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.

Benjamin Graham and manic-depressive Mr. Market

Manic-depressive Mr. Market can be your friend or your enemy. You can’t control it, but you can control how it affects you. Mr. Market offers a price at which you can either buy or sell shares. If you are not satisfied with the offer, he will come back to it later. This continues from moment to moment, and the real value of the investment is of little importance in the short term. Emotions drive Mr. Market, and you can’t do anything about them. You have to accept them.

A manic Mr. Market moves stock prices up, and a depressive one moves them down. Most of the time, he is almost right. In that case, you cannot determine with sufficient certainty whether the prices are reasonable. Mr. Market can steer prices in the wrong direction for years. Prices go higher and lower than few people believe. This is more the rule than the exception. The direction can change in the blink of an eye, and you cannot predict it. In the long run, Mr. Market is more right than wrong. By acting wisely, you can benefit from both directions. You can buy when the price is lower than the true value and sell when it is higher. Most of the time should be spent doing nothing. Sometimes Mr. Market offers opportunities, in which case it offers you a large margin of safety. In these cases, you need to be able to invest significant amounts. Take full advantage when you can, because you may have to wait years.

A wise investor never has to sell shares, but he sells them because the prices offered by Mr. Market are clearly higher than their true value. The market will go in the wrong direction whether you like it or not. Never invest money that you cannot afford to lose. Mr. Market offers an almost 100% guarantee that it will move some of your investments in the wrong direction and for a long time. If you cannot afford to lose money, it will lose it. As an individual investor, you are in a better position because you can choose, because you are taking advantage of the market. Large organizations are practically forced to take prices offered by Mr. Market all the time.

You need to control your actions. You can avoid unnecessary expenses and keep expectations of future returns reasonable, while others are hysterically chasing the price increases. Investors’ expectations matter. Usually, when the market goes up, so do expectations of returns. During the tech bubble in 1999, investors’ expected returns were 19% per year for the next decade. This meant that results would grow by about 5.7 times in ten years. It is worth noting that the US gross domestic product grew by six times in the last century. This estimate of future prices was completely absurd.

You can reduce Mr. Market’s influence on you by following his actions less often. Following him makes it easier for your subconscious to believe that the prices he offers represent real value. Your subconscious is constantly looking for clues in environment. By following prices, you create anchors for yourself, according to which you determine the value of your investments. At the same time, the calculations and their parameters of your analysis can guide you without realizing it towards the price determined by the market.

A rational investor always tries to keep extra cash to exploit the emotional turmoil of Mr. Market. Sometimes Mr. Market can offer so many attractive options that you have to use almost all your money. You need incredible control to exploit emotional turmoil, which is not easy when Mr. Market, with the help of other investors, offers assessments that contradict your views for years. No one can completely resist them. People are animals that crave action. Even Warren Buffett needs action sometimes, as his partner Charlie Munger has stated, among other things, about Buffett's Berkshire investment in Salomon Brothers.

Mr. Market can affect even patient investors when a large enough herd is running in the same direction. Graham’s story of the oilman at heaven’s gate illustrates the influence of the hordes well: Saint Peter informed the oilman that the places reserved for the oilmen were full. The oilman said, “Can I say four words to them?” Peter says, “Why not?” All the oilmen start rushing from heaven to hell. Peter says, “Well done, now there’s room for you here.” The oilman thinks for a while and says to Peter, “I think I’m going to hell, there may be some truth to the rumor after all.” Unfortunately, this is how we usually act, even though we resist the movements of the people for a long time.