Researching Companies
After finding ideas, Fisher began researching companies. He used many sources, including financial statements, competitors, customers, subcontractors, and former employees. Fisher himself was amazed at how accurate a picture he could get of a company’s strengths and weaknesses by using multiple sources who were involved with the company. Without the confidentiality of the sources, this would not have been possible. Fisher had to gain the trust of each of his sources. He also had to live with this trust for decades, because his network of sources would have disappeared. The biggest weakness of Fisher’s method is its duration. Good opportunities can disappear while the company is being researched.
The questions had to be intelligent and well-prepared. Competitors were one of the best sources. By going through five companies in the business sector and asking intelligent questions about the strengths and weaknesses of their competitors, Fisher was able to create a surprisingly accurate and detailed picture. He got a clear picture of the capabilities of the people, or management, by talking to subcontractors, customers, and other people who worked with the management. He had to be careful with former employees, because their motives were not always pure. It is important for an investor to understand the reasons for their departure from the company. Former employees were not so much reliable sources as those who left voluntarily.
Fisher had fifteen points that he examined for each company. Almost all of them had to be true for him to talk to the management. These points mainly dealt with the quality of the managers and the characteristics of the business. Important quality factors for management included honesty, long-term perseverance, openness to change and conservatism in accounting. Important characteristics of the company included growth orientation, high profit margins, high return on capital and investment in product development. The list of fifteen points:
1. Do the company's products or services have significant growth potential that will last for several years?
Declining or flat sales do not offer investors the opportunity for high returns in the long term. A company can increase its profits in the short term, but it cannot do so in the long term. An investor aiming for high returns is only looking for long-term growth, which will increase the company's returns. An investor also cannot focus on companies whose business can be expected to grow for a while, but then stop. Even the fastest growing companies do not increase their sales every year. Sales of new products and services grow in spurts. Do not expect continuous steady development. Business cycles also matter. They bring their own fluctuations to sales. Growth rates should not be assessed annually but rather viewed over several years. Many companies can demonstrate that their growth will continue beyond the next few years.
Fisher divided growing companies into two groups, namely those that happened to be competent in the growth sector and those that grew while they were competent. As examples of the first group, he described Alcoa, which focused on aluminum, and Du Pont, which originally operated as a gunpowder manufacturer until it moved on to manufacturing polymers such as nylon and Teflon. Both groups can make a lot of money for an investor if their managers are competent.
One of the most important factors in investment success is the investor's ability to understand what the company's sales growth will look like in the future. Incorrect estimates can be disastrous. In addition, the investor must constantly understand how well the company's management can see technological changes and take care of product development that enables growth. A careful investor constantly studies how management takes care of sales growth by focusing the best employees and resources on increasing sales in the long term. Fulfilling this point was one of the most important conditions for Fisher in finding an investment target.
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