Masterclass:

Phil Fisher
report published December 2005

Intelligent Investor
PO Box 1158
Bondi Junction NSW 2022
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Share advisor 2

PO Box Q744 Contents

Queen Victoria Bldg. NSW 1230
T 1800 620 414
F 02 9387 8674 The ‘growth’ investment philosophy of Philip A. Fisher 3
[email protected] Fisher’s six formative influences 4
shares.intelligentinvestor.com.au Early triumphs: Food Machinery Corp and 6
Dow Chemical Co
Fisher’s philosophy in practice 7
DISCLAIMER This publication
is general in nature and does Fisher-style stocks in Australia 11
not take your personal situation Further reading 12
into consideration. You should A summary of Philip Fisher’s philosophy 13
seek financial advice specific to
your situation before making
any financial decision.
Past performance is not a reliable
indicator of future performance.
We encourage you to think of
investing as a long-term pursuit.
COPYRIGHT© The Intelligent
Investor Publishing Pty Ltd
2011. Intelligent Investor
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DATE OF PUBLICATION
20 December 2005,
layout updated Sep 2014
 3 MC • phil fisher

The ‘growth’ investment

philosophy of Philip A. Fisher
The late Phil Fisher is ranked among the most influential and successful investors of all time and yet few people have
ever heard of him. Here, you’ll learn about his background, his outstanding performance and the techniques he employed
to achieve it.

Philip A. Fisher was born, educated and, apart from a was first quoted on the stock exchange at about US$2.70,
stint of military service in the Second World War, lived and subsequently increased to more than US$200—a rise
his whole life in the San Francisco Bay area, California. of 7,400% (not counting dividends). Because he bought
The gifted son of a medical doctor, Fisher entered university the shares privately and years before they were listed, it
at the age of 15 years in 1922, and in 1927 enrolled in is likely that Fisher’s results were even better than that.
Stanford University’s newly established Graduate School Fisher was the first investor to publish a coherent and
of Business. After less than a year, and with the intention justifiable method of judging whether a given company
of returning to his studies, he accepted a ‘temporary’ job was a ‘growth company.’ He believed that:
as a statistician (the forerunner of the modern securities n outstanding businesses are characterised by their
analyst) at the Anglo–London and Paris National Bank. In ability over the years to maintain and extend a
less than two years he became the head of the bank’s significant competitive advantage
statistical (research) department; and it was from there
that he witnessed the Crash of 1929. n technological and marketing expertise underlies such
an advantage
If the job has been Shortly afterwards he moved to a local brokerage firm, but
correctly done when lost his job when it was destroyed by the Depression. In n this advantage enables these businesses to increase
1932, he founded his own investment business. their sales and earnings spectacularly
a common stock is
purchased, the time At that point, when the slump was at its worst, executives n the advantage cannot be meaningfully gauged with
to sell it is—almost had little to do and were happy to talk extensively to him numbers and mathematical formulas.
never. about their companies and competitors. On the pillars of Accordingly, Fisher was a masterful practitioner of what he
such intensive research, for a select few clients, he built dubbed the ‘scuttlebutt’method of investing. He invested
up and managed Fisher & Co. until he retired in 1999. only after he had meticulously sifted through scores of
He died not long after in March 2004. trade journals and other literature and conducted long
Philip Fisher ranks among the most successful and and detailed interviews with relevant people. To properly
influential investors of the twentieth century. He was understand a company and appraise its operations,
one of the first to invest almost exclusively on the basis argued Fisher, investors must talk not only to its managers
of non-numeric factors such as the superiority of a but also to its staff, suppliers, competitors and customers;
company’s management and its prospects for spectacular they must also attend trade fairs and devour any and all
long-term growth. relevant industry information; and most generally, they
must keep their eyes and ears open to any developments
He has been acclaimed as one of the earliest proponents that might affect a company’s long-term prospects.
of ‘growth investing’. Fisher sought only the best
companies with the most outstanding prospects, and Fisher had an unconventional and contrarian turn of
disdained all others. His speciality was researching the mind that he used to spot outstanding value well before
type of enterprises for which the San Francisco Bay area the crowd. Most investment professionals, inadvertently
has become famous—the innovative ‘tech’ companies or otherwise, speculate relentlessly by betting on
driven by intensive research and development—and he ‘tips’, today’s news and other short-term information.
developed this speciality almost 40 years before the In sharp contrast, Fisher sought to minimise risk and
phrase ‘Silicon Valley’ was coined. maximise results by holding on to the shares of those
select companies that were best positioned to achieve
The firms he selected during the 1930s and 1940s, such outstanding long-term growth. He eschewed short-term
as Food Machinery Corp. and Dow Chemical Co., were trades for quick profit and instead held his most successful
gradually recognised, after he bought their shares, as investments for decades. Because very few companies
leading ‘high-tech’ firms of that era. Later, he was among are growth companies in his sense of the term, and
the first to spot the potential of electronics firms such because their shares can seldom be bought at attractive
as Hewlett Packard, Motorola, and Texas Instruments. prices, Fisher was also an early proponent of portfolios
Texas Instruments is perhaps his most successful that contain only a handful of companies. His portfolio
investment. He was able to buy a large slice of TI for his never held more than 17 companies, typically held fewer
clients in 1956, long before it became a public company than 10, and three holdings often made up 75% of his
in 1970. Adjusted for its many splits in the past 30 years, it total assets under management.
Share advisor 4

It has been widely acknowledged that since the 1960s Buffett has called Fisher a ‘giant’ of investing and is ‘an
Fisher’s philosophy has greatly influenced other prominent eager reader of whatever Phil has to say.’ ‘I sought [him]
and successful investors. Perhaps most notably, Fisher out after reading his Common Stocks and Uncommon
prompted Warren Buffett to evolve from a strict disciple Profits. When I met him, I was as impressed by the man
of Benjamin Graham (who focused almost exclusively as by his ideas. A thorough understanding of the business,
upon the analysis of a company’s financial statements, obtained by using Phil’s techniques … enables one to
eschewed ‘scuttlebutt’ and forbade his employees to make intelligent investment commitments.’ Most notably,
speak to companies’ managements) into an investor who it was from Fisher that Buffett ‘learnt the value of the
also recognises the qualitative value of fine management “scuttlebutt” approach: go out and talk to competitors,
and a durable competitive advantage. Fisher and Buffett suppliers [and] customers to find out how an industry or
both believed that these ingredients promote the rapid company really operates.’ On several occasions Buffett
growth of a company’s earnings over the years. has stated that his approach to investment was ‘15 percent
[Phil] Fisher and 85 percent Benjamin Graham.’

