Philip A. Fisher - Lessons From the 15% Man

Warren Buffett has said that his investment style is 85% Graham and 15% Fisher. Who is this 15% man the Oracle is referring to?

Philip A. Fisher (September 8, 1907 – March 11, 2004) began his career as a securities analyst in 1928, and founded Fisher & Company, an investment counseling business, in 1931. Widely respected and admired, he is among the most influential investors of all time. His investment philosophies, introduced over fifty years ago, are recorded in his book Common Stocks and Uncommon Profits first published in 1958. This old classic is a must read still today. Let’s take a look at some of his invaluable lessons.

Look At The Product Itself

When looking at an investment, ask the question: Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years? Indeed you can make a fair one-time profit from a firm with saturated or even decreasing sales, but only if bought at a low enough price. Sleep easier at night by adhering to Buffett’s classic line:

“Time is the friend of the wonderful company, the enemy of the mediocre.“

Management competence plays a part in the longevity of a product or service. No business grows for a prolonged period of years just because it’s lucky.

Does the Company Have a Worthwhile Profit Margin?

All the sales growth in the world will not matter, if a company cannot keep an increasing amount of what is left in the hand after the cost of those sales have been accounted for. When looking at a company with growing sales year-over-year, look at the operating margin throughout the years. Personally, I like a number that is consistently above 10%.

The Relationship Between Employees and Their Managers

Good companies treat their employees well. You need to look for win-win situations, where the benefit of one stakeholder does not come at the cost of another. So how does the investor properly judge the quality of a company’s labor and personnel relations? According to Fisher, there is no simple answer. One method is to evaluate union relations. Keyword: Evaluate. Union affiliation or lack thereof may or may not be an indicator of labor and personnel relations. However, constant and prolonged strikes is a good indication of bad labor relations.

A company making above-average profits while simultaneously paying above-average wages is likely to have good labor relations. In contrast, a business where a significant part of earnings comes from paying below-standard wages may in time find itself in serious trouble.

(Consistent) Dividend Policy Matters

A company that constantly shifts its dividend policy will not attract a permanent shareholder following. The shares of these companies do not make the best long-term investments. When dividend policy is consistent, investors can plan ahead with some assurance of future behavior.

The intelligent investor must evaluate the dividend yield and payout ratio. Be careful with yields above 3% and payout ratios of over 50%. Do not blind buy dividend stocks! To make an intelligent decision when investing for dividends, read my post on the topic here.

Be Careful of the Shiny Annual Report!

When reading annual reports, evaluate your own reaction to its aesthetics. Are you being influenced by shiny pictures and impressive graphs? According to Fisher, investors are not always careful to analyze just what has caused them to buy one stock rather than another. If they did, they might be surprised how often they were influenced by the wording and format of the general comments in a company’s annual report to stockholders.

Dissecting shareholder letters is an often overlooked part of intelligent investing. Figure out who’s behind the pen and evaluate the tone of the letter.

Conclusion

So what is the 15% that Buffett referred to his adaption of Fisher? Buffett was a student of Ben Graham at Columbia and later worked for him for 10 years, so obviously we know who his biggest hero is. Though the bulk of Buffett’s philosophy is “Grahamian” value investing, Phil Fisher’s influence relates to growth and evaluating management competence. Warren has famously said “Value and growth are joined at the hip” . You don’t need to give up one for the sake of the other.

Below is a video of Warren and Charlie comparing the methods of Graham and Fisher. Buffett believes that Graham would not have dismissed Fisher’s ideas, but they would’ve been harder to teach.