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.