Fisher’s six formative influences

In his first year of business, Fisher earned about the same as a newspaper hawker. And yet he describes this time as
the most profitable of his life.

Philip Fisher’s approach to investment was not born fully subjected its executives and managers to long, detailed
formed. Like an infant, it possessed distinguishing features discussions about the business’s strengths, weaknesses
from an early age, crawled and stumbled before it walked, and prospects.
gradually finding its feet but nonetheless requiring years Fisher recognised that these visits provided a learning
to mature. According to Fisher, ‘no investment philosophy, opportunity of just the type that he sought, and he was
unless it is just a carbon copy of someone else’s approach, able to manoeuvre himself to take particular advantage
develops in its complete form in any day or year. In my of them. Fisher recounts ‘in that day … when the ratio
Standford University’s Graduate own case, it grew over a considerable period of time, of automobiles to people was tremendously lower than
School of Business partly as a result of what perhaps may be called logical it is today, Professor Emmett did not have a car. I did. I
reasoning, and partly from observing the successes and offered to drive him to these various plants. I did not learn
failures of others, but much of it through the more painful much from him on the way over. However, each week
method of learning from my own mistakes.’ on the way back to Stanford, I would hear comments of
Fisher’s first interest in business, finance and investing was what he really thought of that particular company. This
Fisher’s first interest sparked one afternoon when, at about 10 years of age, he provided me with the most valuable learning experiences
in business, finance overheard his uncle and grandmother discussing business I have ever been privileged to enjoy.’
and investing conditions and how they might affect the companies A third seminal event occurred during the northern
whose stocks she owned. As Fisher recalls it, ‘years later
was sparked one summer of 1928. Unlike the hundreds of students who
I was to realise how very few were the shares she owned enrol today in every major business school and the scores
afternoon when, at
and how extremely superficial were the comments I who focus on finance, in Fisher’s day Stanford (whose
about 10 years of
heard that day, but the interest that was kindled by that Business School rose rapidly to become one of America’s
age, he overheard conversation has continued all during my life … A whole most reputable) enrolled just 19 students, only a handful
his uncle and new world opened to me … I thought the whole subject of whom studied finance and investment. During the
grandmother of judging what makes a business grow an intriguing one, ‘roaring twenties’ these students were quickly hired by
discussing business and here was a game that if I learnt to play it properly firms in New York. In that fateful summer, a local bank
conditions and how would by comparison make any other with which I was sought from Stanford a graduate trained in investments.
they might affect familiar seem drab, meaningless and unexciting.’ The school was anxious to meet this request because
the companies A second formative influence occurred ten years later. it might provide a forerunner for more placements in
whose stocks she During the 1927–28 academic year Fisher was enrolled as the future. Alas, Stanford had no graduates to send. As
owned. a first-year student in Stanford University’s then-fledging Fisher recalls, ‘it was not easy to do, but when I heard of
Graduate School of Business. One day per week was this opportunity, I finally persuaded the school to send
devoted to visits to some of the largest businesses me with the thought that if I were to make good, I would
in the San Francisco Bay area, under the direction of stay there. If I could not fill the job, I would come back
Professor Boris Emmett. Students did not simply visit a and take second-year courses, with the bank realizing
company and inspect its plant and equipment; rather, that the school had made no pretense of sending them
they also listened intently while Professor Emmett a completely trained student.’
 5 MC • phil fisher

