Sunday, September 5, 2010

The Making Of A Market Guru: 1984 - 1985

Ken Fisher manages $35 billion in individual and institutional funds and is value-focused. His father wrote a terrific investment book discussed here, but this book is about Ken's investment philosophy, which evolved over his career. This book chronicles that value-focused evolution over his 25 years as a Forbes columnist.

Buying glamour stocks does not pay, Fisher argues. At this point in his investing career (as his fund was still small in 1984), Fisher prefers small, out-of-favour stocks. How does he identify stocks that are out of favour? Using the price-to-sales ratio (PSR). Often times, companies have low or negative earnings for short-term reasons that cause the P/E value to be meaningless. This is why Fisher prefers price-to-sales, since sales are much more stable from year to year. He shows empirical data demonstrating that stocks with low PSR and strong balance sheets outperform the market significantly.

When evaluating small-caps qualitatively, Fisher argues that investors place too much emphasis on the company's product quality and not enough on the company's marketing quality. More often than not, Fisher finds that strong marketing is far more important than superior technology. Fisher also argues that investors should prefer companies with leading market share in their industries. Fixed costs can be spread out over a larger customer base, leading to a competitive advantage. Too often, investors look at companies with low market shares on the assumption that the growth potential is higher, without regard to this scale disadvantage.

Fisher also describes some strategies to make money off of bankruptcies, and offers a recommended reading list of mostly value-oriented books. Included on that list are several of the books that are already summarized on this site, including his father's book, The Intelligent Investor, Security Analysis, Contrarian Investment Strategy, and Reminiscences of a Stock Operator.

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