If you have not heard of Philip Fisher, you should have. While Benjamin Graham gets most of the credit for educating Warren Buffett (Trades, Portfolio), Buffett himself has stated he is “85% Graham and 15% Fisher.” I would argue this ratio has shifted to 85% Fisher and 15% Graham as Buffett’s strategy has strayed from value toward growth.
Broadly speaking, Fisher’s strategy was growth at a reasonable price, although it was much more involved. Fisher liked to do in-depth research on the companies he was buying, visiting management, suppliers and customers to get the best idea of the business.
Of course, such a rigorous process of due diligence was not easily repeated, so he concentrated his portfolio on his few best ideas - four or five core ideas with a few satellite positions. This concentrated portfolio approach reportedly made clients “extraordinary gains” as they rode the coattails of great growth companies (his biggest holding, Motorola (MSI, Financial), purchased in 1955, returned nearly 3,000% between 1975 and his retirement in 1999.)
Fisher’s method for finding growth stocks was to concentrate on out-of-favor companies that were spending significant amounts on research and development, spending he believed would pay off over the long term. Fisher was more than prepared to wait for value to be realized.
The best way to describe Fisher’s strategy is to let him describe it himself. The following excerpts are taken from an interview Fisher gave to Forbes in October 1987. The interview is prefaced with a comment from Buffett.
On risk-reward:
"Now I have gone into about three to four times as many additional securities in which I've made more money than I've lost. I've had losses, in two cases as high as 50%. There also have been a number where I have made or lost10%. That's almost the cost of being in business. But there are lots of cases where a stock has gone down moderately, and I've bought more, and it's paid off for me enormously."
On looking for world leaders:
"They are all low-cost producers; they are all either world leaders in their fields or can fully measure up to another of my yardsticks, the Japanese competition. They all now have promising new products, and they all have managements of above-average capabilities by a wide margin."
On looking for growth before Wall Street finds it:
"With Raychem you've got another situation. {With annual sales of $944 million, Raychem manufactures high-performance plastic products.} Several years back management recognized that its older product lines wouldn't keep growing the 20% to 25% a year that they had since the company was started. Raychem developed a whole series of new technologies. But it underestimated how long it would take to get prosperity out of them. The last couple of years it's been bringing these into the market. Now people who are interested in growth but who aren't very sophisticated tend to measure it by how much you spend on R&D. Actually, when bringing on new products, R&D, while important, is less costly than the combination of marketing money, when you're first introducing those new products, and the high-cost production when you first start to get those new products out but where you haven't yet come down the learning curve. The fact these new products have been bunched together has resulted in several years of flat earnings. For a company that had steadily growing earnings before that, this threw Wall Street, with its short-term outlook, for a loop. Now there is great suspicion. Is it really a growth company? To me, it epitomizes a growth company but sells at a price/earnings ratio that doesn't fully reflect this."
On investing for the long term:
"Let me go back to the 1930s. The company I really started my business on was FMC Corp. (FMC, Financial), then called Food Machinery. Two-thirds of its business was in selling to fruit and vegetable canners. So I started learning a fair amount about the canning business. Three different times in the thirties I bought California Packing--that's the Del Monte line--at a low price, when the outlook for canning looked poor, and sold it at a high price. I also bought, for any client who I could get to buy it, as much Food Machinery stock as they would let me. Then in 1940 or 1941 I reviewed the bidding and found that the effort I had put into the timing of buying and selling California Packing shares considerably exceeded the time I had spent learning about and watching Food Machinery stock. Yet already by 1940 my profits in Food Machinery dwarfed the ins and outs of California Packing. That episode finally made me decide not to follow the almost accepted policy at the time that you should buy low and sell high and make a profit and bring it in. This just isn't valid."
Disclosure: The author owns no stock mentioned.
