Today’s Chapter is based on the book “Philip A. Fisher Collected Works: Common Stocks and Uncommon Profits, Paths to Wealth through Common Stocks, Conservative Investors ... and Developing an Investment Philosophy” by Philip Fisher.
Philip Fisher was an influential American investor and author best known for Common Stocks and Uncommon Profits. He pioneered growth investing, emphasizing long-term ownership of high-quality companies and deep research into management, products, and competitive advantage. Warren Buffett once said that he is 85% Ben Graham, but also 15% Philip Fisher.
Here’s what I learned:
Long-Term
“If we think long term, we can accomplish things that we couldn’t otherwise accomplish.”
— Jeff Bezos
Philip Fisher mentions in his book that the greatest investment rewards come from identifying companies that are capable of sustained growth in sales and profits, especially those far exceeding the industry average, and to remain invested through market fluctuations. He argues against frequent trading or chasing short-term bargains, believing that patience with quality businesses compounds substantially.
This insight of Fisher reminds me of the famous saying that time in the market beats timing the market. Fisher mentions that “within the lifetime of most investors and within the period in which their parents could have acted for nearly all of them, there were available scores of opportunities to lay the groundwork for substantial fortunes for oneself or one’s children. These opportunities did not require purchasing on a particular day at the bottom of a great panic. The shares of these companies were available year after year at prices that were to make this kind of profit possible. What was required was the ability to distinguish these relatively few companies with outstanding investment possibilities from the much greater number whose future would vary all the way from the moderately successful to the complete failure.”
“Even in those earlier times, finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear.”
— Philip Fisher
As such, Fisher’s remarks is a proof that thinking long-term is necessary to compound wealth. As a matter of fact, he explains that sound investors should not sell shares in outstanding companies even during market downturns. He argues that it is impossible for one to time the market. He writes, “If the job has been correctly done when a common stock is purchased, the time to sell it is—almost never.”
Fisher elaborates that there are only three reasons for which an investor should sell shares in a company. The first is when the original purchase was a mistake and the facts reveal that the company was less attractive than initially believed. Fisher also mentions that a lot of investors often have the urge to wait for a stock to recoup its losses before selling, but that this is always a mistake.
“More money has probably been lost by investors holding a stock they really did not want until they could ‘at least come out even’ than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous.”
— Phil Fisher
The second reason for selling is when the company’s fundamentals has deteriorated. For example, this can happen when the management team has lost its edge or the company’s competitive position has weakened. As such, it is primordial for investors to remain alert to changes in the companies they own. He writes, “Sales should always be made of the stock of a company which, because of changes resulting from the passage of time, no longer qualifies in regard to the fifteen points outlined in Chapter Three to about the same degree it qualified at the time of purchase. This is why investors should be constantly on their guard. It explains why it is of such importance to keep at all times in close contact with the affairs of companies whose shares are held.”
Finally, the third reason to sell is when an investor discovers an even more compelling opportunity and needs to reallocate capital. However, Fisher cautions that this situation should seldomly arise and should only be acted upon with great confidence.
“The company that can show an average annual increase of 12 per cent for a long period of years should be a source of considerable financial satisfaction to its owners. However, the difference between these results and those that could occur from a company showing a 20 per cent average annual gain would be well worth the additional trouble and capital gains taxes that might be involved.”
— Phil Fisher
This reminds me of what we have learned from Charlie Munger who has always been a big proponent of delayed gratification. He believes in the importance of patience and being prepared to act at scale when a great opportunities arise. As he once said, “If you’re glued together and honorable and get up every morning and keep learning every day and you’re willing to go in for a lot of deferred gratification all your life, you’re going to succeed.”
Munger gave a great example of delayed gratification: How he earned $400 million from reading Barron’s magazine. Munger had been reading Barron’s magazine for more than fifty years, but found only one actionable idea in it. He bought a cheaply valued auto parts company at $1 per share and sold a few years later at $15 per share, earning him $80 million in profits. Munger then gave this $80 million to Li Lu who turned it into $400 million. This story is a great example of the significance of extreme patience, deferred gratification, and the display of strong decisiveness at the right moment.
“People who arbitrage time will almost always outperform. The first order thought of instant gratification is a crowded path, ensuring mediocre results at best. Delayed gratification, which requires second order thinking, is less crowded and more likely to get results.”
—Shane Parrish
The Scuttlebutt Method
“But when I started out, and for a long time I used to do a lot of what Phil Fisher described — I followed his scuttlebutt method. And I don’t think you can do too much of it.”
