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Philip Fisher, the father of growth investing, spent seven decades buying into technology companies. Naturally he regarded research and development as a key factor in the success of a company.
For Fisher it is not simply a matter of looking at the amount that is spent on R&D. It should be a straightforward task to divide the R&D figure by the total sales figure, and thereby work out how much is spent on each dollar of sales. But even here there is a problem, in that there is not a set method for what is included in or excluded from the R&D figures published in company accounts, nor for how companies allocate their spending in this area. The quality of R&D shows enormous variation, with well-run companies obtaining at least twice as much gain for each research dollar as less well-run companies. Tech is not all about the tech guys A technological genius is all very well, but his or her skill has to be managed, and good teamwork is essential. The image of the isolated genius producing new products and processes no longer represents the reality. Today’s innovations tend to come from teams of highly trained people, each with a different specialty. You may find a chemist working with a solid state physicist, a metallurgist and a mathematician. Their individual skills are only part of the equation. You also need leaders able to effectively coordinate the work of people of such diverse backgrounds and keep them driving toward a common goal. Indeed, so important is t....To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
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An essential component for a company to maintain its competitive position is its marketing arm; one which is capable of generating repeat sales to satisfied customers. If a company manufactures good quality products, and offers good after-sales service and spares, it is difficult for a competitor to move in.
‘An efficient producer or operator with weak marketing and selling may be compared to a powerful engine that, because of a loose pulley belt or badly adjusted differential, is producing only a fraction of the results it otherwise would have attained.’ (Philip Fisher) Among other things, the marketing team is in charge of making sure that the customer appreciates the quality and reliability of the product, so that the customer is very wary about switching to a competitor whose product might be inferior and unreliable. Customers do not beat a path to the door of the man with the better mousetrap. It is up to the marketing team to extol the virtues of the mousetrap to the public. Philip Fisher was surprised by how little attention is.......To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Click heOften, a good investment is made when the underlying company has special characteristics that will allow above-average profitability not just the next year or two, but for decades into the future, and the shares can be obtained for a reasonable price. But, how do you figure out degree of competition advantage?
Philip Fisher, the leader of the growth investing school, recommends, as a starting point, using Scuttlebutt (asking around) in seeking companies which have a consistent history of performing better than their competitors. How to retain a competitive advantage There are a number of ways in which a company can maintain its competitive edge, and the best way is to promote efficiency in all aspects of the company’s activities, whether it be selling, buying, manufacturing, management or any of the other elements that contribute to the running of a company. Companies which make high profits invariably attract the attention of other companies who would like a share of their market. The best way to deal with this type of competition is to be so efficient that competitors cannot compete without committing themselves to considerable expenditure, or getting involved in a damaging price war which is likely to cause indignation in their shareholders, and thereby a loss of confidence in the company with a resulting loss in value. Economies of scale can be a potential source of competitive advantage. But any operating cost benefit gained is too often lost in the extra cost of the additional layers of management needed. Companies that run perfectly well at a certain size can lose their efficiency as they grow larger, and their executives can be increasingly isolated from the company’s activities; Scuttlebutt is useful in this situation and can give clues to company performance. The biggest advantage for the largest company is usually not on the manufacturing but on the marketing side. If the largest company develops a new product, the average customer is likely to buy it because the large company has already established ‘an atmosphere’ (Philip Fisher) in which new customers are more likely to buy from the industry leader. This is because the leader has an established reputation for performance and/or sound value. Thus the manager responsible for buying is unlikely to be criticised for making this particular decision. A company which is the leading company in its field seldom loses its position as long as its management remains competent. As an example of a large company, Philip Fisher liked to use Campbell, the soup producer. A household name and market leader, it had achieved cost reduction through scale and backward integration (buying up suppliers); it had the most prominent position in retail outlets with the largest display area and the cost of its marketing was spread over billions of cans of soup. Sometimes high returns are not caused by a company being excellent at the core business. Rather it is able to maintain its competitive edge by the efficiency with which it handles what appear to be subsidiary matter such as its leases, insurance policies, or real estate. The three factors For Fisher, three factors combine to give a company dominance in some industries:
Philip Fisher, thought-leader in growth investing, developed his philosophy over decades, partly as a result of logical reasoning and partly from observing the successes and failures of others. However, the most powerful element was the painful method of learning from his own mistakes.
