"I don't want a lot of good investments; I want a few outstanding ones." -Philip Fisher
Among the classic investment books available and still recommended by other guru investors is Philip Fisher’s “Common Stocks and Uncommon Profits and Other Writings.” It was published in 1958, during the boom that followed World War II.
Its advocates include Charlie Munger (Trades, Portfolio), who took what he learned from Fisher and used it to help convince Warren Buffett (Trades, Portfolio) to look for quality stocks at reasonable prices, rather than “cigar-butt” stocks that were very cheap but also very risky.
It is introduced by his son, Ken Fisher(Trades, Portfolio), who built his own California investment firm separately from his father's. Ken stuck to many of his father’s principles, but reported he has a more eclectic approach to investments.
Fisher was born in 1907 and died in 2004. He dropped out of Stanford Business School in 1928 to take a job as an analyst at a San Francisco bank. Three years later, he started his own money management firm, Fisher & Co. He kept running it until retiring at age 91 in 1999. Investopedia lists him in the number seven spot on its list of the greatest investors.
In chapter one of his book, Fisher began by noting that before buying any stocks, an investor should see how fortunes were made in the past. And that examination would show there are two very different methods that produced “spectacular fortunes.”
The first method, which he said had been heavily used in the late 19th and early 20th centuries was to make big bets on the business cycle. He attributed this to the unstable banking system, which caused exaggerated boom and bust cycles. That changed, however, in 1913 with the inception of the Federal Reserve System and was solidified with securities and exchange legislation in the early 1930s.
But even as cyclical betting was becoming less common, some investors were making more money and taking fewer risks—by finding quality companies and sticking with them for years. Fisher wrote, “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.”
And it is remarkable, he wrote, that within an investor’s lifetime, he or she had scores of opportunities to build a substantial fortune. It was possible, he added, that someone could invest $10,000 at some point in time and see that grow to $250,000 or more within 25 to 50 years.
Fortunately, it was not necessary to buy “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.” The key was separating the relatively small number of companies with outstanding potential from the relatively large number that had potential ranging from moderately successful to complete failure.
Fisher then asked rhetorically (in 1958) whether such opportunities still existed. Yes, he answered, and they are better opportunities than in the past. That’s because of several fundamental changes. One involved the shift to corporate management, as well as corresponding changes in the handling of corporate affairs. Previously, large corporations were managed by an owning family, and they looked upon their corporations as personal possessions while mostly ignoring the interests of outside shareholders.
For example, the issue of management succession revolved around the motive of taking care of a nephew or son, rather than taking care of shareholders’ capital. In addition, “Today's top corporate management is usually engaged in continuous self-analysis and, in a never-ending search for improvement, frequently even goes outside its own organization by consulting all sorts of experts in its effort to get good advice.”
The author also drew attention to the developing idea of corporate research and engineering, what we would now call “R&D.” This development, along with corporate management learning to use the fruits of research to increase profits, opened up a “golden harvest” for shareholders. Fisher noted that R&D was generally ignored until the threat of Adolph Hitler made it a necessity for military purposes, a necessity that evolved into industrial research after World War II.
According to Fisher, “The impact of this sort of thing on investment can hardly be overstated. The cost of this type of research is becoming so great that the corporation which fails to handle it wisely from a commercial standpoint may stagger under a crushing burden of operating expense.”
What’s more, successful research cannot be picked in advance, and thus many companies will make no profit at all from their investment research. And those that are successful may need many years to get from the idea to the cash register.
Still, not doing research or not doing enough of it can be even more costly. As new materials and new types of machinery emerge, then failure to keep up can lead to complete failure. Give credit here to Fisher’s awareness of the world around him; in 1958 he wrote, “So will such major changes in basic ways of doing things as will be brought about by the adoption of electronic computers for the keeping of records and the use of irradiation for industrial processing.”
Fisher also identified a third factor that was good for investors: Government management of economic cycles, and willingness to lower taxes or take other “deficit-producing” moves aimed at restoring prosperity and reducing unemployment. Add to that the growing influence of income taxes—when there is a sharp decline in business, federal revenues also decline, forcing an incentive to act on governments.
There are a number of other measures that have been implemented or could be implemented that should shorten the length of any recession or depression. These include price supports, unemployment insurance and more. For shareholders in a growth company with strong fundamentals, recessions should no longer be less fatal or disabling.
Finally, in summarizing the differences between the past and the present (the 1950s), Fisher noted, “Such a study indicates that the greatest investment reward comes to those who by good luck or good sense find the occasional company that over the years can grow in sales and profits far more than industry as a whole. It further shows that when we believe we have found such a company we had better stick with it for a long period of time.”
That’s an observation with which value investors such as Munger and Buffett would agree in 2018.
(This article is one in a series of chapter-by-chapter digests. To read more, and digests of other important investing books, go to this page.)
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