthermore, in August of 1929 Fisher's evaluation of the stock market was so bearish that he issued a report to the officers of his bank that the next six months would see the beginning of the greatest bear market in a quarter of a century. Nevertheless, Fisher did not put his money where his mouth was, and lost a lot of money in the ensuing stock market collapse.

Following the crash, jobs in the finance industry were hard to come by. Fisher realizes now that it was a great time to start his own firm, but back then he had little choice, as only menial jobs were available. Therefore, in a small office with expenses of $25/month, Fisher started his own advisory firm. In the first year, he made a profit of just $3/month, and in the following year it would grow to $30/month. This is the kind of money he could have made as a newsboy selling papers, but it laid the foundation for a business that would prove to be extremely profitable.

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