Philip Fisher, an American investor, is considered to be one of the greatest investors in the history of the stock market. Fisher, who passed away in January 2008, is most famous for having predicted the 1987 stock market crash, and for having demonstrated the power of technical analysis.
He was the only Wall Street analyst to have correctly estimated the peak of the Dot-com bubble, and he was named to the Wall Street Journal’s All-Star team of stock market analysts for the period ending September 1989.
Philip Fisher is one of the few investors that can be said to have been a true master of the stock market. His name is synonymous with the phrase “sell in May and go away”, as he made a living out of foreseeing the market’s inevitable bear market.
Philip Fisher (Wikipedia link) was a legendary investor who mostly focused on emerging markets.
It would not be wrong to say that Philip Fisher was one of the first to influence the fundamental analysis of companies. In 1957 he also wrote a book entitled Ordinary Stocks and Unusual Profits. But this book is as relevant today as when it was first published. The purpose of this book was to teach people how to analyze a business to determine if it can be profitable in the future.
In 1931 he founded his own company, Fisher & Co. He continued to lead the company for the next seven decades, until 1999. Philip Fisher passed away in 2004. Today, this man is best known as the founder of growth investing.
Philip Fisher’s investment policy
This simple statement touches almost every aspect of Philip Fisher’s investment style. It answers some basic questions that all investors ask themselves when investing.
- What stocks to buy? Fisher believed in buying only stocks of well-run companies with good prospects for future growth.
- How many shares should I buy? Fisher believed in the need for a concentrated portfolio with only a few stocks. Excessive diversification through random stock purchases should be avoided.
- What investment strategy should I follow? For Fisher, as for all great investors, the practice of long-term investing is very important. Buying stocks and holding them for an incredibly long time is the best strategy.
- How do you identify the right actions? To identify them, we must first learn the basics of justice. Most importantly, we have a VERY good understanding of the company we are investing in. How do you do that? You can do this by mastering the art of fundamental analysis.
Investment principle
Philip Fisher always divided his companies into two types: large and small. Over a 10-year period, good stocks in large companies can yield about 15 to 18% per year. At this rate of growth, the capital invested could be multiplied by five in 10 years. But to reap the benefits of multi-cap stocks, Fisher usually went into the dreaded small-cap territory. These are growth values in the true sense of the word.
Let’s take an example. Havells was a small company with a share price of Rs 15 lakh in 2008. In the next decade, Havells entered the elite section of big business. At that time, the price was 600 million rupees. The company also issued bonus shares at a ratio of 1:1 (June 2010) and implemented a 5:1 share split (2014). Taking all these factors into account, Havells’ 10-year return is 82% per year (from 2009 to 2019). This represents a 400-fold increase in capital in 10 years. What does the above example suggest? Investors who hold a stock for a longer period, for example. B. 10-year-old should buy shares of good NEW companies.
Recognizing a good share: Philip Fisher’s style
Fisher was always looking for growth stocks. In his book Common Stocks and Uncommon Profits, he describes several ways to identify good stocks to invest in. Here are Fisher’s fifteen suggested criteria for stock selection:
#1. Products and services
For businesses, it all starts with what they can offer their customers. Unique products and services that meet growing demand automatically win in the long run.
#2. Management commitment to product and service development
No product or service can remain useful forever. Therefore, the range of companies must evolve over time. Management must recognize this and continue to encourage the team to constantly evolve and innovate.
#3. Research and development infrastructure
A company that wants to grow must do its own research and development. To this end, they must have an adequate infrastructure to carry out R&D functions.
#4. Sales department
Most products and services in this world don’t sell themselves. There must be a sales force with a developed sales strategy. And to sell more and more listings, you need a comprehensive sales plan.
#5. Profit margin
A company can sell millions of products, but if its profit margin is minuscule, it will post a meager net profit. Therefore, it is most important for the company to create a sufficient profit margin. The goal should be to improve the industry standard.
#6. Focus on growth of profit margin
Past profits determine today’s price. But the future price will be determined by future profits and margins. The company has to work hard to maintain its profit margin. Further efforts are needed to improve margins. Cost reduction and pricing power are two tools a company can use to improve its profitability.
