Sunday, February 28, 2010

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

As Fisher's philosophy has matured, he has further refined his investment processes. In this chapter, Fisher takes the reader through his thought process, and recommended mode of action, on several points.

Following World War II, Fisher's research led him to believe that the chemical industry would do well in the coming decades. As such, he spent some time researching various businesses in this industry in order to find the one that offered the most promise for outstanding returns. In the end, he chose Dow Chemical as his investment choice, and he was greatly rewarded.

There were many reasons for his choice. Throughout the organization, Fisher was getting the impression that there was excitement from employees and the belief that greater growth lay ahead. Fisher was tremendously impressed with the CEO's response when asked the most important long-range problem facing his company (which is one of Fisher's favourite questions):

"It is to resist the strong pressures to become a more military-like organization as we grow very much larger, and to maintain the informal relationship whereby people at quite different levels and in various departments continue to communicate with each other in a completely unstructured way and, at the same time, not create administrative chaos."

Dow also limited its involvement to product lines wheer it was or had a reasonable chance of becoming the most efficient manufacturer. Research was a priority, and individuals of unusual ability were identified and elevated. Some of the sayings of Dow's late founder were also quoted to Fisher by a number of employees, two of which Fisher incorporated into his own investment business:

"Never promote someone who hasn't made some bad mistakes, because if you do, you are promoting someone who has never done anything."

"If you can't do a thing better than others are doing it, don't do it at all."

While Fisher was wildly successful with his investments in the ensuing decades, he did make a few mistakes. He spells out some of his errors, as these are often the most worthy experiences from which to learn. One problem is that success breeds complacency: on one particular occasion, Fisher only completed part of an analysis on a company before buying in. With more effort, he would have uncovered the problems that would cause the stock to subsequently drop in the coming year.

Fisher also states that he has been far more successful in industries which he knows well, which are manufacturing and high-tech companies that serve manufacturers. In other industries, he believes his methods can be applied, but believes investors with more knowledge of those particular industries are in the best position to thrive. Finally, Fisher recommends that investors not sell in anticipation of predicted market downturns, for predictions of this nature are extremely difficult to make.

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