Philip Fisher Part 17, His Mistakes and Summary

 Mistakes are inevitable and no one avoids them. How you react to them is more important. Fisher made them. They were concentrated at the beginning and end of his investing career. Early mistakes are inevitable. Most investors learn nothing, but the best ones learn even more. They have learned more from mistakes than from success, and successful investors are no exception. Fisher's late-career mistakes, according to his son, were largely due to his poor health.

Fisher was also a victim of the great stock market crash that began in 1929. He thought stock prices were expensive, but he still put his money in three stocks that seemed cheap with low P/E ratios. He lost almost all of his investments by 1932. He put his money in a locomotive manufacturer, a roadside advertising company, and a taxi company. From this he learned that a seemingly cheap price does not guarantee a successful investment. It can be a sign of weakness. Fisher also tried market timing three times. Each time, he made profits, but found them too small for his time, so he stopped the business when it was unprofitable. In addition, he struggled in the early days to set a suitable purchase price. As a result, he often missed out on stocks that would have brought him big profits.

It is not easy to expose errors in thinking, but I think Fisher’s belief in the importance of top management in good investments is excessive. To quote Buffett, “when a company with a bad reputation meets a company with a good reputation, the company’s reputation is what remains.” I think Fisher never understood that human irrationality can lead to a lasting competitive advantage. This is one reason why he was not good at investing in companies that sell consumer goods. On the other hand, he was good at focusing on the companies that he understood best.

Constantly worrying about everything bad was a characteristic of Fisher. It made him feel more secure. Even small details could make him worry about the risks associated with an investment. This made him abandon many investments because he did not dare to take even small risks associated with them. His returns were lower due to this character trait. He did not dare to take as calculated risks as many other top investors.

Summary

Fisher was the father of qualitative thinking. His process was long and demanding. It is not for everyone. It is easier to implement if you are extroverted and ready to talk. For introverts, it is difficult and perhaps too demanding. I do not recommend it for them. Fisher succeeded well at it for one reason or another, so it is not impossible for those who do not care about other people. Fisher believed that luck equals in the long run, so for him, continued investment success depends on skill and sound principles. Fisher's book Developing An Investment Philosophy contains eight principles that he used, which crystallize his investment philosophy:

1. Buy stocks of companies that have disciplined plans for long-term profit growth and the inherent qualities to let others enjoy their profits.

2. Focus on the above-mentioned companies when they are not popular in the market.

3. Hold the shares until the company undergoes significant changes or has grown to a point where it cannot be expected to grow faster than the general economic situation.

4. Investors focused on appreciation should downplay the importance of dividends, because the best opportunities for returns are found in profitable companies that pay little or no dividends.

5. Making mistakes is a necessary price to pay for large investment profits.

6. There are a limited number of great companies. Their shares are usually not available at attractive prices, so the investments must be large when the opportunities arise. Investments should be concentrated only in the best targets. Owning more than 20 shares indicates incompetence.

7. The basic ingredient of investment management is not to directly accept the views of investors or to oppose them without understanding reality.

8. Success in stock investing depends on hard work, intelligence and honesty.

Philip A. Fisher part 16 Mergers and Acquisitions

Mergers and acquisitions can be seen as threats and opportunities. They are both. They can be a good way to grow both business and profits. They often contain more hopes than the above. The wrong acquisition or merger can weaken a company's operating opportunities for a long time. This is especially true in a situation where the sizes of the companies do not differ much from each other. In individual cases, buying or merging with much smaller companies does not have much impact on the success of the investment target. Too many small acquisitions too quickly can be a problem.

The biggest risks for buyers come from the fact that sellers know more about the weaknesses and strengths of their company. They are also better able to assess the value of the business they are selling. This applies to cases where the operating performance of the sold companies is not in a weak position. The risks for the buyer depend a lot on the competence of the top management, according to Fisher. Bad managers can destroy the investment target with one wrong acquisition. Every merger and acquisition is different. Fisher developed general guidelines for evaluating them.

There are three main sources of problems in mergers and acquisitions. The first is a fight for top management positions. This can cause internal tensions and inflamed relations, even though top management should be blowing out the coals. The second is a situation where top management dominates the business of an industry in which it has no experience. This can lead to a decrease in top management's efficiency. The third situation is the seller's advantage in pricing its business. The buyer may pay too high a price for the acquired company.

Mergers and acquisitions in which the buyer moves down the value chain rarely pose a high risk to the owners. This applies, for example, to a situation where a company that manufactures and sells a final product buys its subcontractors. This applies to situations where the buyer can improve its cost efficiency and quality by doing things itself. Usually, the buyer then knows in advance what he is getting. In addition, the three main sources of problems are usually conspicuous by their absence in these situations. These acquisitions rarely have any significance for the owners. The same principles can be applied to moving up the value chain as moving down. There is an exception to this when a company buys a business that competes with its customers. In this case, the end result is almost always unpleasant for Fisher.

