Key Takeaways

● Philip Fisher championed growth stocks that generated high returns with high risks

● Fisher created a "15-Point Strategy" in his book Paths to Wealth Through Common Stocks to assess companies

● Corning Glass Works, Texas Instrument, and Motorola are Fisher's highlighted investments

In the previous lesson, we've introduced Benjamin Graham, the renowned investing guru of value investing. Today, we'll walk you through the stories and investing philosophy of Philip Fisher, another influential figure and a pioneer of growth investing.

He was the first to evaluate a stock's worth based on its potential growth and emphasized the analysis of the underlying company's intrinsic value. As a champion of long-term investing, Fisher objected to short-term trades and recommended promising growth stocks selected based on the business "grapevine" analysis, which evaluates a company's business prospect, profitability, and management level.

Strategies

To help investors research potential investments in his book Paths to Wealth Through Common Stocks, Fisher put forward a technique described as "Scuttlebutt" when analyzing Corning Glass Works, a glass producer and one of his most well-known investments. (WARREN BUFFETT: HOW PHIL FISHER’S SCUTTLEBUTT METHOD SHOULD BE USED, August 21, 2020)

This investing technique details 15 points about which investors should be concerned. (Fisher’s 15-point checklist to select quality stocks that can deliver big, Dec 12, 2020)

1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?

2. 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?

3. How effective are the company's research and development efforts in relation to its size?

4. Does the company have an above-average sales organization?

5. Does the company have a worthwhile profit margin?

6. What is the company doing to maintain or improve profit margins?

7. Does the company have outstanding labor and personnel relations?

8. Does the company have outstanding executive relations?

9. Does the company have depth to its management?

10. How good are the company's cost analysis and accounting controls?

11. 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?

12. Does the company have a short-range or long-range outlook in regard to profits?

13. 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 anticipated growth?

14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?

15. Does the company have a management of unquestionable integrity?

Lessons Learned

Fisher summarized eight crucial lessons learned from his five decades of investing experience.

1. Invest in companies with high growth potential. Buy into companies with disciplined plans to achieve dramatic profit growth in the long run. These companies should have inherent qualities, making it hard for newcomers to share in that growth.

2. Buy stocks that are out of favor. Identify companies whose market prices are way less than their intrinsic values at the right time. If more than one company meets this criterion, choose the most undervalued company to minimize the risks.

3. Concentrate the funds. Only about 5% of the listed companies can be considered outstanding in any given market, among which undervalued ones are even rare. When favorable prices of these companies appear, seize the opportunity with concentrated funds.

4. Downgrade the value of dividends. Generally, more attractive opportunities will be found among stocks with a low dividend payout or none at all. Companies with the greatest potential need funds to finance their growth. On the other hand, if a company pays a high percentage of its profits to shareholders, it may suggest the firm is facing difficulty expanding its market share. But this argument only applies to cash dividends. Bonus shares as dividends should be encouraged.

5. Recognize mistakes as soon as possible. Good investment management is manifested by the willingness to take small losses in some stocks and to grow greater profits in more promising stocks. On the contrary, lousy investment judgment involves taking small profits in good investments and letting losses grow in bad ones.

6. Hold the stock. Except for rare circumstances, never sell based on economy or stock market forecasts, as they're rarely accurate. Never sell the most attractive stocks you own for short-term reasons.

7. Neither to accept blindly nor to reject the prevailing view simply for the sake of being a contrarian. Investors should have more knowledge and better judgment in assessing different situations. When proven right, take courage to act "in opposition to the crowd".

8. Success in stock investment relies on hard work, intelligence, and honesty. Good fortune always plays a role in stock portfolio management, but luck tends to even out. It is the combination of skill and adherence to sound principles that determines sustained success.

Case Study

Fisher's most well-known investments include Corning Glass Works, Texas Instrument, and Motorola. (Common Stocks and Uncommon Profits and Other Writings, MAY 1, 1996, by Philip A. Fisher)

Corning Glass Works caught Fisher's attention when he researched the television industry. He read through a survey of the sector conducted by one of his Wall Street friends. The study looked at a dozen of the principal set producers and concluded the business would be highly competitive. The survey also found that the industry was in great shortage of glass bulbs (for the picture tube), of which Corning Glass Works appeared to be the most successful producer. He studied the company's R&D capability and potential market value, which all seemed favorable. So he bought the companies' shares in 1947 and made a 10× return ten years later.

An opportunity for Fisher to buy shares of Texas Instruments, Inc. appeared in the summer of 1956 when the company's principal officers intended to sell their shares to avoid the possible estate tax liability. He discussed this firm with several of his friends in the financial community, all of whom thought highly of it. Through more research, Fisher was impressed by the far-sightedness of the able management in their assessment of the business prospects and their caring for employees. He continued to add his positions and hold the stock for two decades, amassing a 20× return.

In the case of Motorola, Fisher had an equally great liking and respect for its people. When he invested in the company in 1955, Motorola's position in the semiconductor industry was insignificant. But he saw the company's enormous potential in the mobile communications business. This investment also generated a handsome return for him as the company's share price shot up from $1 to $20 over the twenty-one years of holding. (Lessons from Philip Fisher on Tencent, Motorola and Rate of Learning, July 18, 2021)

Fisher Quotes

1. Change creates opportunities to grow, but it also creates opportunities to slip.

2. Even a great company can be priced too high if there's a lot of glamour attached to it.

3. My stocks sometimes get overpriced, but in the long run, this kind of company, if you can find it, will outperform the market and the economy. The worst thing you can do is try to catch the swings, sell out too soon and be afraid to buy back in.

4. The things most companies boast about are yesterday's story.

5. I want companies that welcome dissent rather than stifle it and that don't penalize people who criticize what management is doing.

6. I am vitally interested in companies that are going to survive, but I don't think a big-cap company is necessarily one that will.

7. I think it is more conservative in the long run to be in a company that is really progressing and really has an edge.

8. Buy slowly stocks of companies that will capitalize on the problems of scarcity and social need. Companies with excellent management.

9. I know plenty of guys who consider themselves to be long-term investors but who are still perfectly happy to trade in and out and back into their favorite stocks.

10. It is true that you don't go broke taking a profit, but that assumes you will make a profit on everything you do. It doesn't allow for the mistakes you're bound to make in the investment business.

The Bottom Line

Fisher kept a low profile for much of his investing career. He declined almost all interviews.

On a rare occasion when he talked to Forbes Magazine （A Talk with Phil Fisher, October 19, 1987, https://rlaexp.com/studio/biz/financial_investing/see/articles/phil-fisher-87.html）, he summarized his professional experience when asked about "the most important lesson learned in the career":

It is just appalling the nerve strain people put themselves under trying to buy something today and sell it tomorrow. It's a small-win proposition. If you are truly a long-range investor, of which I am practically a vanishing breed, the profits are tremendously greater. One of my early clients made a remark that, while it is factually correct, is completely unrealistic when he said, "Nobody ever went broke taking a profit."

Well, it is true that you don't go broke taking a profit, but that assumes you will make a profit on everything you do. It doesn't allow for the mistakes you're bound to make in the investment business.

The funny thing is, I know plenty of guys who consider themselves to be long-term investors but who are still perfectly happy to trade in and out and back into their favorite stocks.

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