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Phillip Fisher’s Stock Investing Checklist: Part 3

Many investors have heard of Warren Buffett, but perhaps less know is Phillip Fisher, and his rules on investing in the stock market. Fisher is one of the investment greats with a stellar track record of investing in well-managed, high-quality growth stocks for the long-term. In fact, Fisher is one of Buffett’s investing mentors.

Fisher’s most famous investment was that of Motorola – he bought the stock in 1955 and did not sell it for the remainder of his life (he passed away in 2004). In his book Common Stocks and Uncommon Profits, Fisher shared a checklist of 15 characteristics he looked out for when it comes to buying growth stocks. I want to discuss his checklist in a series of articles, and I recently published the first two articles in the series (see here and here), which looked at the first six criteria in Fisher’s checklist.

This article – Part 3 – shall look at the next three characteristics.

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

This attribute talks about whether a company has good relations with its labour unions, but in Singapore’s context, labour unions are not common – my colleague Ser Jing commented that the only major company he knows of which has a labour union is Singapore Airlines Limited (SGX: C6L).

For us as investors, it’s important to try to find out from management if the company’s workers are getting fair wages for the work they do. If this information is unavailable, then we should at least question the compensation and remuneration structure for the company’s top performers. A well-run company which employees like to work for would make for a conducive environment for building a strong business, thereby enhancing shareholder value.

We can also visit the company’s website and annual report to determine if there are social activities organized for staff members for them to relax and interact in a casual setting – if there is, it would be a plus point as it shows that the company has staff welfare at heart.

8. Does the company have outstanding executive relations?

This point is in relation to a company’s top leader putting focus on performance and ability when recruiting senior management and high-ranking staff, and not simply about the leader advancing his or her own family agenda through the company.

Nepotism is still well and alive in today’s corporate world, and we should ensure that major positions within a company are not filled with people who got the job simply because they are key leader’s relatives and family, and not because they have the required skill sets. This form of cronyism shows up when certain business divisions perform badly and the head of the division cannot provide a suitable explanation, or worse, cannot even seem to identify the problem.

We can also check a company’s annual report to see if its executives’ compensation levels are in line with industry standards (meaning we compare the company with its competitors) and not excessive. We can also check the company’s past five years’ worth of remuneration data to see if there is any justification for it increasing, if there’s an increase; for example, if the company has steadily rising net profit, it would justify higher compensation for its executives.

9. Does the company have depth to its management?

The ninth point relates to the presence of different types of skill sets within a company’s management team, and illustrates how a company should have a diverse group of people working together to advance shareholders’ interests. “Depth” in this case refers to a wide range of competencies which a management team should have, in order to perform a commendable task. If a company does not have this breadth of talent, it may end up losing out to competitors who do possess such skill sets.

Part 4 shall continue on with the next three points within Fisher’s 15-point checklist. Stay tuned!

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