Philip Fisher part 7 and the Fisher method, Company research, points 9-11 /15

 9. Is there depth in corporate management?

Small companies can do well when they have a capable person at the helm alone. Investors need to understand what happens to small companies if that person has to stop working. Sooner or later, a small, brilliant company grows so large that it cannot manage with one capable manager. At that point, the number of capable people in top management begins to affect success. A capable manager has to share responsibility because his or her time is not enough to handle all management tasks. The need for a large company to find a CEO from outside its ranks indicates that there is something wrong with the current management.

Top management is forced to share responsibility downwards or the company itself will not be able to develop future top managers. By sharing responsibility to lower management levels, top management does not turn its subordinates into incompetent decision-makers. Future leaders will develop if they are given enough opportunities to use their skills. A company is rarely a good long-term investment if top management interferes with the day-to-day operations of the company at lower levels. In addition, top management should welcome all suggestions for improvement, even if they criticize the way the company is run. Lower-level employees can provide a flood of useful ideas if their feedback is utilized.

10. How well does the company analyze its costs and manage its accounting?

No company will succeed in making investors high returns in the long term if it cannot examine its costs in sufficient detail in each of its operations. Only then will management know what requires the most attention. Successful companies do not rely on just one product. The success of companies suffers if their management does not know exactly the costs of individual products or services compared to others. The company will not be able to set the right prices to maximize profits if it does not know which products require special efforts in sales and marketing. In the worst case, the products with the greatest profit potential will make a loss.

Accounting management is important. The problem for investors is that if a company's accounting and cost analysis are inadequate, they will not receive enough information about the matter. Investors need to understand their limited ability to know when cost analysis is effective. Investors can consider it likely that a company is operating efficiently if its ability to manage its business is above average. The probability of this is significant as long as top management understands the importance of cost analysis and accounting management.

11. How well does the company manage the specific characteristics of its industry?

These characteristics include, for example, the locations of grocery retailers or the patent portfolios of technology companies. Finding good retail locations at low prices compared to the number of people moving around in the environment helps to increase the turnover of grocery retailers and thus also profits. Without good relationships with the bodies that decide on retail locations, it is difficult to succeed.

The patent portfolios of large technology companies improve their chances of success. They are rarely sources of large profits. Strong patent portfolios can give companies exclusive opportunities to make products more cheaply than others. Patents can usually prevent only a few ways to achieve the same result. An investor can foresee difficulties for a larger company that relies solely on its patent portfolio to achieve higher profit margins. An investor should pay special attention to the patent portfolios of small technology companies, because large companies can easily destroy them if their patent portfolios do not provide sufficient protection against large ones. Continuous product development is more important to companies than their patent portfolios. An investor should not give patents too much weight.

Philip Fisher part 6 and the Fisher method, Company research, points 6-8 /15

 6. What does a company do to maintain or increase its profit margins?

Past margins can be used as a guide, but they are not nearly as important as future margins. Costs tend to rise, so a company must strive to reduce costs by continuously improving its cost efficiency. A quality company must be the most cost-efficient company in its industry or close to it. It must also show evidence that it will remain so.

This gives it room to maneuver, since most competitors cannot compete on price for long in difficult times. Low costs also help it win the market when less cost-efficient companies are forced to abandon competing businesses. In addition, a higher-than-average margin helps finance most of the company's future growth internally. This reduces the company's need to draw on its owners' money to finance growth.

A company must strive to improve its operations by improving its products and services to be more cost-effective. An investor needs to understand how well a company is reducing its costs by improving its operating methods. It is likely that the companies that ared most ingenious in improving their cost efficiency will be the most successful investment targets in the long run. According to Fisher, business leaders talk about cost efficiency more enthusiastically than many other things to investors.

Improving cost efficiency is not the only way to improve margins. Companies can raise prices. Few companies can do this without increasing competitors. Prices can rise as demand increases. A company's margins can also rise when competitors raise their prices more, which promotes sales as customers switch vendors. These ways of increasing margins are rarely long-term. For a long-term investor, continuous price increases to increase margins for all players in a business sector offer a poor prognosis. Monopolies and other closely regulated businesses can be considered exceptions. Fisher also did not understand the concept of a sustainable competitive advantage that would arise, for example, from through psychological factors.

