Fisher has a fairly simple investment
plan: buy only outstanding companies and sell only when they are
no longer outstanding. Although many people try to time the
market, this is the method that he has found will consistently return
good results. However, finding outstanding companies is a bit of a
challenge and the book mostly concentrates on suggestions on how to
find the good ones and avoid the bad.
Fisher discovered that his main method of discovering quality companies
was through “scuttlebutt”. Detailed analysis of company
financials simply cannot provide the necessary information; one
must talk to people who know the company. These, of course, are
quite varied individuals, from competitors to vendors and customers, and
when used with caution, former employees.
After scuttlebutt clearly points to a promising company, then an
evaluation can be made with a list of requirements. The
requirements did not seem much different that Graham and Dodd propounded
in
The
Intelligent Investor, and certainly not nearly as elegantly
as in
Good
to Great. They are designed to answer the questions
“is management good” and “is the company doing what it needs to in
order to maintain and expand its market position”. The latter
focuses largely on technology research, an area that Fischer feels is
required for continued success.
The book concludes some advice to investors on what not to do, which
can be fairly effectively summarized by saying “ignore what Wall Street
thinks is important”.
While no means a thorough treatment of investment, Fisher provides very
practial guidelines to how the investor can realize consistently good
profits. Unfortunately, as a fund manager Fisher is able to talk
to management of a company, a luxury not necessarily afforded to the
individual investor and some of his points require this ability. However, there is no way to be sure one’s judgement is correct; his guidelines merely significantly increase the probabilities, and if
the individual investor must settle for slightly worse probabilities,
following Fisher’s methods should still produce significantly better
than average results.
Review: 8
The content, while good, is not
great. The advice is sound and somewhat rare to find, but not
terribly unique. I suspect that, had Good to Great been written before
Fischer’s book, he would have been able to simplify his
guidelines. Also, the writing, while good with good examples, is
not great. This is a good book to read for information, but not
for new ideas or excellence in writing.
Summary
- Buy only high quality companies
- Find these companies by talking to competitors, customers,
vendors, and if one factors in the inevitably strong bias, from former
employees. After scuttlebutt consistently suggests that the
company is good, continue investigations.
- Fifteen points to look for. Require fourteen, perhaps
thirteen if the others are strong.
- “Does the company have products or services with sufficient
market potential to make possible a sizable increase in sales for at
least several years?”
- “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?”
- “How effective are the company’s research and development
efforts in relation to its size?”
- “Does the company have an above-average sales organization?”
- “Does the company have a worthwhile profit margin?”
- “What is the company doing to maintain or improve profit
margins?”
- “Does the company have outstanding [superb] labor and personnel
relations?”
- “Does the company have outstanding [superb] executive
relations?”
- “Does the company have depth to its management?” (i.e.
more than just one or two people)
- “How good are the company’s cost analysis and accounting
controls?” (i.e. ability for detailed cost analysis)
- “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 may be in relation to its competition?”
- “Does the company have a short-range or long-range outlook in
regard to profits?” (the latter is desirable)
- “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 accelerated growth?” (An answer in the negative is
desirable)
- “Does management talk freely to investors about its affairs
when things are going well but ‘clam up’ when troubles and
disappointments occur?”
- “Does the company have a management of unquestionable
integrity?”
- We do not know enough to guess market trends.
- The best time to buy is when a superb company has just spent lots
of money developing a new product and (inevitably) delays occur, causing
investors to push down the prices. This always happens with new
products and if you can have confidence in the outcome, the stock is
now selling at a discount.
- “If the job [selecting a company] has been correctly done when a
common stock is purchased, the time to sell it is—almost never” (p. 91).
- “Perhaps the most peculiar aspect of this much-discussed subject
of dividends is that those giving them the least consideration usually
end up getting the best dividend return” (The better stocks
typically have a lower dividend, but the company grows faster than the
stocks with the bigger dividend, so the end result is a larger total
dividend, although it is a smaller percentage)
- Ed: This is not quite the view of Graham and Dodd (The Intelligent Investor); they claim that stocks with dividends generally increase faster than
those without and virutally mandate consistent and increasing
dividends. However, Graham and Dodd lack a theory of how to pick
great companies. I think their view is that consistent and
increasing dividends is a trait of companies likely to do well.
- Ten don’ts for investors:
- “Don’t buy into promotional companies” (ie. IPOs)
- “Don’t ignore a good stock just because it is traded ‘over the
counter’”
- “Don’t buy a stock just because you like the ‘tone’ of its
annual report”
- “Don’t assume that the high price at which a stock may be
selling in relation to earnings is necessarily an indication that
further growth in those earnings has largely been already discounted in
the price” (i.e. the high P/E might be an indication that
the company will continue to grow at those rates)
- “Don’t quibble over eighths and quarters” (i.e. don’t try
to get get a stock for 50 cents cheaper; it may never get there
and you never buy an excellent stock)
- “Don’t overstress diversification”
- “Don’t be afraid of buying on a war scare”
- “Don’t forget your Gilbert and Sullivan” (i.e. don’t give
too much weight to things that don’t matter, like the price of the
company four years ago, or the historical earnings. What matters
is the state of the company now.)
- “Don’t fail to consider time as well as price in buying a true
growth stock”
- “Don’t follow the crowd”