The work was extremely simple. In Fisher’s opinion it was 12 months, as the stock market continued on its reckless
also intellectually dishonest. His employer’s investment but merry way with most stocks climbing to new highs,
arm participated in underwriting syndicates that earned I noticed with increasing interest how the stock I had
very high commissions from the sale of new issues of singled out for trouble was sagging further and further
what today would be called ‘junk bonds’. (‘Junk’ bonds in that rising market. It was my first lesson in what later
are issued by firms that lack strong credit ratings and, to was to become part of my basic investment philosophy:
compensate investors for the risk they entail, bear high reading the printed financial records about a company is
rates of interest.) No real attempt was made to evaluate never enough to justify an investment. One of the major
the quality of these bonds, yet the bank’s salespeople steps in prudent investment must be to find out about
told customers that its statistical department would survey a company’s affairs from those who have some direct
customers’ holdings and provide a report on each security familiarity with them.’
Fisher’s approach to they owned. According to Fisher—in a passage that also The lesson Fisher learned from interviewing the radio
investing gelled as aptly describes recent shenanigans and demonstrates agents was quickly followed by a salutary fifth lesson.
he learnt from both how little really changes in investment markets—‘what Fisher writes, ‘In August of 1929 I issued another special
his successes and was actually done in those “security analyses” was to report to the officers of the bank. I predicted that the
grievous mistakes look up the data on a particular company in one of next six months would see the beginning of the greatest
of the late 1920s. the established manuals of the day, such as Moody’s bear market in a quarter of a century. It would be very
He learnt that, or Standard Statistics. Then someone like myself, with satisfying to my ego if at this point I could alter drastically
while a stock might no further knowledge than what was reported in that the tale of just what happened and leave the impression
manual, would simply paraphrase the wording of the
be attractive if it that, having been exactly right in my forecasting, I then
manual to write his own report. Any company that was profited greatly from all this wisdom. The facts were
had a low price-to-
doing a large volume of sales was invariably reported as quite to the contrary.’
earnings ratio (PER),
“well managed” just because it was big. I was under no
a low PER by itself direct orders to recommend that customers switch some Fisher’s head told him during the northern summer of
indicated little, of the securities I “analysed” into whatever security the 1929 that the market as a whole was dangerously high,
and guaranteed bank was attempting to sell at the moment, but the whole but his heart enticed him towards those few stocks ‘that
nothing—and atmosphere was one of encouraging this type of analysis.’ were still cheap’ and were surely worthwhile investments
indeed could be ‘because they had not gone up yet.’ He drew upon the
The superficiality and dubious morality of this procedure meagre profits from trades he had conducted before
an indicator of quickly prompted Fisher to conclude that there must he entered university, and combined them with money
the company’s be a better way. Fortunately, his immediate superior he had earnt while studying and the money he had
weakness. empathised with his dissatisfaction and granted him the saved from his employment at the bank. These funds
time to conduct an experiment. This experiment and its he divided roughly equally among three stocks which
results formed the fourth formative influence upon the he thought were still undervalued. Alas, ‘in spite of my
development of Fisher’s approach to investment. success in ferreting out what was going to happen to
This event happened during the northern autumn the radio stocks, I just did not have the sense to start
of 1928, when speculative interest in radio stocks making similar enquiries from people who knew about
engulfed America. Fisher, drawing upon his experience these [other] … enterprises, even though obtaining
at Stanford, introduced himself to the purchasing agents such information or even getting to meet the people
of major electronics retailers in San Francisco. He, as a who ran these businesses would have been relatively
representative of his employer, sought the agents’ views simple, since they were close at hand.’ As Fisher recalls
about the three major competitors in the ‘hot’ wireless painfully, by 1932 ‘only a tiny percentage of my original
communications industry. Each of the agents gave Fisher investment was represented by the market value of the
surprisingly uniform views about the three radio firms. shares in these companies.’
One, which was privately owned, was very well regarded A wise person is one who makes a particular mistake
and was progressing rapidly. The second, the market only once. (‘If you fool me once’, say people from Texas,
leader Radio Corporation of America, was holding its own ‘then shame on you; fool me twice, shame on me’.)
but feeling the pressure from the private up-andcomer; Wise people quickly recognise their errors, study them,
and the third, a stockmarket favourite at the time, was correctly identify their causes and take immediate steps
slipping drastically and showing signs of severe and to ensure that the same mistake does not recur. It also
perhaps terminal operational difficulties. helps if, like Fisher, they hate to lose money. Fisher’s
Fisher’s employer did not underwrite or trade the approach to investing gelled as he learnt from both his
securities of radio companies and so his research was successes and grievous mistakes of the late 1920s. He
of no particular interest to most of its officers and staff. learnt that, while a stock might be attractive if it had a low
Several of them, however, traded the shares of the two price-to-earnings ratio (PER), a low PER by itself indicated
listed radio companies for their own accounts—and little, and guaranteed nothing—and indeed could be an
nowhere in the material they received from Wall Street indicator of the company’s weakness. He realised, Wall
firms was there a word about the operational difficulties Street opinion to the contrary, that ‘what really counts
that Fisher concluded would shortly overwhelm the in determining whether a stock is cheap or overpriced
market darling. According to Fisher, ‘in the ensuing is not its ratio to the current year’s earnings, but its ratio
Share advisor 6

to the earnings a few years ahead. If I could build up in himself that when prosperity returned he would start his
myself the ability to determine within fairly broad limits own business. Using his rapidly developing philosophy, he
what those earnings might be a few years from now, I resolved to manage others’ capital in exchange for a fee.
would have unlocked the key both to avoiding losses and As it happened, he did not wait for prosperity to return.
making magnificent profits.’ Unable to find employment in the interim, Fisher opened
Early in 1930 Fisher changed employers. This change the doors of Fisher & Co. (a partitioned and windowless
itself was relatively unimportant but it started a chain of area, sub-leased from a desperate lessor, and barely big
The grim news
events that produced the final formative influence upon enough for a desk and a visitor’s chair) at the lowest ebb
of my associates
his philosophy of investment—the one that enabled Fisher of the Great Depression in 1932. In that awful year he
was to prove
to put it into practice. A local brokerage firm made him earned an average of $2.99 per month after expenses—a
one of the most an offer that he could not refuse: in addition to a hefty paltry amount even by the standards of that desperate
fortunate business increase in salary, he would use his emerging criteria and time. In 1933, also a very tough year, although his average
developments, if not methods to identify and purchase the shares of particularly monthly earnings increased by 1,000%, the result was
the most fortunate, attractive companies. Alas, during the remainder of that little more than $29. This, Fisher recalls, was about what
of my life. year President Hoover’s interventionist policies, together he could have earned as a newspaper hawker.
with the disastrous policies the Federal Reserve followed Recall, however, that Fisher’s genius was to buy a company
during the late 1920s and early 1930s, did much to turn into his portfolio, not on the basis of its earnings today
the recession and market crash of late 1929 into the or tomorrow, but on the basis of the vastly increasing
decade-long Great Depression. As a result, his employer’s earnings that he expected it would generate for years
business, like thousands of others, shrivelled. Just before into the future. He used the same logic to evaluate the
Christmas it was declared insolvent and suspended from hardship of his first years on his own: ‘… in what those
the San Francisco Stock Exchange (a forerunner of today’s years were to bring me in the future, they were two of
Pacific Stock Exchange). Fortunately, Fisher was able to the most profitable years of my life. They provided me
make the best of this dire situation. In his words, ‘the with the foundation for an extremely profitable business
grim news of my associates was to prove one of the and with a group of highly loyal clients by 1935.’
most fortunate business developments, if not the most
fortunate, of my life.’ During 1930 Fisher had thought to

Early triumphs: Food Machinery

Corp and Dow Chemical Co
Using his stint in the military as a period in which he could refine his investment approach, Fisher left active service
with two great stock recommendations.

