by Frederik Vanhaverbeke
In the latest of a series for Master Investor Magazine, Frederik Vanhaverbeke, author of Excess Returns: A comparative study of the methods of the world’s greatest investors, looks at how some of the world’s greatest investors are so successful.
The percentage of investors who own 25 or more different stocks is appalling. It is not this number of 25 or more which itself is appalling. Rather it is that in the great majority of instances only a small percentage of such holdings is in attractive stocks about which the investor has a high degree of knowledge.
Philip Fisher was a reclusive American who managed the money of a selective group of investors between 1931 and 1999. He became famous as the man who had the second-largest impact on Warren Buffett’s investment style. Although Fisher had valuable insights on all facets of investing, Buffett was especially impressed by Fisher’s publication (almost 60 years ago) of his ideas about the factors that contribute to the success of corporations. Even nowadays, the way Buffett performs his qualitative analyses of stocks is still inspired by Fisher’s ideas.
The least one can say is that Fisher’s business views were visionary and way ahead of their time.
Even more, in my analysis of recent business literature on best corporate practices and management success factors I was amazed that this literature praises the very characteristics that Fisher had identified as critical more than half a century ago. In this article I briefly highlight some of these factors. For those readers who are interested in a more thorough discussion on due diligence please see my book Excess Returns: a comparative study of the method’s of the world’s greatest investors.
To ensure that he covered every relevant business aspect and to avoid being seduced by promotional companies that promise a lot but that have yet to deliver, Fisher designed a framework for the analysis of companies. This framework consists of a list of fifteen points that he systematically tried to answer for every potential investment. In summary:
- His first concern was with the company’s sales. Fisher wanted to make sure that there was sufficient sales potential for the company’s product (or service) portfolio. He, therefore, checked whether there was true demand for the company’s current products or services, whether the company’s innovation and R&D were above par to ensure a string of new future products, and whether the company’s sales and marketing efforts were superior to those of competitors. Fisher was primarily impressed by companies that managed to grow sales at rates (far) above the industry’s average.
- Second, Fisher was only interested in profitable growth. His preference for long-term investments went to companies with higher profit margins than their peers (indicating stronger pricing power), and to companies that were likely to increase their profit margins over the next years.
- Next, Fisher paid an extraordinary amount of attention to management. Fisher invested only in companies with managers of unquestionable integrity, who talk freely about problems and failures, and who promote people based on merits. He stressed that management should be careful to maintain outstanding relations with all employees (e.g., through decent salaries and delegation of power) as this leads to higher productivity. He expected management to manage the business for the long-term, since a short-term focus (e.g., under pressure of Wall Street) often reduces the creation of value over the long-term. Fisher also highly valued a razor-sharp focus on cost control. He also argued that outstanding top executives nurture a pool of talented managers that are ready to take their place when they leave.
- Finally, Fisher looked for peculiar aspects of the business. He was partial to companies that did things differently from their rivals, and that thought outside the box.
Once he had finished his analysis Fisher’s final step was a so-called “scuttlebutt” double check. Fisher walked into stores to check out the companies’ products, and talk to vendors. He grilled managers to challenge them and to sort out uncertainties. He interrogated employees and ex-employees about the company. He asked the opinion of competitors (e.g., management or the sales force) and suppliers on the company. And so on. According to Fisher, the thorough (first) analysis combined with the scuttlebutt check revealed an enormous amount of unique information that put him at a clear advantage in the market.
Fisher stated that since it is very hard to find an outstanding business that meets all your requirements and that trades at an interesting price, one should try to make the most out of one’s best ideas. He advocated a concentrated portfolio and dismissed the conventional wisdom that one should reduce risk through wide diversification.
Fisher’s portfolio seldom consisted of more than ten stocks, and he was not afraid to have three quarters of his portfolio in three to four stocks. In addition, once he found an outstanding business Fisher preferred to hold on to it for a very long time and as long as the company continued to deliver. Motorola is an example of a stock that stayed in his portfolio for many decades.
In the same logic, market timing was wasted on him. Fisher argues that one should buy and sell based on fundamental considerations (about which the investor should have a lot of knowledge) and ignore one’s subjective gut feel about the market direction (which is largely based on guessing).
Fisher’s investment wisdom had a huge impact on the investment world, and has been instrumental in the way great investors identify excellent businesses. In my next article I discuss another pioneer of investing: Benjamin Graham.