7. Does the company have great relationships with its employees?

One thing investors often neglect is to examine how good the work environment is in the company. A great atmosphere among employees leads to better profit margins. The difference in productivity between a great atmosphere and an average atmosphere is much greater than the direct effect of strikes. Effective management that makes employees feel well-treated improves productivity. Training new employees is expensive, so high staff turnover leads to unnecessary costs.

When management can convince all employees that it is serving their interests, it will be rewarded with lower costs and higher productivity. Management must treat its employees with respect and consideration and communicate well with them. Top management must know how employees at every level think. Management must deal with grievances quickly with employees. Whistleblowers cannot be punished, but must be rewarded. Employees should not just be told to do their jobs, but let them decide how to do their jobs. A high number of strikes indicates difficulties in the work environment. Their absence does not directly mean a great work environment.

In addition, a company should pay wages according to merit. A company that pays its employees better than average and has a better than average profit margin probably has a good work environment. Management should be prepared to improve employees' wages as productivity increases, even at lower levels, and not collect glory and euros only for itself. A company management that takes an unreasonable share of the profits rarely guarantees the best possible returns for investors in the long term.

8. Is the work environment among the company's management great?

The relationships among the top management also affect the company's success. They have the greatest responsibility and their decisions have the greatest impact. In companies that offer the best opportunities for investors, the relationships among the top management are great. Everyone in the top management trusts the CEO and the chairman of the board. This means, among other things, that all employees can rely on their own merits to reach the top management level. Relatives and friends are not favored in the career path. Top managers constantly review salaries according to qualifications and there is no need to ask for raises separately. Top management does not allow solo work but emphasizes working together. It also behaves that way. Investors can find information about these issues by asking employees at different levels of the hierarchy.

Philip Fisher part 5 and the Fisher method, Company research, points 4,5 /15

 4. Is the company able to sell its products and services better than average?

Few companies have products or services that are so good that they do not require excellent selling. Selling is one of the basic functions of a business. Repeated transactions with old and satisfied customers are the first sign of success. Fisher believes that investors do not appreciate the relative effectiveness of the sales organization enough. This is due to the difficulties of measuring this issue as easily as the effectiveness of many other business functions.

The marketing and sales organization must be constantly aware of the changing desires of customers. This way, the company can offer products that customers want right now. Some marketing organizations create desires for customers that they are not aware of. They create markets with product developers that did not exist before. Simply observing customer desires is not enough; the organization must also communicate the benefits of the products it sells in a way that customers understand.

All of this must be done in the most cost-effective way possible. Company management must constantly measure and manage the process. Sales can suffer in three ways if management is inadequate. 1. Sales volumes may fall short of potential. 2. Costs increase beyond what is possible, reducing profits and 3. Profitability of certain product groups decreases when some products do not reach their full potential.

It is easy to find evidence of the relative effectiveness of the sales organization from sources outside the company. Both competitors and customers know the answers. The effectiveness of the sales organization is at least as important as production and product development. Many successful companies develop their sales organization by continuously training their personnel in the sales organization. The importance of sales is constantly increasing today, because customers have more information about the products sold than in the past.

5. Does the company have a sufficient profit margin?

An increase in sales is of no use if it does not increase the company's profits. The first task of an investor is to examine the profit margin, i.e. how many cents the company makes in profit for every euro. A profit margin of 2-3 percent higher than the next best competitor will give an investor a great return. Company margins vary within and between business sectors. The issue needs to be studied over a longer period than a year. Margins should be examined over at least one business cycle. Margins in a business sector almost always change with the cycle.

A company must be either more cost-effective than other players or at least as efficient as other companies in all its most important products. It must also show investors that it will be so in the future. This is reflected in profit margins when the company is compared to competitors.