Food Machiner y Corporation was the first major of the deep depression, and as I see it now after all these
selection for Fisher & Co.’s clients’ portfolios. He years, this infant Food Machinery Corporation was unusually
described this company, ‘as it existed in the depths attractive from the “people” standpoint. [Its founder and
of the Great Depression, [as] a microcosm of the type president] was not only an extremely efficient operating
of opportunity I was to seek in the years ahead.’ The head and highly regarded by his customers and his
firm was the product of the merger of three agricultural employees, but also he was a deeply religious man who
machinery companies, and it appealed to Fisher on several scrupulously lived up to a high moral code.’ Accordingly,
grounds. It was, firstly, one of the biggest, strongest and employees from the president to the most junior clerk
lowest-cost manufacturers in its field. Further, thanks to possessed a genuine sense of trusteeship with respect
an outstanding marketing division and a ‘superbly creative to shareholders’ funds, and took great care to ensure that
research or engineering department’ it possessed not just shareholders received the rewards that, as the owners of the
a formidable position in a number of niche markets, it was company and its ultimate bearers of risk, were due to them.
also likely that its constant stream of new products and Food Machinery Corp. was one of a large number of
innovations would maintain and extend its competitive companies that listed during the late 1920s. Unfortunately
advantage well into the future. for most other investors, but very fortunately for Fisher, ‘it
Moreover (and, by Fisher’s way of thinking, perhaps most was thought to be just another of the many “flaky” firms
importantly), he trusted and admired the company’s which were sold to the public at the height of a speculative
management. ‘As I saw the situation in those dark days orgy … [accordingly, during the ensuing Depression]
 7 MC • phil fisher

it was possible to buy these shares in quantity at the very small number of outstanding ‘growth’ companies.
ridiculous price to which they had sunk.’ Fisher did just Finally, during his military service, Fisher decided to learn
that on his clients’ behalf: ‘With a deep conviction that as much as he could about America’s chemical industry.
Food Machinery Corporation would vastly outperform He was convinced that when the US economy resumed
the market as a whole, I bought my clients every share peacetime production, the firms in this industry would
that I was able to convince them to hold. I [also] made possess excellent potential for long-term growth.
the possibilities of this business the spearhead of my
approach in talking to any potential clients I could reach.’ In 1947, his research concluded, he invested a substantial
portion of his clients’ funds in Dow Chemical Co. It
The progress of Fisher’s career was suspended during his appealed because its efforts to become the lowest cost
service in the US Army Air Corps from 1942 to late 1945. producer in several major and rapidly growing markets
His assignments (‘desk jobs’ at various locations within the were showing significant results. Like Food Machinery
US which alternated between short intervals of frenzied Corp., Dow Chemical also emphasised the ‘people factor.’
To be a truly paper-shuffling and long periods of idleness) provided Just after the War, when Fisher asked Dow’s president
conservative an excellent opportunity to plan the resumption of his what he thought would be its biggest problem in the
investment a investment business. During those years his approach to future, the president replied that he worried that Dow
company—for a investment, already very distinct, took its final form. He would become a more ‘military-like organization.’ The
majority if not for all decided, for example, that there was little or no future president’s competence, prescience and sincere concern
of its product lines— in ‘in-and-out-trading’ (he engaged less and less in this for employees and customers, together with the results
must be the lowest- during the 1930s) and resolved to banish it from his of the exhaustive research about the company and
cost producer or repertoire. He also decided to concentrate not just upon industry that Fisher had conducted, convinced Fisher
a particular type of company but upon a particular type
about as low a cost that Dow would be able to increase its profits steadily
of investor. Before the War he had served all types of and substantially during the next several decades. From
producer as
clients, large and small, who had very different objectives. his subsequent—and very happy—experience with
any competitor.
Most but not all of Fisher & Co.’s business had focused on Dow Chemical, Fisher derived another principle: ‘even
finding companies that would enjoy significantly above- if the stock of a particular company seems at or near a
average growth. After the War he limited his clientele to temporary peak and that a sizable decline may strike in
a small group of large investors who shared the same the near future, I will not sell the firm’s shares provided I
objective: the concentration of their holdings upon a believe that its longer-term future is sufficiently attractive.’

Fisher’s philosophy in practice

During Fisher’s career, which spanned more than 60 years, a number of specific themes emerged. These included a
checklist of 15 criteria against which he would measure every potential investment. Let’s take a look at the themes
which constitute Fisher’s philosophy in practice, including a close look at the 15 criteria.

Adopt clues from the past from a representative cross-section of the opinions of
Throughout his career, Fisher constantly studied the those who in one way or another are concerned with any
results of his and others’ investment operations. ‘It seems particular company.’ Given its centrality to his investment
logical,’ he stated more than once, ‘that before even approach, Fisher wrote surprisingly little about scuttlebutt
thinking of buying any common stock the first step is to (his most important book devotes only three pages to it);
see how money has been most successfully made in yet it permeates virtually everything he wrote and did as
the past.’ From these ongoing studies he concluded ‘that an investor. Most notably, it is the basis of a generalization
the greatest investment reward comes to those who by that Fisher demonstrated again and again between the
good luck or good sense find the occasional company 1920s and 1990s: ‘go to five companies in an industry,
that over the years can grow in sales and profits far more ask each of them intelligent questions about the points of
than industry as a whole. It further shows that when we strength and weakness of the other four, and nine times
believe we have found such a company we had better out of 10 a surprisingly detailed and accurate picture of
stick with it for a long period of time.’ all five will emerge.’

The centrality of scuttlebutt The importance of R&D and marketing

In its everyday sense, the word ‘scuttlebutt’ refers to vague Fisher found again and again that an outstanding
and unsubstantiated rumour. Fisher’s use of the term is company’s research and development (R&D) contributes
far more systematic and precise. ‘It is amazing what an mightily to its above-average growth of sales and profits.
accurate picture of the relative points of strength and Even a ‘non-technical’ business, he noted, often needs
weakness of each company in an industry can be obtained considerable research to produce better products and
Share advisor 8

