The First Dimension of conservative investing, according to Philip Fisher in “Common Stocks and Uncommon Profits and Other Writings,” was an outstanding company, one which competently managed its production, marketing, research and financial controls.
The Second Dimension, he wrote in In chapter two of part two, was people, the managers who made success possible in these outstanding companies. It’s not just good or competent managers he had in mind, but good teams. Such teams must be focused on corporate goals, not power struggles.
In turn, that means top management must invest time to identify and train motivated junior managers. This process should continue down through the chain of command, in a process we now call “succession planning.”
As to the question of promoting from within or hiring outsiders, Fisher wrote that companies should never go outside to recruit, except for staffing at the lowest levels. Still, he is willing to concede that bringing in new managers from outside may inject new ideas.
However, he was quite emphatic about one situation: When a large company needs to bring in a new CEO from outside, it is “a damning sign of something basically wrong with the existing management—no matter how good the surface signs may have been as indicated by the most recent earnings statement.” This action is so concerning, Fisher recommended that investors review their holding when it happens. He also encouraged investors to check the salaries of the top managers: Be wary if the top manager receives a significantly higher compensation package than the next two or three executives.
Turning to the second half of the chapter, Fisher wrote that three elements are always needed in companies tapped for conservative, long-range investments: management recognizes its world is changing at an ever-increasing rate, every worker and manager must feel their company provides a good place to work and management must be disciplined in searching for sound growth.
Management recognizes changes are occurring
Fisher liked companies that keep pushing themselves. He said:
“The company that is rigid in its actions and is not constantly challenging itself has only one way to go, and that way is down. In contrast, certain managements of large companies that have deliberately endeavored to structure themselves so as to be able to change have been those producing some of the most striking rewards for their shareholders.”
From his vantage point in the mid-1970s, he used Dow Chemical Company (now Dow-Dupont (DWDP, Financial)) as an example. He noted the company had broken itself up in to five geographic segments to handle local concerns more quickly. In addition, the five divisions began to compete among themselves, to the benefit of customers. In addition, he commended the company for making the move before being forced into the move by a crisis.
Continuously strive to make the company a good place to work, for everyone
Fisher believed all employees would be more productive and reduce costs if they felt they worked at a company that created a good work environment and had their best interest in mind. Management does that by treating everyone with dignity and consideration; the author cited a case, based on a union complaint, in which production line employees had to eat lunch with grease-stained hands because of a lack of time and washroom facilities. Were this true, he said, the stock of this company would be shunned by careful investors.
On the positive side, Fisher gave the example of Texas Instruments (TXN, Financial) and its “people-effectiveness” program. The program allowed all employees opportunities to take part in managerial-type decisions, an exercise that would improve the company’s performance—and the engagement of employees. The results, said Fisher, were spectacular because employees felt they were really participating in decisions, and they were being rewarded financially as well as with honors and recognition.
He did warn, though, that practices such as this had to be introduced very carefully. Management had to deliver on its promises, since plans are easy to formulate but hard to implement. Nevertheless, companies that can get it right do have something of a proprietary advantage, making them more valuable to long-term investors.
Management must accept the discipline required for sound growth
Fisher began by repeating that companies in his (and our) rapidly changing world cannot stand pat, they must get better or worse. Further, he reminded us that the true objectives of growth investing are to both make gains—and avoid losses. Not every growth company does that; investors must be aware of companies that try to turn in the greatest possible profits every quarter and ignore longer-term growth. Investors should look for companies that earn enough current profits to expand the business.
To put it another way, Fisher argued companies worthy of long-term investment will not give in to the impulse to maximize profits. Instead, they will pursue other good opportunities in which a dollar invested today is likely to turn into multiple dollars in the years ahead.
He summed up this way:
“For the conservative investor, the test of all such actions is whether management is truly building up the long-range profits of the business rather than just seeming to. No matter how well known, the company with a policy that only gives lip service to these disciplines is not likely to prove a happy vehicle for investment funds. Neither is one that tries to follow these disciplines but falls down in executing them, as, for example, a company that makes large research expenditures but so mishandles its efforts as to gain little from them.”
(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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