#7. Employee orientation
There are two measures to assess the attention a company pays to its employees. A team of happy employees can move a company forward significantly. Promotions and salary reviews are two things that immediately come to mind when it comes to managing employee satisfaction.
#8. Talent development
A company that identifies and then prepares talent for future leadership positions is always prepared for the future. The unwillingness to delegate responsibility to young leaders is a sure recipe for self-perpetuating stagnation.
#9. How does the entity track all costs?
As discussed in points 5 and 6 above, profit margins and their growth are critical. One way to do this is to control costs. The company can control its costs by keeping track of all disbursements. An ERP system usually takes care of this task. Careful recording of all expenditure in the ERP system provides a clear overview. Senior management will be aware of the cash flow and will therefore be able to control it. A company with a robust ERP system will thrive.
#10. What is the success factor of a business?
All new enterprises are active in their core sectors/industries. To win in the industry, a company must follow a path to success (a winning strategy). The key is to identify and clarify this path to success. Companies that have found their success strategy will be more likely to grow rapidly in the future.
#11. Emphasis on long-term benefits
Some companies are too focused on their quarterly results. They are too worried about how the market will react to their numbers. This indecision makes them defensive, and these companies often grow slowly. On the other hand, companies that manage their operations and CAPEX plans simultaneously will remain profitable in the long run.
#12. Does the entity have cash or cash equivalents or payables?
It is not difficult for listed companies to raise capital through share capital. The difference between issued capital and share capital leads to equity financing. The company is selling its shares to raise funds. These companies may increase their profits over time, but these profits are settled by increasing the number of shares outstanding. Companies that remain solvent are not required to raise equity capital. You can borrow money from banks. Shareholders of these companies will see growth in the form of higher earnings per share.
#13. How does a company report in difficult times?
It is a natural first instinct to hide your mistakes and poor performance. But it is not legal for a publicly traded company to hide the facts from shareholders. Good companies are always transparent. A reading of the companies’ annual reports can provide this insight. An annual report that only brags about its successes is like a red flag.
#14. Quality control
A company run by good managers can be exceptional. No matter how good the performance, sales and profits are, if a company does not have quality managers, investors will eventually shun the stock.
#15. Handling of employment-related complaints
There will be times when employee problems escalate. The causes can be accidents, job loss, sanctions, etc. How the company handles these issues can make a big difference. Prompt settlement of employment law claims is essential. The company cannot afford to continue fighting such issues in court.
Concluding remarks
Philip Fisher was a visionary investor. Even people like Warren Buffett are inspired by his investment style. In his book Ordinary Stocks and Unusual Profits, Fisher talks about three common mistakes retail investors make when investing:
- A manifestation of the herd mentality: We often buy stocks that everyone else is buying. The best strategy for long-term investors is to buy the best stocks in a sector that is already battered and bruised. These stocks may not come back to life anytime soon, so buy them and hold them for a very long time. The idea is that no sector will remain in need forever.
- Excessive diversification : People who don’t know what they are buying will continue to buy the stocks they can get their hands on. This leads to over-diversification. A more profitable strategy is to create a circle of competent people and buy shares within that circle. The idea is to buy shares in companies we understand well.
- Missed opportunity: The shares of the outstanding companies are hardly ever subject to significant price corrections. That can happen, but only because of external factors such as COVID, the subprime mortgage crisis, etc. When these adjustments occur, you should take advantage of this opportunity as soon as possible. Right now, we shouldn’t hesitate to pay an extra 1-2% to buy such stocks.
These were some lessons from Philip Fisher that can be of great use to us as retail investors. I hope you enjoy it. Have fun investing. It doesn’t matter whether you are a pro or a newbie to investing, or even if you are a newbie to investing and you don’t know much about it. But you do know one thing, you need to make some money, and you need to do it now. To achieve this, you are going to need to find the right investments. You can go to the traditional market, or you can go to the stock market. Then you will need to find the best way to invest. This is what it takes to make the right investment.