Fisher taught Buffett the benefits of focusing on just a few investments. The danger in purchasing too many stocks, he felt, is that it becomes impossible to watch all the eggs in all the baskets. In his view, buying shares in a company without taking the time to develop a thorough understanding of the business was far more risky than having limited diversification.
Phil Fisher’s style of investing: (i) Hold a concentrated portfolio (ii) Purchase and hold for the long term (iii) Buy companies that you understand very well (iv) Buy outstanding companies with compelling growth prospects
“It is not the profit margin of the past but those of the future that are basically important to the investor.” (One has to consider a company’s strategy for reducing costs and improving profit margins because Inflation/ deflation effects expenses and competition effects profit margins)
Fisher’s sensitivity about a company’s profitability was linked to company’s ability to grow in the future without requiring equity financing. If a company is able to grow only by selling stocks, he said, the larger number of shares outstanding will cancel out any benefit that stockholders might realize from the company’s growth.
Fisher purchased Motorola in 1977 and he is famous for providing investors with a qualitative guide to finding superbly managed companies with excellent growth prospects. According to Fisher, a company must qualify on most of these 15 points to be considered a worthwhile investment:
- Does the company have the products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
- 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?
- How effective are the company’s research and development efforts in relation to its size?
- Does the company have an above average sales organization?
- Does the company have a worthwhile profit margin?
- What is the company doing to maintain or improve profit margins?
- Does the company have outstanding labor and personnel relations?
- Does the company have outstanding executive relations?
- Does the company have depth to its management?
- How good are the company’s cost analysis and accounting controls?
- 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?
- Does the company have a short range or long range outlook in regards to profits?
- 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?
- Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?
- Does the company have a management of unquestionable integrity?