more efficient services. In addition to R&D, Fisher also in inquiring into this subject is usually richly rewarded.’
subjected a company’s sales organisation to close scrutiny. 5. Does the company have a worthwhile profit
A company might develop outstanding products and margin? Although they need not necessarily rise over
services but, unless they were expertly merchandised, time, Fisher seeks companies with the largest possible
the superior R&D would never translate into revenues operating margins. Accordingly, whether the company is
and profits—salespeople are responsible for helping large or small, new or well established, ‘investors desiring
customers understand the benefits of a company’s maximum gains over the years had best stay away from
products and services. An expert sales and marketing low profit-margin or marginal companies.’
organisation, Fisher also noted, monitored its customers’
buying habits and was able not just to spot but even to 6. What is the company doing to maintain or
anticipate changes in their needs. Fisher’s outstanding even improve its profit margin? Simplified drastically,
companies demonstrated repeatedly that marketing is companies can either raise their prices or reduce their
the invaluable link between R&D and profit. costs. Fisher is somewhat sceptical of the company
The greatest that maintains or improves its margins exclusively by
investment reward What to buy: Fisher’s 15 criteria increasing its prices, and looks for those that also maintain
comes to those who Fisher believed that investors should focus on 15 criteria a keen eye towards production, marketing and other cost
by good luck or when deciding where to place their money. The more efficiencies, capital improvements and other innovations.
criteria a given company can meet, the better. ‘A company 7. Does the company boast outstanding labour and
good sense find the
could well be an investment bonanza if it failed fully to personnel relations? Fisher’s interest in technological
occasional company
qualify on a very few of them. [But] I do not think it could excellence and innovation led him towards companies
that over the years
come up to my definition of a worthwhile investment if whose employees tended not to be members of a
can grow in sales it failed to qualify on many.’ trade union. Further, ‘the company that makes above-
and profits far more
1. Does the company produce goods or services average profits while paying above-average wages for the
than industry as
whose sales are likely to increase substantially for area in which it is located is likely to have good labour
a whole.
at least the next several years? Fisher was interested relations. The investor who buys into a situation in which
not in ‘one-off’ growth, nor necessarily in steady, year- a significant part of earnings comes from paying below-
after-year increases in growth, but rather in ‘greater-than- average wages for the area involved may in time have
normal growth not only for the next several-year period, serious trouble on his hands.’
but for a considerable time beyond that.’ Fisher does not 8. Does the company have outstanding executive
just extrapolate past sales growth: he seeks to understand relations? ‘The company offering [the] greatest
how, and therefore to confirm that, past growth can investment opportunities will be one in which there is
continue into the future. a good executive climate.’ By this Fisher meant (among
2. Is management determined to develop new other things) that executives have confidence in their
goods or services? According to Fisher, ‘companies president and CEO, and that salary and promotion are
which have a significant growth prospect for the next based upon ability and results. ‘The further a corporation
few years because of new demand for existing lines, but departs from these standards, the less likely it is to be a
which have neither policies nor plans to provide for further really outstanding investment.’
developments beyond this, may provide a vehicle for a 9. Does the company have more than a handful of
nice one-time profit. [But] they are not apt to provide the talented managers? The less an organisation’s survival
means for the consistent gains over 10 or 25 years that and success depends on one or a small number of
are the surest route to financial success.’ personalities, and the less one executive interferes with
3. How effective is a company’s research and the job of another, the better. ‘The organisations where
development? ‘If quantitative measurements—such top brass personally interfere with and try to handle
as the annual expenditures on research or the number of routine day-to-day operating matters seldom turn out
employees holding scientific degrees—are only a rough to be the most attractive type of investments. Cutting
guide and not the final answer to whether a company across the lines of authority which they themselves have
has an outstanding research organisation, how does the set up frequently results in well-meaning executives
careful investor obtain this information? Once again it is significantly detracting from the investment calibre of
surprising what the “scuttlebutt”method will produce.’ the companies they run.’
4. Does the company have an above-average 10. How good are the company’s methods of cost
sales organisation? The sale of goods and services is analysis and accounting? No company will create
the most basic activity that a business undertakes; yet outstanding success or continue it for any period of time
the effectiveness of a company’s sales, advertising and if it does not know its costs in such detail that it is able to
distribution receives far less attention from investors than distinguish its most profitable activities (which it should
it should. Here, too, Fisher relies heavily upon scuttlebutt: continue and possibly expand) from its least profitable
‘of all the phases of a company’s activity, none is easier to and unprofitable activities (which it should either improve
learn about … Both competitors and customers know the or discontinue).
answers. Equally important, they are seldom hesitant to
express their views. The time spent by the careful investor
 9 MC • phil fisher