— Warren Buffett
One of Phil Fisher’s most innovative contribution to investment practice was his emphasis on what he called the “scuttlebutt” method. Rather than relying solely on the numbers on the financial statements, he believes that to truly understand a company requires talking to everyone connected to it, such as the competitors, suppliers, customers, former employees, and industry experts. This deep research would reveal the qualitative factors that financial statements could never capture.
As such, Fisher advices that the first step while analyzing a company is to read their financial statements and the second step is to conduct a scuttlebutt on it. However, before doing so, Fisher recommends reading analyst reports that are recently written on the company. He writes that “There are two benefits from doing this. It will enable any experienced financial man to sharpen his perception of exactly what comprises the current financial image of the company so that he may be that much more alert for deviations. Also the better of these reports may furnish him valuable leads as to particular aspects of the business on which he should focus special attention.”
As for the second step, Fisher mentions that the scuttlebutt method is aimed at investigating the company through individuals who are not officers or employees of the company but who know a great deal about it, especially details that cannot be learned from reading readily available materials. He elaborates that “One of these groups is vendors or suppliers to a company. Another is customers, particularly large customers. However, perhaps the most important of all is competitors. It has been said that if anyone went to the top sales people in each of six competitive companies, seeking the comparative strengths and weaknesses of each of the other five, the consensus views that would emerge would provide a remarkably accurate picture of the good and bad points of all six.”
“It is my opinion that in almost any field nothing is worth doing unless it is worth doing right. When it comes to selecting growth stocks, the rewards for proper action are so huge and the penalty for poor judgment is so great that it is hard to see why anyone would want to select a growth stock on the basis of superficial knowledge. If an investor or financial man wants to go about finding a growth stock properly, I believe one rule he should always follow is this: he should never visit the management of any company he is considering for investment until he has first gathered together at least 50 per cent of all the knowledge he would need to make the investment. If he contacts the management without having done this first, he is in the highly dangerous position of knowing so little of what he should seek that his chance of coming up with the right answer is largely a matter of luck.”
— Phil Fisher
To conclude, Phil Fisher’s method is definitely not for the lazy or impatient. It demands intellectual curiosity, social skills and persistence. But for those who are willing to do the work, it offers a possibility of gaining insights that others miss. On this, Fisher writes, “In what other line of activity could you put $10,000 in one year and ten years later (with only occasional checking in the meantime to be sure management continues of high caliber) be able to have an asset worth from $40,000 to $150,000? This is the kind of reward gained from selecting growth stocks successfully. Is it either logical or reasonable that anyone could do this with an effort no harder than reading a few simply worded brokers’ free circulars in the comfort of an armchair one evening a week?”
The “Scuttlebutt” method reminds me of Howard Marks who believes that successful investing is far more demanding than most people realize. It requires seeing beyond the obvious surface-level analysis that everyone else is doing. Marks argues that merely matching the market is easy, but outperforming it requires superior insight, which he calls second-level thinking. He writes, “Anyone can achieve average investment performance—just invest in an index fund that buys a little of everything. That will give you what is known as “market returns”—merely matching whatever the market does. But successful investors want more. They want to beat the market.”
As such, in Marks’ opinion, the definition of successful investing is to do better than the market and other investors. He adheres to the fact that “To accomplish that, you need either good luck or superior insight. Counting on luck isn’t much of a plan, so you’d better concentrate on insight.”
The core challenge is that not only do you need to have a contrarian approach, but your thinking must surpass the collective intelligence of the market. Other participants are smart, informed, and equipped with powerful tools, so you need an edge they lack.
“Remember, your goal in investing isn’t to earn average returns; you want to do better than average. Thus, your thinking has to be better than that of others—both more powerful and at a higher level. Since other investors may be smart, well-informed and highly computerized, you must find an edge they don’t have. You must think of something they haven’t thought of, see things they miss or bring insight they don’t possess. You have to react differently and behave differently. In short, being right may be a necessary condition for investment success, but it won’t be sufficient. You must be more right than others … which by definition means your thinking has to be different.”
— Howard Marks
Marks mentions that second-level thinking is not linear or simple. It involves weighting probabilities and comparing your view to the consensus. A second-level thinker must take many things into account such as:
What is the range of likely future outcomes?
Which outcome do I think will occur?
What’s the probability I’m right?
What does the consensus think?
How does my expectation differ from the consensus?
How does the current price for the asset comport with the consensus view of the future, and with mine?
Is the consensus psychology that’s incorporated in the price too bullish or bearish?
What will happen to the asset’s price if the consensus turns out to be right, and what if I’m right?