Through experience, Fisher realised that for an investment to be a good choice, the most important criterion was to spend time finding out about a company; talking to managers and other knowledgeable people about an industry or company. This was what he termed ‘Scuttlebutt’. Scuttlebutt surrounded all the other qualities Fisher looked for in a company, reinforcing the facts available from reports and normal sources. What he was looking for was a company that would be outstanding in its field, with all the qualities he had so admired in the Food Machinery Corporation – see newsletter dated 5 Jan 2022; a company that had the probability of spectacular earnings growth with efficient management throughout. When he found such a company, an ‘investment bonanza’, he held onto the shares for at least three years, and often longer, believing investors should not be seeking quick returns or an easy way to fortune. Having conducted thorough research and made use of Scuttlebutt, Fisher’s ideal company is one which performs exceptionally well in every single aspect of its business. These companies were generally in the technology industry, where failure is part and parcel of progress. Less well-informed investors tend to sell when things go wrong and earnings are less than expected, thus depressing the price, and this gave Fisher a chance to pick up a bargain. If the people running the company are exceptionally able, and the mistakes that have occurred are only transient, then the company still provides an excellent investment vehicle, and is a better choice than a company which never takes any pioneering risk. Scuttlebutt This is Fisher’s name for research into a company, but not via the usual methods of reading reports. It is using the business grapevine, seeking the opinions of anybody and everybody associated with the company; employees, customers, suppliers, contractors, rivals, academics, trade association officers, industry observers, ex-employees etc. An amazingly accurate picture of .........To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Reflecting on his ideas to further hone his investment philosophy Philip Fisher, in the 1940s, decided to concentrate on finding unusual companies which had the possibility of significant growth and earnings and to restrict his client group to a few large investors (12 was the maximum number of clients Fisher had during the 1950s and 60s).
He also decided that the chemical industry would enjoy substantial expansion after the war, and set about finding the most attractive large chemical company. Researching the chemical industry to find out everything he could about the companies and their managements, he talked to anyone who had some knowledge of the industry. All the qualitative pieces of information (e.g. innovations, inventions and competitive conditions) that he had gathered were added to his analysis of financial data. We are talking about months of work here, not the few minutes some share punters allocate. Dow Chemical By spring 1947 he had managed to single out one firm which met all his criteria – this was Dow Chemical Company. The reasons for his choice are:
The experience of Philip Fisher, father of rational growth investing, can teach us a lot about the investment process that has great applicability to us today. Even though he was investing a long time ago human nature and the behaviour of markets seem unchangeable so we face the same issues that he did.
Boom times In 1929 the 22-year old Philip Fisher became increasingly convinced that there was a wild unsustainable boom in share prices. He even wrote a report for the bank he worked for in August 1929 predicting that the next 6 months would see the start of the greatest bear market in 25 years. Sadly he was one of only a few voices opposing the accepted wisdom that share prices would continue to climb to ever higher prices on the amazing theory that economy and businesses were in a “new era”, where earnings per share were obviously going to rise and rise year after year. These optimists pointed to all the new technologies (e.g. radio, cars, electricity) that were going to propel the economy at a much faster pace than in the past. I remember a similar sentiment in the late 1990s as people believed the internet, computers and telecommunication will push us to ever greater heights without interruption. We have had a lot of ‘new eras’ in the last century or ‘this time it’s different’ assertions to explain away very high share prices. A knowledge of stock market history and the perspective it brings is a pre-requisite for a good investor - the more we understand the past the further we can see into the future. Despite Fisher’s sound reasoning, he found himself caught by the market frenzy, and spent his carefully acquired savings on shares that were still cheap and had not yet risen, without making enquiries or obtaining information about them, totally ignoring what he had just learned in his successful analysis of which radio stock was still under-priced. Lessons After the crash he was left with only a tiny proportion of his original investment. It was a chastening experience and he learned a number of lessons, one of which is that a low price is no guarantor of value. What the investor needs is a share with a low price relative to its earnings a few years hence. He started to think in terms of predicting (within fairly broad limits) the earnings of firms a few years from now. In 1930 he joined a regional brokerage firm with the task of finding stocks which were suitable for purchase because of their characteristics, and for eight months he enjoyed putting into .........To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Philip Fisher is the leading light of growth investors. There is a common misconception that growth investors overlook whether the share is selling at a value price. While some growth investors are careless in this regard, Fisher was always insistent that the growth share was selling at a value price.