11. Are there other aspects of the business, general conditions, infer how they will influence individual
somewhat peculiar to the industry involved, which companies and time his purchases and sales based on
will give the investor important clues about how that information.
outstanding the company may be compared with Immediately after the Second World War, when most
its competitors? In retailing, for example, the way a others cowered in fear of a depression like the one that
company handles matters such as the location and followed the First World War, Fisher doggedly sought
duration of leases is very important. In the ‘tech’ field, it is and bought great companies; so too during the next 20
not just the innovations themselves but also their degree of years, which were characterised by a huge upswing in
patent and other protection ‘which is a major factor in prosperity and a commensurate increase in asset prices.
appraising the attractiveness of a desirable investment.’ He continued with this policy during 1971–81, a period
12. Does the company have a short- or a long-range which witnessed a bear market that was in many respects
outlook? Some companies conduct their affairs to gain as severe as the one during the Depression.
the greatest possible profit today. Others deliberately Fisher also ignored forecasts because in his view ‘the
don’t take jam today so that they can enjoy more jam economics which deal with forecasting business trends
tomorrow. Fisher seeks the latter and avoids the former may be considered to be about as far along as was the
type of company. If executives focus too much on the science of chemistry during the days of alchemy in the
hereand-now, for example in their treatment of customers Middle Ages.’ He adds an important insight: ‘the amount
and vendors, they might make poor long-term decisions. of mental effort the financial community puts into this
13. Will the company’s growth require so much constant attempt to guess the economic future from a
equity finance that the much larger number of shares random and probably incomplete series of facts makes
outstanding will largely cancel the benefit from this one wonder what might have been accomplished if only
anticipated growth? Fisher seeks companies whose a fraction of such mental effort had been applied to
growth relies mostly upon their own existing resources something with a better chance of proving useful.’ Bearing
(shareholders’ funds and retained earnings) and only in mind Fisher’s stature, that ‘something’ might well be
incidentally upon external resources. In other words, Fisher’s approach to investment.
The company
he rejects companies that borrow heavily or issue large Fisher liked to buy the shares of an outstanding company
offering [the]
amounts of equity to finance their operations. 14. Does when its earnings and the price of its shares were (he
greatest investment the management talk freely to investors about its affairs believed temporarily) depressed. Earnings and price might
opportunities will when things are going well but become mute when troubles be depressed because others do not consider general
be one in which occur? ‘The investor will do well to exclude from investment economic conditions to be favourable. In this situation,
there is a good any company that withholds or tries to hide bad news.’ ‘in contrast to guessing which way general business or
executive climate … 15. Does the company have a management the stock market may go, [the investor] should be able
The further a of unquestionable integrity? Fisher noted that a to judge with only a small probability of error what the
corporation departs company’s executives will almost always be much more company into which he wants to buy is going to do in
from these standards, familiar with a company’s affairs than its shareholders are. relation to business in general.’ The earnings and price of an
the less likely it is For this reason, managers can benefit themselves at the outstanding company might also be temporarily depressed
to be a really expense of shareholders in many ways. Decades before because a major new product or process, one which has
outstanding most others, Fisher recognised that ‘probably most costly required significant resources for research, production and
investment. of all to the investor is the abuse by insiders of their power marketing but will not contribute immediately to earnings,
of issuing common stock options.’ Fisher’s response? has just been launched.
‘There is only one real protection against abuses like
Buy before and during the sound of
these. This is to confine investments to companies
cannons
[whose] managements have a highly developed sense of
trusteeship and moral responsibility to their stockholders. Fisher beseeched investors to overcome their fear of
This is a point concerning which the “scuttlebutt”method ‘buying on a war scare.’ He notes that ‘at the conclusion
can be very helpful’. of all actual fighting—regardless of whether it was World
War I, World War II, or Korea—most stocks were selling at
When to buy levels vastly higher than prevailed before there was any
Virtually any time can be a good time to buy. Fisher thought of war at all. Furthermore, at least 10 times in the
sought to buy shares of ‘outstandingly desirable’ last 22 years, news has come of other international crises
companies, usually ‘working on the very frontiers of which gave threat of major war. In every instance, stocks
scientific technology,’ whose per share earnings would dipped sharply on the fear of war and rebounded sharply
grow spectacularly in the years and decades ahead. He as the war scare subsided.’ More generally, ‘war is always
reasoned that these companies could resist the storms bearish on money. To sell stock at the threatened or actual
and rip tides of the business cycle almost regardless outbreak of hostilities so as to get into cash is extreme
of general economic conditions. In other words, the financial lunacy. Actually just the opposite should be
companies that Fisher sought would be able to generate done. If an investor has about decided to buy a particular
excellent results. Hence he ignored forecasts of general common stock and the arrival of a full-blown war scare
business and macroeconomic conditions. He did not, starts knocking down the price, he should ignore the scare
as do so many others, use these forecasts to anticipate psychology of the moment and definitely begin buying.’
Share advisor 10

When to sell most skilled statistical bargain hunter ends up with a profit
Only three reasons can possibly justify the sale of a which is but a small part of the profit attained by those
common stock that has been originally selected according using reasonable intelligence in appraising the business
to Fisher’s principles and, even then, a sale should occur characteristics of superbly managed growth companies.’
only infrequently. Fisher seeks firms with at least one year of operational
The first reason is a mistake—that is to say, a company profit, and two to three years of business, before he buys
thought to meet his criteria actually does not. The second their shares. No matter how ‘hot’ and avidly spruiked
is a fundamental change of circumstances: a company that by brokers, he avoids any initial float of ‘promotional
met Fisher’s criteria at the time of purchase subsequently companies’, companies that have been formed to
ceases to do so. The third is when an outstandingly promote a founder’s insight or idea. ‘When a company
attractive investment opportunity arises and another stock is in a promotional stage … all an investor or anyone else
must be sold to finance it. can do is look at a blueprint and guess what the problems
and strong points may be.’ Further, ‘there are enough
Too much ado about dividends
spectacular opportunities among established companies
Having located an outstanding company with outstanding that ordinary individual investors should make it a rule
prospects, and assuming that over the years this company never to buy into a promotional enterprise.’
fulfils the expectations that prompted the investor to buy
its shares, Fisher preferred the company to retain and Fisher also believed that investors should not ‘ignore a
reinvest its earnings rather than pay them to shareholders good stock just because it is traded “over the counter”.’
as dividends. In an Australian context, he would not ignore a company
simply because it is owned by a few private individuals
Individuals’ marginal rates of tax tend to be higher than rather than the general public; or, if it is listed, is traded
the corporate rate. Accordingly, it is far more likely that irregularly and in small parcels. Further, ‘don’t buy a stock
The ten don’ts for
the company can reinvest its retained earnings at a higher just because you like the “tone” of its annual report … The
investors
rate than the investor could by reinvesting the dividend. annual report may … reflect little more than the skill of
1. Don’t buy into
At the same time, however, Fisher was wary of two the company’s public relations department in creating an
promotional companies. reasons why earnings are retained and no dividends are impression about the company in the public mind.’ Also
2. Don’t ignore a good stock paid. The first is when executives accumulate cash as a ‘don’t quibble over eighths and quarters.’ By this Fisher
just because it is traded
‘over the counter’.
nest-egg for a rainy day; and the second occurs when means that if you have been lucky enough to locate a
3. Don’t buy a stock just
‘substandard managements can get only a subnormal truly outstanding company, are prepared to pay $1.00
because you like the return on the capital already in the business, yet use per share and its shares are available for $1.03, then do
‘tone’
of its annual report.
the retained earnings merely to enlarge the inefficient not quibble: ‘if the stock seems the right one and the
4. Don’t assume that the
operation rather than to make it better.’ price seems reasonably attractive at current levels, buy
high price at which a
stock may be selling in
Fisher believed that ‘regularity or dependability’ are most “at the market”.’
relation to earnings is important in a company’s dividend policy. He illustrates Unlike most investors, and virtually all investment
necessarily an indication
that further growth in
his claim using the restaurant parable that Warren Buffett institutions, Fisher focuses rather than diversifies his
those earnings has largely subsequently cited. ‘There is perhaps a close parallel portfolio. To the crowd, diversification is a mantra; but to
been already factored
into the price.
between setting policy in regard to dividends and setting Fisher it is a vexation. Diversification ‘is the disadvantage
5. Don’t quibble over
policy on opening a restaurant. A good restaurant man of having eggs in so many baskets that a lot of the eggs do
eighths and quarters. might build up a splendid business with a high-priced not end up in really attractive baskets, and it is impossible
6. Don’t overstress venture. He might also build up a splendid business with to keep watching all the baskets after the eggs get put
diversification.
an attractive place selling the best possible meals at into them.’ Further, ‘investors have been so oversold
7. Don’t be afraid of buying
on a war scare.
the lowest possible prices. Or he could make a success on diversification that fear of having too many eggs in
8. Don’t rely on superficial
of Hungarian, Chinese, or Italian cuisine. Each would one basket has caused them to put far too little into
financial numbers. attract a following. People would come there expecting a companies they thoroughly know and far too much in
9. Don’t fail to consider time certain kind of meal. However, with all his skill, he could others about which they know nothing at all. It never
as well as price in
buying a true growth
not possibly build up a clientele if one day he served seems to occur to them, much less to their advisors, that
stock. the costliest meals, the next day low-priced ones, and buying a company without having sufficient knowledge of
10. Don’t follow the crowd. then without warning served nothing but exotic dishes. it may be even more dangerous than having inadequate
The corporation that keeps shifting its dividend policies diversification.’
becomes as unsuccessful in attracting a permanent
shareholder following. Its shares do not make the best Finally, do not automatically follow the crowd. Just as in
long-range investments.’ popular music and clothing, there are fads and fashions on
the stockmarket. These can—sometimes for several years
Don’t succumb to common fallacies at a time—produce severe distortions in the relationship
Fisher believed that ‘the typical investor has usually between market prices and underlying values. Fisher
gathered a good deal of the half-truths, misconceptions, witnessed both the ‘roaring twenties’ and the ‘tech mania’
and just plain bunk that the general public has gradually of the 1990s, and notes that ‘the ability to see through
accumulated about successful investing.’ One of the most some majority opinions to find what facts are really
pervasive—and damaging—is that that only a ‘bookish there is a trait that can bring rich rewards in the field of
genius’ can generate good results. Fisher disagrees: ‘the common stocks. It is not easy to develop, however, for
 11 MC • phil fisher

