Many investors have heard of Warren Buffett, but perhaps less known 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 three articles in the series (see here, here, and here), which looked at the first nine criteria in Fisher’s checklist.
This article – Part 4 – shall look at the next three characteristics.
10. How good are the company’s cost analysis and accounting controls?
Admittedly, it can be pretty tough for us to find out if a company has good control over its costs, as these controls are handled by the accounting department of each company for which we likely do not have access to.
What we can do is to use metrics and ratios to determine if a company’s costs are being controlled effectively, or if they seem to be spiraling toward trouble. Use the company’s operating margin and compare this against rivals, and also look at a 5-year or 10-year history of the company to see if its costs have ballooned or have been maintained. Another option is to speak with the company’s chief financial officer if possible – if not, the next best thing is to look up the CFO’s history and check his track record.
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?
In here, Fisher is referring to specific industries and their unique characteristics, and whether we as investors can gain knowledge of practices which certain companies may have which give them an edge over their competitors.
For example, a restaurant may have a successful loyalty program which endears customers to its meals. This encourages repeat visits which result in the restaurant earning a much higher profit margin compared to its peers. By understanding the details of the restaurant’s loyalty program and why it has been so successful, we can then better appreciate why this restaurant chain is producing much better numbers than its competitors.
12. Does the company have a short range or long range outlook in regards to profits?
This is an important attribute which we should find out: Is a company’s management motivated mainly by short-term targets, or are the company’s leaders willing to sacrifice profits in the short-run in order to invest and grow the company for the long-term future?
We can tell by the actions taken by management. For example, a company which obsesses over its quarterly earnings guidance and then comments on whether the targets were beaten or not would definitely give the impression of being short-term focused. Companies which have a long-range outlook typically do not harp on quarterly earnings numbers. Instead, they focus on long-term targets and make strategic investments in areas which may only yield results many years down the road. This is what is known as “short-term pain but long-term gain.”
Part 5 shall touch on the last three points within Fisher’s 15-point checklist. Stay tuned! [Editor’s note: The final part has been published and it can be found here.]
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.