Almost all companies increase their margins when the industry is booming. Less high-quality companies increase their profit margins relatively more during the cycle than high-quality ones. The margins of weak companies fall much more as the brilliance of the business sector fades after the peak of the cycle. An investor will not make the greatest returns in the long run by investing in weaker companies. Fisher says the only reason to invest in companies with lower profit margins is clear evidence that the situation is changing. The cycle cannot be the cause of the change. The company must either improve its efficiency or introduce new products to the market.

In the case of older and larger companies, the greatest returns come to the investor when the company's profit margin is among the highest in its industry. There is one exception to this. Sometimes these companies reduce their margins to accelerate their growth by using their profits to increase product development and sales more than usual. Investors need to find out what is going on when margins are falling and not just take the company's word for it. Investors should avoid these companies unless they can be sure that the falling margins are temporary and intentional.

Philip Fisher part 4 and the Fisher method, Company research, points 2,3 /15

 2. Is management ready to develop new products and processes when the growth potential of the current ones has already been used up?

Few companies have enough current products to sustain decades of growth that will bring the best returns to investors. The company should invest in scientific research and product development. These are the best ways to increase sales in the long term. New products and the development of old ones improve opportunities. Investors usually get the best returns by investing in companies whose new products are related to the current ones.

This does not directly mean that the company should focus only on certain products. It can have several product groups for which it develops new products. A company that creates a foundation for its future growth and focuses on its research foundation will produce the best opportunities for future growth. Developing new products for completely new businesses that do not correspond to the company's current business is more likely to fail.

3. How efficient is the company's product development activities relative to its size?

Many companies report their product development costs, so measuring their efficiency in relation to the size of the company and other companies in the industry does not sound like a complicated task. One big problem with this is that not all companies measure the same cost items in the company's results. An investor can only use the figures to make rough estimates of whether a company is doing an abnormal amount of product development, only clearly less than others. Even in well-managed companies, the differences in efficiency can be a ratio of two to one. The differences between well-managed and poorly managed companies are even greater.

Creating new products and methods requires high-level expertise in several fields. New products are rarely developed by a single genius. Expertise alone is not enough; high-quality management is also needed, which makes people with different backgrounds work efficiently towards a common goal. Coordinating product developers, production and sales is not easy. If this is not done, new products will not be manufactured as cheaply as possible and the new products will not achieve the best possible sales. In this case, the risk is that the market will be taken over by more efficient competitors.

Senior management must also understand the importance of product development processes. Development projects should not be expanded in good years and suddenly reduced in bad ones. Some in senior management may suddenly transfer experts from other important projects to their own purposes, temporarily suspending projects for the sake of a momentary important project. This is rarely sensible. The essence of successful commercial research is that the company focuses only on projects from which the highest profits are expected compared to the costs. Many in the company's management did not understand this since Fisher. Company management must avoid the temptation to invest heavily in projects whose markets are too small to make significant profits.

If an investor cannot find the company's reported figures for product development investments, he can try to find answers himself by talking to researchers in the field at universities and research institutes, competitors and statistical offices. A simpler approach might be to examine a company's profits and sales growth compared to its R&D investments over a longer period. Fisher suggests ten years as one possible period.

Philip Fisher part 3 and the Fisher method, Company research, intro and point 1/15

 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.

Philip Fisher part 2. Fisher method and finding ideas

 Fisher's method

The idea behind Fisher's method is to find the best business, run by the best management, and invest in it without worrying too much about the numbers. His goal was to find a few excellent investment targets and stick with them for decades. Fisher's method can be divided into three parts: finding ideas, researching companies with the help of customers, subcontractors, and former employees, among others, and meeting management. This requires time, understanding of the business, and skill.

It took Fisher months to find an investment target. In today's rapidly changing world, it can seem like an eternity. It's not, because investments are intended to be held for decades. The process of a few months is a small price to pay for decades of returns. The investor must think for himself whether the time required by Fisher's method is necessary for the returns he is seeking. The answer is individual.

