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Lessons From Philip Fisher

Many of history’s greatest figures stood on the shoulders of giants. This is also true of history’s greatest investors. In my opinion, few shoulders are as broad as those of Philip Fisher.
Philip Fisher is regarded as The Father of Growth Investing. One of the best investing books ever written is “Common Stocks and Uncommon Profits”. Fisher’s 1958 book essentially defines what it means to be a business-focused investor. The philosophies that Fisher advocates within have inspired legions over the years, from Warren Buffett to our own David Gardner, co-founder of The Motley Fool.
Fisher mentioned in his book that stockbrokers are the men who know the price of everything and  the value of nothing, so he saw the need for a firm dedicated to studying not just ratios and metrics, but the best business the stock market had to offer.
He found his own company in 1931 and managed the company’s affairs until his retirement in 1999 at the age of 91. In 70 years of money management, Fisher maintained an extraordinary record by purchasing and holding for long term of well-managed companies with compelling growth prospects that he understand very well. One of Fisher’s most famous investments was Motorola; he bought in 1955 and didn’t sell it for the remainder of his life. He was also an early investor in semiconductor giant Texas Instruments.

Things to learn from Philip Fisher

Fisher, was unlike almost any investor who came before him, specialized in innovative and technology-focused companies preceded Silicon Valley by five decades. There are lots of things to learn from his growth stock method of investing. Here they are.

Lesson 1: Focus more on the business characteristics rather than valuation

First and foremost, Philip Fisher was a growth stock investor. In his view, the greatest investment returns did not come from the purchase of stocks that were undervalued, since even a stock that is undervalued by as much as 50% would only double in price once it reached fair market value.   Instead, he sought much higher returns from those companies that could achieve growth in sales and profits greater than the overall market over a long period of time.
Fisher’s goal in investing was to find multi-bagger stocks more than screen lists of companies selling for less than their book values. He did not seek companies that showed promise of short-term growth due to cyclical events or one-time factors. Instead, he focused on long-term growth coming from companies that were strong in three factors:

• The company is producing goods or services with the potential for future long-term sales
• The company has special characteristics that retain competitive advantages over existing competitors and newcomers
• The company has excellent management with both a determination to grow the company, and the ability to implement its plans.

Lesson 2: Great stocks may look overpriced

Fisher’s approach is clearly different from traditional value investing. No “net-net” or “cigar butts”. Valuation may matter, but it’s secondary to identifying top-notch businesses. For instance, at many points of his book, Fisher says a high PE ratio should not be an automatic turn-off for investors.
Quote from “Common Stocks and Uncommon Profits”:

If the company is deliberately and consistently developing new sources of earning power, and if the industry is one promising to afford equal growth spurts in the future, the price-earnings ratio five or ten years in the future is rather sure to be as much above that of the average stock as it is today…This is why some of the stocks that at first glance appear highest priced may, upon analysis, be the biggest bargains.

Fisher was willing to study any business selling for any price. As he counsels investors in Common Stocks, “Don’t assume that the high price at which a stock may be selling in relation to its earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price.”
Even as information about stocks is more available today, many seemingly expensive stocks go on to crush the market’s expectations. That’s why our co-founder David Gardner is trying identify grossly overvalued stocks according to the financial media. The “too expensive” label comes from underestimating how a game changer company can disrupt its industry, displace competitors, and grow over time. Investors’ fears leave many on the side-lines, only to come in later and drive the stock up further as the writing on the wall becomes more apparent.

Lesson 3: Found home run investments in small and young companies

“I don’t want to spend my time trying to earn a lot of little profits. I want very, very big profits that I’m ready to wait for.” – Philip Fisher

Although large financially strong companies with solid growth prospects can deliver satisfactory returns, the real home runs are to be found in “small and frequently young companies with products that might bring a sensational future.”
Simple math will tell you mega-caps ranging from $350 billion to $750 billion today can’t possibly be 10-baggers not to mention 100-bagger. To find a home run stock that will completely transform your financial situation, you have to be searching among ones that have ample room to grow. After all, all mega-caps are once small caps.
Fisher wrote, “the young growth stock offers by far the greatest possibility of gain. Sometimes this can mount up to several thousand per cent in a decade.”; All else equal, investors with the time and inclination should concentrate their efforts on uncovering young companies with outstanding growth prospects.
The potential reward for looking hidden gem is simply breath-taking!

Fisher 15 Points for Growth Stocks

All good principles are timeless! In the book, Fisher lays out “Points to Look for in a Common Stock”; remain as relevant today as when they were first published. The 15 points are a qualitative guide to finding superbly managed companies with excellent growth prospects. According to Fisher, a company must qualify on most of these 15 points to be considered a worthwhile investment.
1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
3. How effective are the company’s research and development efforts in relation to its size?
4. Does the company have an above-average sales organization?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labour and personnel relations?

8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company’s cost analysis and accounting controls?
11. Are the other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders’s benefit from this anticipated growth?
14. Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?
15. Does the company have a management of unquestionable integrity?

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Disclosure: Hayes Chan, CFA does not own shares of any companies mentioned. Motley Fool Hong Kong is not licensed by the Hong Kong Securities and Futures Commission to carry out any regulated activities under the Securities and Futures Ordinance.