Howard Marks reminds us that investing is a competitive endeavor. To win consistently, you cannot follow the crowd. You must train yourself to question assumptions, probe deeper, and stay disciplined when your view diverges from the majority. Marks makes it clear that this higher-level cognition is the foundation of lasting outperformance. He writes, “Before trying to compete in the zero-sum world of investing, you must ask yourself whether you have good reason to expect to be in the top half. To outperform the average investor, you have to be able to outthink the consensus. Are you capable of doing so? What makes you think so?”
“If your behavior is conventional, you’re likely to get conventional results—either good or bad. Only if your behavior is unconventional is your performance likely to be unconventional, and only if your judgments are superior is your performance likely to be above average.”
— Howard Marks
Quality of Management
“The greatest leader is not necessarily the one who does the greatest things. He is the one that gets the people to do the greatest things.”
— Ronald Reagan
Throughout his writings, it is clear that Philip Fisher understands that the quality of management is the single most important factor in determining whether a company will be successful long-term investment or not. As a matter of fact, he believes that management quality can be manifested in many ways. For example, it can be shown through the company’s profit margins relative to competitors, in its research and development productivity, in its labor relations, or in its treatment of customers and suppliers. As he explains, “No company grows for a long period of years just because it is lucky. It must have and continue to keep a high order of business skill, otherwise it will not be able to capitalize on its good fortune and to defend its competitive position from the inroads of others.”
To identify a good management team, Fisher first prioritizes integrity. He insists on finding companies where managers do not prioritize their own interests over those of shareholders, and those that have a genuine sense of trusteeship.
“Regardless of how high the rating may be in all other matters, however, if there is a serious question of the lack of a strong management sense of trusteeship for stockholders, the investor should never seriously consider participating in such an enterprise.”
— Phil Fisher
Furthermore, a second thing that Fisher emphasizes is the depth of the company’s management team and its ability to train successors. He explains that no matter how brilliant a manager is, the company is extremely vulnerable if talent isn’t developed at every level. He writes, “One of these goals, which is absolutely essential if an investment is to be a truly successful one, is that top management take the time to identify and train qualified and motivated juniors to succeed senior management whenever a replacement is necessary.”
To do, it is important for management team to be able to delegate authorities to those below them.
“No large company ever built up an outstanding management team which did not delegate authority to those who were performing well. Otherwise, junior executives could have no opportunity to perfect themselves from actual experience, to mature, and to grow.”
— Phil Fisher
This is eerily similar to Warren Buffett’s philosophy, who believes that management quality is paramount when evaluating potential investments. A skilled and trustworthy management team can significantly influence a company’s success or failure. He once said, “After some other mistakes, I learned to go into business only with people whom I like, trust, and admire.”
As a matter of fact, for Buffett, integrity is the most important trait he’s looking for in a manager. He explains, “You’re looking for three things, generally, in a person, intelligence, energy and integrity. And if they don’t have the last one, don’t even bother with the first two. I tell them, ‘Everyone here has the intelligence and energy—you wouldn’t be here otherwise. But the integrity is up to you. You weren’t born with it, you can’t learn it in school.’”
Furthermore, Buffett explains that talented managers aren’t necessarily those that are highly qualified in terms of education or those that have an MBA degree. As a matter of fact, Alan Greenberg once said, “If somebody with an MBA degree applies for a job, we will certainly not hold it against them, but we are really looking for people with PSD degrees (PSD stands for poor, smart and a deep desire to become rich.)”*
“Berkshire’s CEOs come in many forms. Some have MBAs; others never finished college... Our team resembles a baseball squad composed of all-stars having vastly different batting styles.”
— Warren Buffett
Finally, Buffett explains that once you have identified a superb manager, you have to make sure that you do everything in your power to retain them even if they are getting old. As he once said, “We do not remove superstars from our line-up merely because they have attained a specified age... Superb managers are too scarce a resource to be discarded simply because a cake gets crowded with candles.”
And as we have previously seen, Warren Buffett is well-known for his decentralised management system at Berkshire Hathaway. Charlie Munger, the ex-Vice Chairman of Berkshire Hathaway once described the system as “delegation just short of abdication.” While the capital allocation decisions are taken care of by Munger and Buffett, all operation decisions are left to managers in the company who are left alone to run their businesses.
As Buffett mentions, “At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment... Our trust is in people rather than process. A “hire well, manage little” code suits both them and me.”
*“Our managers are totally in charge of their personal schedules. Second, we give each a simple mission: Just run your business as if:
You own 100% of it;
It is the only asset in the world that you and your family have or will ever have; and
You can’t sell or merge it for at least a century. As a corollary, we tell them they should not let any of their decisions be affected even slightly by accounting considerations. We want our managers to think about what counts, not how it will be counted.”*
— Warren Buffett
Beyond the Book
Read "The Cookie Monster Knows More About Willpower Than You" by Farnam Street
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