Investment approaches are often categorized as being either growth or value oriented. William O'Neil's C-A-N-S-L-I-M system focuses exclusively on smaller, market-leading companies, with accelerating earnings growth and price momentum. O'Neil shows little concern over buying a stock with a rich price-earnings multiple, and feels that market timing is an important element to a successful approach to investing.
On the other hand, the Benjamin Graham approaches focus on trying to buy a dollar's worth of stock for 50 cents. Graham's stock selection technique places an emphasis on locating financially sound stocks with reasonable prices compared to asset values and earnings levels. While earnings and dividend growth were an important consideration for Graham, earnings stability was emphasized over eye-popping earnings growth.
Fisher received his professional start in the financial markets in 1928 as a "statistician" for a bank underwriting securities. The norm at that time was highly margined investments in speculative issues without investor research or knowledge of the business. Even Fisher lost a significant amount of money in the 1929 crash by investing in a few stocks that still looked cheap because of their low price-earnings ratios, though his analysis of the market identified it to be highly risky and ready for the "greatest bear market in a quarter of a century."
In his writings, Fisher relates that with the sour feeling toward the investment community after the market crash, the term statistician fell out of favor and was replaced with security analyst. Fisher started his investment counseling firm in the early 1930s with the investment philosophy of selecting deeply researched companies with strong long-term growth prospects and holding them through the gyrations of the economic cycle. Fisher favored buying and holding the stocks of companies that were well-positioned for long-term growth in sales and profits. This positioning could best be determined by examining factors that are difficult to measure through ratios and other mathematical formulations--the quality of management, the potential for future long-term sales growth, and the firm's competitive edge.
Fisher's investment philosophy and its development is revealed in his collection of writings "Common Stocks and Uncommon Profits," published in the late 1950s, "Conservative Investors Sleep Well," published in the mid 1970s and "Developing an Investment Philosophy," published in the early 1980s. All three works have been republished by John Wiley & Sons in "Common Stocks and Uncommon Profits and Other Writings by Philip A. Fisher." ($19.95; John Wiley & Sons, 1 Wiley Drive, Somerset, N.J. 08875; 800/225-5945) These writings serve as the basis of this article and provide an interesting perspective on the evolution of the investment philosophy of a successful money manager who knows how to learn from his mistakes.
Much of the material in Fisher's book deals with the qualitative aspects of selecting securities. Fisher admits to relying on the recommendations of respected investment advisers as the preliminary screen for four-fifths of his investment ideas. (The other fifth comes from industry scuttlebutt.) These preliminary lists would always be followed up with in-depth research. Fortunately, Fisher's writings provide enough detail for the investor to establish some basic screens that highlight growth stocks meriting further in-depth analysis.
Fisher first and foremost was a growth stock investor. He felt the greatest investment returns did not come from the purchase of stocks that were undervalued, since even a stock that is undervalued by as much as 50% would only double in price once it reached fair market value. Instead, he sought much higher returns from those companies that could achieve growth in sales and profits greater than the overall market over a long period of time. On the other hand, once those companies were found, he favored buying them opportunistically, either when the market temporarily undervalues the company due to unexpected bad news, or when the overall markets are depressed.
Fisher did not seek companies that showed promise of short-term growth due to cyclical events or one-time factors, feeling that the timing was too risky and the promised returns too small. Instead, he focused on long-term growth, which he felt could only come from companies that were strong in three "dimensions":
True long-term growth companies, he felt, were not necessarily small and relatively young firms, although he did not exclude these companies (as long as they had some operating history upon which he could judgehe did not favor new firms). On the other hand, he noted that the qualities that constitute excellent management vary considerably based on firm size.