Making a single investment was a labor and pain for him. This took months. Fisher rarely went so far as to visit the companies and talk to the management. According to him, only about one in 250 ideas led to an investment. About one in 100 ideas led to a conversation with management, and on average, about one in five ideas led to researching the company. He rarely needed to spend months researching an investment because most companies were eliminated early on using the method. This method is similar to modern automated stock research using key figures, but Fisher focused mostly on the quality aspect rather than crunching numbers. Some of the quality factors are reflected in the company's numbers, so Fisher also paid attention to what.

Finding Ideas

Fisher used his business contacts and other investors to find investment targets. Using his business contacts, he got a fifth of his ideas and four fifths from other investors. This came as a surprise when he looked at where he got his ideas. He had thought that business contacts would bring most of his ideas. He didn't listen to just anyone many times, but most of his ideas came from a few investors and the rest from business contacts.

He gave each young investor the opportunity to meet with him once to talk about their investment. He rarely met with the same person more than once. He was open to a second meeting and a willingness to exchange ideas if, after the first meeting, he believed the investor was exceptionally capable. These people gave him many ideas over the decades. He had a fifteen-point checklist that he went through with each idea. He only got more than one idea from the same person twice. The other was his son Ken Fisher, whose ideas he used three times. Both of the other person’s ideas made him lose money.

You can use other investors to find ideas, but you have to be selective in how you use them. Not all investors who seem to be successful are skilled or intelligent. They may have longer-term luck than others. Fisher used other people’s ideas only when he was sure of the other investor’s ability and the goodness of his ideas. Only by carefully examining the ability of others can you use their ideas. Without certainty of competence, there is no point in thinking about using anyone's ideas. If you can't form it, then there is no point in listening to them. In the age of social media, there are thousands of people offering their opinions as facts. You just need to find a few people you are sure are competent and use only their ideas and your own. I recommend that you do your own research on companies.

Competence is not guaranteed by a reputation as an investment guru or a few years of success in bull markets. Long-term, or decades of continuous high returns say more. In the age of social media, it is also not guaranteed by large groups of followers, which say more about the faith of herd souls than about real competence. It is also not guaranteed by the use of difficult terms. The ability to simplify difficult things as far as is reasonable, but no further, tells much more. This is an exceptional ability that is found in all the top investors I have studied. Fisher is no exception.

Philip Fisher, part 1 Short Introduction

 Introduction

“If you can’t do something better than others, don’t do it at all!”

Philip Fisher was a pioneer of the quality company philosophy. He believed that quality business and management would produce the best results for investors in all circumstances. Whether it was inflation, deflation, or times of steady growth, quality was the best option for him. He was at his best as an investor when he put his money in industrial companies that utilized natural sciences to develop market-conquering products. He also believed that financial institutions and consumer products companies offered top targets, but he did not believe that he could definitely find them himself. One reason for the latter was perhaps his excessive belief in rationality, when the cornerstone of many consumer products companies’ business is the brand, which is mostly the result of irrationality. He believed that he would get the best results from companies that utilize technology. His investment results support this argument. He believed that too many investors were focusing on companies in too many industries.

Fisher did not believe in diversification, but concentrated his holdings in a smaller number of companies. The majority of his portfolio was in a few stocks. His longest-standing holdings were Motorola and Texas Instruments. He owned them from the 1950s until the early 2000s. According to his son, in his last years he was already demented and unable to make rational decisions. No one has published exact investment results about him, so it is impossible to say how well he did. By investing in Motorola and Texas Instruments alone, he made extremely good returns.

Fisher was a patient, intelligent, uncompromising thinker. He loved three things most: walking, working, and caring. He could walk long distances, enjoying every moment while being at his most relaxed. He walked to and from work every day. He was a minimalist whose only luxury was the view from his home. He never wanted to change anything in his life. He was in his office from nine to four. One reason he always walked to work was that he didn't like crowds and didn't want to communicate with others. He had a few clients and he lectured at Stanford for a while. His book Common Stocks and Uncommon Profits served as a textbook there for a long time. He was also afraid of everything and everything all the time. He worried so much that he didn't take much risk when investing. That's why he didn't become as rich as he could have been.