the composite opinion of those with whom we associate comes.’ Because very few companies can survive this
is a powerful influence upon the minds of all of us.’ 15-point challenge, Fisher then discards most of his
prospects from consideration. Some he rejects because
How to find a ‘growth stock’
he has enough information to conclude that they are not
Fisher acknowledges that no single investor, or even an the outstanding companies that he requires; others he
industrious team of like-minded investors, could possibly rejects because he cannot collect enough information
investigate more than a modest number of potential to draw a conclusion one way or the other. ‘Only in the
investments. How, then, to locate outstanding growth occasional case when I have a great amount of favourable
stocks? Roughly 20% of Fisher’s initial investigations of data do I then go to the final step of contacting the
prospective investments were prompted by information management. Then if after meeting with management I
from friends in various industries, and 80% from ‘a small find my prior hopes pretty well confirmed and some of
number of able investment men.’ From this stream of my previous fears eased by answers that to me make
inputs Fisher then made ‘frankly a fast snap judgment on sense, at last I am ready to feel I may be rewarded for all
which companies I should spend my time investigating my efforts.’ Fisher has estimated that out of every 250
and which I should ignore.’ companies that he investigates, he rarely invests in more
After a brief scrutiny of a few key points in each company’s than one. Interestingly—and testimony to the bulk of his
prospectus or most recent annual report, he would investigation and sleuthing occurring beforehand—he will
then ‘seek “scuttlebutt” aggressively, constantly working invest in one company per 2.5 company visits.
towards how close to our 15-point standard the company

Fisher-style stocks in Australia

Applying Fisher’s ‘rifle-shot’ investment approach in the That contrasts with a company like Coates Hire, which
Australian market isn’t easy but there are a few stocks Fisher would have most likely ruled out faster than you
that may have caught his eye. could blink. This equipment hire business reported a
In the US there are around 7,000 listed companies but pretax profit margin of 15.7% in 2004 and a return on
in Australia there are just 1,474. That makes the pool of equity of 13.5% in what was an absolute boom year. And
potential Fisher-style stocks that much smaller, although the number of shares on issue exploded from 68 million
the following three companies may have found their way to 104 million in the three years to 30 June 2004. That
into a Phil Fisher Aussie portfolio. would disqualify Coates under Fisher’s criterion #13 as
this company has not financed its growth with its own
The first is ARB Corporation . ARB manufactures cash flows. On that point, we suspect Fisher would be
components for four-wheel-drive vehicles and, according
We suspect Fisher quite impressed by Macquarie Bank but would probably
to our research, satisfies almost all of Fisher’s 15 points. reject Australia’s largest listed investment bank because
would be quite
Its financial record is outstanding and Fisher would most of the large slabs of options it issues to executives. Each
impressed by
likely have been onto the stock at some stage in the last year this effectively waters down outside shareholders’
Macquarie Bank decade. Incidentally, the stock rose more than tenfold in slice of the Macquarie Bank pie.
but would probably the decade from 1994. Shareholders have also received
reject Australia’s regular dividends on top of that exceptional capital growth. Bionic ear implant manufacturer Cochlear is one that Fisher
largest listed would certainly consider. In terms of shareholder returns,
The following quote, from an article originally printed the story is remarkably similar to that of ARB. Since being
investment bank in Bushdriver Magazine, nicely showcases the way ARB spun-off from Pacific Dunlop in 1995, Cochlear’s share
because of the large satisfies several of Fisher’s 15 criteria: price has risen more than tenfold and dividends have grown
slabs of options it
New methods of production are continually trialled for the strongly, too. We suspect Fisher would have cast a careful
issues to executives.
purpose of making the end products more durable, but not eye over it relatively early on.
necessarily more lucrative financially. An unusual approach Even in a tough year like 2004, the company produced a
for a company with shareholders to satisfy, and yet the pre-tax profit margin of 16.5% and a return on equity of
combination of state-of-the-art equipment, coupled with more than 25%. The company’s longer-term averages are
what can only be described as an old-fashioned business even more impressive. Cochlear is by far the global leader
approach, certainly seems to work. in its market and, according to our research, has many
Such an approach is even more impressive when you years of growth ahead of it. Compare that to a business
consider that ARB produced a pre-tax profit margin of like newspaper publisher Fairfax. With targeted internet
17% in the 2004 financial year and a stunning return on sites like www.seek.com.au attacking Fairfax’s lifeblood
shareholders’ equity of more than 26%. of classified advertising, it is fighting an uphill battle to
Share advisor 12

