Thursday, July 13th, 2006
Buffett’s other mentor
Most people would correctly say the biggest influence on billionaire investment legend Warren Buffett is Benjamin Graham, the author of the The Intelligent Investor Rev Ed. (Collins Business Essentials) bible on value investing. But a lesser-known guru, Philip Fisher, could be given almost as much credit for influencing the greatest investor of all time.
His book, 
Common Stocks and Uncommon Profits, helped Buffett shift from focussing purely on value to incorporating into his investment strategy the quality of businesses. Fisher is the ‘great business’ in Buffett’s philosophy of buying ‘great businesses at cheap prices.’
Like Buffett, Fisher has a buy-and-hold philosophy. He advocated buying growth stocks and sought companies which had products and management that generated long-term increases in sales and earnings.
Fisher had a battery of requirements. Though a rather shy and retiring type, he would still drill management to see if they lived up to his high expectations. His rigorous criteria are outlined in the chapter ‘Fifteen points to look for in a common stock’. It includes questions such as: Does management have a determination to continually innovate through new products? Does it have a short-range or long-range outlook in regard to profits? Does the company have a management of unquestionable integrity?
Fisher’s son, Kenneth Fisher, who described his father as “small, slight, almost guant, timid and forever fretful”, has written that his father’s most incisive question was simple. “What are you doing your competitors aren’t doing yet?” That question goes to the essence of great, innovative growth stocks and should be asked of any potential investment. Kenneth Fisher, a Forbes columnist, has himself gone on to make a fortune as a money manager.
The factors Fisher talks about are hard to measure, which is important to note in a time where everything needs to be measured and when judgement is less respected. But qualitative factors can be just as important as a company’s financials. As mentioned, Warren Buffett’s success has come from a synthesis of Fisher’s qualitative approach with
the rigid quantitative methods of Graham. That’s why you’ll hear the Sage of Omaha placing so much emphasis on having honest, focused executives running the companies he invests in.
Fisher’s other insights could be seen as being at odds with the value investing school. He played down the importance of dividends and believed that high price-earnings (PE) ratios shouldn’t necessarily rule a stock out of consideration. He also
eschewed diversification, believing investors should focus on a small number of stocks that they know a lot about. But he advocated buying good companies when the markets drop on fears of war.
Fisher brought a personal approach to finding great growth stocks, too. He limited the stocks he bought to areas he knew a lot about. He also made famous the ’scuttlebutt’ technique of getting the lowdown on a company by talking to suppliers, customers, competitors and employees.
Common Stocks and Uncommon Profits will require several readings to grasp the full impact of its message. But it sums up the characteristics of great growth stocks that generate superior returns over the long term.
Word Count: 497. This entry was posted on Thursday, July 13th, 2006 at 8:51 pm and is filed under Buy & Hold, General investment, Philip Fisher. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
July 17th, 2006 at 7:26 pm
With all due respect to Ben Granham, I believe that Fisher is the better investor of the two. I have read Common Stocks and Uncommon Profits(my most treasured investment book) no less than a dozen times, and I walk away with a new-found perspective after each reading.
Buffett once said that he was “85% Granham and 15% Fisher,” but he said it a long time ago. Today, I would say that Buffet is more like 70% Fisher and 30% Granham.