When a company buys a company that is much smaller than itself, the risk to shareholders is small, as is the reward. There are a couple of exceptions to this. The first is the opportunity to develop a new and significant business for the buyer with the help of the acquired company. The second is to get top managers on the company's payroll through this. For Fisher, the best chances for a successful acquisition or merger arise between companies that operate in the same industry and know each other's business inside out, understanding the problems each other faces. The opposite situation, where companies do not know each other and whose business areas are different, is likely to produce a poor end result.

The most successful companies in M&A rarely do so. They do not actively seek opportunities and act when the timing is most favorable for all factors related to their own business. In addition, they focus on companies in industries that are closely related to their core business. Risks increase when a company is constantly looking for opportunities to grow through M&A. This is likely to lead to excessive diversification of business operations and expensive acquisitions. Operational risks increase when the CEO spends a significant amount of time on acquisitions or considers them to be one of his most important things.

Buying a not-so-attractive business may not be wise, even at a low price. The reason for the attractive price is likely that it has nothing to offer the buyer. Fisher considers attractive purchases to be those that are a perfect fit for the buyer. Their price may be high, but they will bring him the greatest benefits in the long run. Buying several weak companies can kill the management's ability to develop the business in the long run. This is usually justified by the idea of ​​diversifying the business, which should strengthen the business being owned, but it has the opposite effect. Excessive diversification creates unnecessary strain on top management. It is difficult to find a single rule of thumb for the amount of diversification, but its speed provides significant clues to the investor as to its wisdom.

Philip A. Fisher part 15 Top Management

 Fisher puts the weight of top management in the quality of an investment at around 90%. I see this as an exaggerated figure, as many companies can be managed by almost anyone, such as Coca Cola. Even exceptionally good management cannot work miracles if the company is in the wrong industry. Poor management can destroy any business if given the chance, so the ability of top management matters. A wrong assessment of management ability can lead to a wrong investment. At the time of investment, an investor using Fisher's fifteen points as a guide will likely have enough information about the abilities of top management, but assessing the successors of managers can be difficult. The departure of previous managers is the moment when an investor is most likely to make a wrong assessment of top management.

Top management can reward an investor in at least two ways. The first and less significant way is by significantly increasing the P/E ratio since the time of purchase. There are limits to the growth of the P/E ratio. A more significant way is the growth of the earnings per share received by the investor compared to the purchase price. With good management, the company grows its earnings much faster than the market average for a long time, which enables top returns. According to Fisher, few people on Wall Street in his time could justify the goodness of an investment by saying that “senior management has begun to demonstrate its ability to increase shareholder value without the market noticing.”

The CEO is the most important person in the company. He must strive to maximize shareholder value in the long term, not the short term. In addition, he must surround himself with competent people and give them areas of responsibility to handle without interfering in their actions. They must work together to achieve clearly defined goals without internal power struggles. One clue to whether a company revolves around the CEO is the salaries of other top executives. He should not have an unreasonable salary for the next managers in the pecking order. This is a warning sign for investors. Salaries should be reduced gradually.

Even the best members of the management team and teams have traits that are undesirable. The good traits of great management more than offset the bad ones. When an investor carefully examines a company, he can notice possible weaknesses in its management. Fisher listed four different weaknesses that are relatively easy to spot. They may not be the most important, but not requiring that much expertise from the investor to spot them.

The first sign of weakness that an investor may see is a company’s board of directors, which does not have enough people who are involved in the actual business. This is especially true of companies where the CEO also serves on the board. In this case, the CEO usually wants to be responsible for both managing the company’s actual operations and the board’s work. He either does not have enough faith in the other board members or believes that he is always right.

Another sign of weakness can be a member of senior management whose sole task is to grow the company’s business through mergers and acquisitions. Only a few mergers and acquisitions are profitable. The mindset of such individuals shifts to pursuing their own interests, because corporate restructuring is the only way to justify salary payments. Before long, corporate restructurings are done only for their own sake, without caring about the interests of shareholders.

The third sign of weakness is when one or more members are hired to the company's board of directors whose expertise is based on a narrow area of ​​board work. In board work, each member must be able to view the business strategy and its implementation with sufficient judgment. Each member must be able to warn the top operational management when the company is not performing according to expectations or strategy. Seeking narrow expertise for the board indicates that something has been done or is being done wrong in that area, or that weaknesses are being addressed in the wrong way.

The fourth sign of weakness mostly affects smaller companies. When a company operates in too many separate business areas for its size, it is a sign of difficulties or that top management does not know what it is doing. Fighting on too many fronts means that resources are dispersed, which makes it difficult for a company to operate. A mixed bag of tricks rarely produces maximum returns in the long run.