stand still, let alone produce long-term growth. It would listed life. To date, the returns have been disappointing
fail Fisher’s first criterion as it is not at all clear that Fairfax but, with such strong underlying economics and good
is capable of producing genuine growth, especially since it growth prospects, we expect that situation to change in
seems the company is not overflowing with management the coming years.
talent (criterion #9). Those who’ve patiently held the stock Other stocks we consider to be ‘Fisher probables’ include
over the years have not been handsomely rewarded. Computershare, ASX , SFE Corp., Cabcharge and
The third stock we think might have caught Phil Fisher’s MYOB. He probably would have investigated each of these
eye is Infomedia. Its core electronic parts catalogues to some extent, although there are arguments against each
business is extremely profitable. Pre-tax margins in 2004 which may have dissuaded him from investing.
clocked in at more than 40%, as did return on equity. Our
investigations indicate that the company has depth in its
management ranks (criterion #9) and there is a strong
focus on developing new products, which fulfils criterion
#2. Infomedia is undeniably a success story but it floated
only in late 2000 and so has had a comparably short

Further reading
Fortunately, Philip Fisher wrote several investment books reason Kenneth’s three books, Super Stocks (1984), The
of his own, meaning you don’t have to rely on someone Wall Streevt Waltz (1987) and 100 Minds That Made
else’s interpretation of his philosophy. the Market (1994), are worthwhile reading.
Fisher’s approach to the allocation of capital was Kenneth is perhaps best known for his long-running
formulated during the 1920s and 1930s, and since the (20-plus years and still going) column, ‘Portfolio Strategy
late 1950s his books have made it readily available to the in Forbes magazine. During the early 1970s he conducted
general public. His first book, entitled Common Stocks important research which established a tool known as the
and Uncommon Profits and originally published in 1958, Price to Sales Ratio (PSR) as a core part of the financial
outlined his investment philosophy. It is very readable— curriculum. One of Ken’s more recent articles, Cognitive
Fisher’s approach indeed it was the first investment book to appear on the biases in market forecasts, appeared in the March 2000
to the allocation New York Times’ best seller list. Fisher elaborated his issue of The Journal of Portfolio Management and
of capital was philosophy in Paths to Wealth Through Common Stocks won that magazine’s prize for the outstanding article of
formulated during (1960), Conservative Investors Sleep Well (1975), and 2000–01.
the 1920s and Developing an Investment Philosophy (1980), which Finally, John Train’s book Money Masters of Our Time
1930s, and since the describes the experiences that forged Fisher’s philosophy provides valuable insights into a number of the twentieth
late 1950s his books of growth stock investing. All except Paths to Wealth were century’s most successful investors—including Benjamin
have made it readily republished by John Wiley & Sons in 1996 under the title Graham, Warren Buffett and Philip Fisher. Train describes
available to the Common Stocks and Uncommon Profits and Other and distinguishes the unique style that made each a
Writings by Philip A. Fisher.
general public. master of his craft.
Fisher’s youngest son, Kenneth L. Fisher, is CEO and chief
investment officer at Fisher Investments (www.fi.com).
Ken’s approach to investment differs significantly but not
radically from his father’s. Ken is a ‘value’ investor, but
the process he uses to make investment decisions draws
heavily upon ‘scuttlebutt’ and Philip’s 15 points. For that
 13 MC • phil fisher

A summary of Philip Fisher’s philosophy

n Read everything you can.

n Interview those who are in a position to know, such as managers and employees, but don’t forget to also
talk to suppliers, customers and competitors.

n If possible, visit various company sites (and not just headquarters).

The amount of n Act only after you have collected sufficient information and have thoroughly evaluated a situation.
mental effort
n Have the moral courage to act against the crowd when your judgment tells you that you are right.
the financial
community puts n Buy stocks of companies that are likely to generate dramatic long-term growth of both revenues and

into this constant profits.

attempt to guess n Buy with particular gusto when stockmarket conditions are not favourable or other investors do not
the economic future properly perceive these companies’ true worth.
from a random and n Retain the investment in such a company as long as its advantage over competitors remains intact, and
probably incomplete never sell for short-term reasons.
series of facts
n If your primary investment goal is the substantial and long-term appreciation of your capital, as it must be
makes one wonder
if you restrict your portfolio to the most outstanding companies, then you should reduce the emphasis
what might have most investors place on the importance of dividends.
been accomplished
n Recognise that mistakes are inevitable. The important thing is that the investor recognises a mistake
if only a fraction of
quickly, accurately diagnoses its cause and does not repeat it.
such mental effort
had been applied n A good ‘Fisherite’ investor is willing to incur a short-term loss that results from a poor investment, and lets the
gain from a good investment grow over the years and decades.
to something with
a better chance of n Recognise that the investment universe contains very few truly outstanding companies, and that
proving useful. opportunities to buy them occur very infrequently. Hence concentrate your attention and your funds in the
most desirable opportunities.

n ‘For individuals [in possible contrast to institutions and certain types of funds], any holding of over 20
different stocks is a sign of financial incompetence. Ten or twelve is usually a better number.’

n Never forget that one of the most basic rules of life also applies to investing: success is highly dependent
upon a combination of hard work, intelligence, and honesty.
Intelligent Investor Share Advisor
PO Box Q744
Queen Vic. Bldg NSW 1230
T 02 8305 6000
F 02 9387 8674
[email protected]
shares.intelligentinvestor.com.au