After the publication of the original edition of his investment book, Philip Fisher reported that he was deluged with letters from readers, asking for more details about buying what he called “growth stocks.” That prompted him to add in the 1958 edition the content found in chapter 10 of “Common Stocks and Uncommon Profits and Other Writings.”
His first advice was that investors need to commit significant amounts of time, as well as skill and alertness, to the task.
Second, he spoke of his own investment “journey.” Originally, he did his first, qualitative screen using discussions with what he called “quite able business executives and scientists.” For some years, he believed their ideas were his best source for creating a short list.
At some point, however, Fisher did some self-examination and concluded the business executive-scientist classification was not his best source of original ideas. Instead, he found 80% of his best ideas had been coming from what he called “able investment men.” From talking to them, he could quickly find out whether an in-depth examination of a particular stock would be a “good gamble.”
Not all investment men were offering good ideas, though. Nor were most of the printed materials he consumed, whether magazines, investment company reports or brokerage bulletins. While they might occasionally provide good ideas, most did not.
In contemporary terms, few investors have as much access to good investment men as did Fisher, given the amount of money he managed. However, there are some, and one source would be some of the talented writers on GuruFocus. And, this being the age of the Internet, there are vast resources at our fingertips; in 2018, our challenge is not to find wise investment men and women, but to distinguish among all givers of advice, to sort the wheat from the chaff.
Getting back to Fisher, he wrote there are three things he does not do after talking to the investment men: (1) does not yet talk to management, (2) does not pore over annual reports and (3) does not ask stockbrokers what they think of a stock. However, he will take a quick look at balance sheets or read a prospectus to get information on sales, competition and other key operating metrics.
With those tasks completed, he then went into the second stage of his investment process, which was gathering “scuttlebutt,” the term he used to refer to information he collects by contacting customers, competitors and others that have some special insight into a company. At this stage, he returns to his business executives-scientists for their thoughts, which he can now approach with context.
Fisher also offers this insightful idea: If he cannot find enough of the information he needs, he drops his investigation of the company and moves on to another. Did this idea help Charlie Munger (Trades, Portfolio) formulate his concept of not wasting time on companies that required hard decisions?
Once Fisher has enough scuttlebutt to get a general sense of a company’s strengths and weaknesses, he is then ready to approach management. As he put it, “no matter how punctilious a management may be in this respect, no corporate officer in his own self-interest can be expected, unasked, to volunteer some of the most significant matters for you, the investor, to know.” In other words, use the scuttlebutt stage to find out what you do not know, since the company is unlikely to volunteer anything negative to you.
To put this part of the process in contemporary terms, imagine gathering information from articles, social media and elsewhere. In developing a profile of a company from this information, you will find some blank spots and some negative issues. Articulate those concerns into specific questions and email them to the company’s investor relations department. While investor relations will no doubt put its best face on all answers, reputable companies are unlikely to lie or mislead (on the risk of facing financial or imprisonment penalties).
From management, Fisher wanted to gather enough information to know whether the company he is interviewing meets the criteria set out in his 15 points. In addition, before he talks to management, he has to believe there is a fair chance he will invest in the company, based on what he learned from the scuttlebutt.
The author proactively anticipated at least one reader objection, “How can anyone be expected to spend this amount of time finding just one investment? Why are not the answers already neatly worked out for me by the first person in the investment business to whom I ask what I should buy?” His response was to ask a third question: In what other line of activity could you put $10,000 in one year and 10 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, he said, was the kind of reward available to investors who buy growth stocks successfully. And, was it possible to get this kind of reward from doing nothing more than reading a few, free brokerage pamphlets one evening a week, while seated in a comfortable armchair?
“So far as I know, no other fields of endeavor offer these huge rewards this easily. Similarly, they cannot be made in the stock market unless you or your investment advisor utilize the same traits that will bring large rewards in any other field of activity. These are great effort combined with ability and enriched by both judgment and vision.”
(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.)
Disclosure: I do not own shares in any company listed, and do not expect to buy any in the next 72 hours.
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