Benjamin Graham, known for value investing, and Philip Fisher, the father of growth investing, shaped different paths in the investment world.
Fisher gained fame as a significant American stock investor through his book "Common Stocks and Uncommon Profits." His strategy centred on investing in quality companies for the long haul and giving a lot of importance to detailed research before making any investment. When choosing where to invest, he mainly considered the quality aspects of a company rather than just looking at numbers.
One of his most famous investments was Motorola which he bought in 1955 and didn’t sell for the remainder of his life. According to Fisher,
“If the job has been correctly done when a common stock is purchased, the time to sell it is almost never.” — Philip Fisher
Though my focus leans toward value investing, Fisher's principles resonate. It helps me avoid value traps and prioritize a company's growth potential.
Fisher's approach included 15 points for considering a stock, yet he emphasized that a company didn't necessarily have to fulfil all these criteria. Instead, meeting most of these points was sufficient to make it worth considering an investment in that company.
Let us go through this list and by the end of it, write down which point resonates with you the most.
Philip Fisher 15 points checklist
Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?
A good example that Fisher gives is the boom in TV sales when they were new. However, once almost every home had one, demand plummeted since people didn't need multiple TVs.
His point emphasizes a company's potential for sales growth.
He distinguishes between lucky companies and those that create their luck through their capabilities, stressing the need for sustained market potential for future growth.
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?
Many failed businesses suffered because they either exhausted their product lines or neglected innovation.
Nokia serves as an example: it grew complacent and failed to create new products. When competitors like Apple and Samsung emerged, Nokia couldn't catch up.
Fisher highlights successful businesses focus on developing related areas instead of entirely new ventures.
How effective are the company's research and development efforts in relation to its size?
This question checks if a company invests well in innovation based on its resources. You can figure this out by dividing revenue by R&D spending.
But keep in mind, that results vary widely among companies, so it's important to compare with industry peers for a meaningful assessment.
Does the company have an above-average sales organization?
Even if a product is great, it needs effective sales and investors often overlook sales efficiency.
Fisher looks at whether a company has a standout sales team. He emphasizes the importance of training in sales, seen as a key measure of a company's success.
Does the company have a worthwhile profit margin?
Fisher examines if a company's profit margin supports its operations and rewards investors. He recommends analyzing earnings across several years, not just recent ones.
He warns against companies that wildly swing with industry trends, suggesting these as red flags. Don't be swayed by flashy percentage increases; scrutinize real numbers to gauge sustainability versus hype in profits.
What is the company doing to maintain or improve profit margins?
Fisher emphasizes how a stock's success post-purchase isn't tied to its past performance. While it seems obvious, we often rely on history for evaluations.
His point urges us to focus on the future; past performance, though important, doesn't guarantee future success.
Does the company have outstanding labor and personnel relations?
Fisher seeks to determine if the company maintains excellent and positive interactions with its workforce, fostering a conducive and productive environment. Strong labor and personnel relations often indicate better morale, productivity, and stability within the company.
Good relations mean less chance of strikes or high turnover, saving the company money.
Does the company have outstanding executive relations?
It is about finding companies with top-notch leadership for better returns.
Strong leaders are drawn to promising opportunities. They value merit-based achievements, rewards, and promotions over politics. They’re not much different from us, seeking success based on performance and opportunity.
Does the company have depth to its management?
Succession planning matters; things may not always go as expected. Larger companies usually handle this better. Fisher advises grooming C-level talent between $15-$40 million in revenue.
Micromanaging hinders growth; delegation empowers employees to grow. Listening to and valuing diverse ideas cultivates future leaders. Without these, a company risks lacking strong future leadership, affecting investors.
How good are the company's cost analysis and accounting controls?
Understanding costs is crucial for business success. Without knowing the costs, it's hard to pinpoint expensive products or processes. This knowledge helps manage expenses effectively.
In addition to that, you won’t know what products are your valuable products which will keep you from promoting them and maximizing profits.
Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company will be in relation to its competition?
This question looks beyond usual measurements to find signs of how well the company might outshine others in its field.
These unique aspects give investors key insights into how the company might perform against its industry rivals.
Does the company have a short-range or long-range outlook in regard to profits?
It looks at whether a company prefers quick profits or opts for steady, long-term growth.
Companies willing to forgo short-term gains for lasting success are commendable and worth exploring. Amazon stands out as a bold and visionary example of such a company.
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' benefit from this anticipated growth?
Fisher wants you to check if the company's cash and potential borrowing can cover future projects. If not, it is a problem.
The company's future growth might demand so much equity financing that the issuance of new shares might diminish the benefit current shareholders expect from the company's anticipated growth.
Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles or disappointments occur?
This is a significant warning sign when evaluating a company. Do the executives openly address issues, or do they hide them when things go wrong? Concealing problems rarely solves them.
Just like in personal matters, hiding information erodes trust. If you can't trust a company, it's wise to reconsider investing in it immediately.
Does the company have a management of unquestionable integrity?
This question, like the one before, examines the honesty of the management. Fisher looks at whether they stick to high ethical standards, showing honesty and transparency.
He highlights red flags like management owning land and renting it to the company at high rates. He also warns about potential employee kickbacks from vendors, urging investor caution.
This checklist of 15 questions isn't a quick and easy tool; it requires time and careful consideration. Over-analyzing may lead to feeling pressured to invest.
While the checklist offers a framework, it's flexible. Embracing better ideas and updates is key. Investors should customize it based on their investment philosophy and risk tolerance.
Let me know which point resonates with you the most and why in the comments below!
Comments