Even high growth potential companies can be over-looked or fall out of favour and sell for less than their underlying worth from time to time. These companies are rare because the vast majority of companies with fast earnings growth are well recognised and selling at high prices - but they are well worth seeking out (Microsoft, a few years ago, was selling on a low PER, for example) What you can learn from Fisher is that you can out-perform the market, but only by having a laser-like focus on a particular industry or a small group of industries. There’s no point in trying to understand a wide range of industries because this will not allow you to develop the depth of insight needed to succeed in a focused area. Considerable dedication and experienced judgement needs to be brought to bear on the task of understanding all the firms in an industry; what drives their strategies and the calibre of the managers. Philip Fisher teaches us to:
Fisher was born in 1907 and enjoyed an incredibly long 74 year career in the investment world, before retiring at the age of 91. He came from a large family, and his mind was opened to the world of investment at an early age, when he heard a conversation between his grandmother and an uncle, discussing her investment stocks. He was intrigued and excited at the possibility of buying a share in the future profits of any one of hundreds of companies. His grandmother was concerned that he might have been bored by the subject of the conversation, but, on the contrary, this brief glimpse of the world of stocks and shares ignited a lifelong interest. In his teenage years he began .........To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Following a strict value investing approach I sold a lot of shares before and during the first Covid wave. The pile of cash was very useful later in 2020 and 2021. The shares bought in the last year or so have generally risen nicely.
A list of all the shares I bought in the crisis (Newsletters published at the time of each purchase set out my rationale for buying) Company Purchase date Purchase price Divs to 31.12.21 Price 31.12.21 Return to 31.12.021 Smiths News 18.3.20 £0.151 zero £0.376 149% Character 5.6.20 £2.52 11p £6.20 150% McCarthy & Stone1.10.20 £0.718 0 Sold 7 Dec 2020 £1.185 65% Capital & Counties6.11.20 £1.032 0 Sold 19 Aug 2021 £1.743 69% Dewhurst “A”11.11.20 £5.94 13.50p £6.20 7% MS International16.12.20 £1.292 8.25p £2.10 69% Wynnstay29.12.20 £3.405 15p £5.70 72% Lloyds Bank12.3.21 £0.4169 1.24p £0.4819 19% J Smart18.3.21 & 24.3.21 £1.253 0.95p £1.43 15% Fletcher KingFeb 2020 – May 2021 £0.3265 0.5p £0.40 24% Orchard Funding7.6.21 £0.568 3p £0.50 -7% Caffyns22.6.21 £4.65 zero £5.00 8% Highcroft22.7.21 £8.75 22p £8.50 -1% Town Centre Securities10.8.21 £1.426 zero £1.37 -4% AVERAGE 45%Longer run performance Nine years ago that I left a tenured professorship to concentrate on investment. Back then the FTSE 100 was around 6,600. It is now 7,400 – a slow rise. But there have been dividends of around 3% per year. I believe the numbers in the tables below show that I have outperformed, which is quite a relief given the salary and security sacrifice I made nine years ago. The tables display the results (so far) of all the shares bought for the portfolios I’ve been writing about in my Newsletters. The comments I made at the time explaining the rationale for each investment are available for you to read in older newsletters - there is nowhere for me to hide from my appraisals I made three, four or seven years ago – all the errors of omission and commission are there in broad daylight. I present the returns after taking the hit on broker costs, stamp duty and bid/offer spread. (Some of you have joined us recently so, in case you are not familiar with them, I briefly describe the criteria for my portfolios following the portfolio performance tables.) The 2013 Net Current Asset Value, NCAV, portfolio CompanyPurchase date Purchase price Divs to 31 Dec 2021 Price 31 Dec 2021 Return to 31 Dec 2021 French Con.25.7.13 £0.3047 zero Sold July 2015 £0.4378 44% Caledonian T25.7.13 £0.70 zero Sold April 2020 for £1.391 99% Fletcher King6.8.13 £0.30 14.25p Sold June 2016 for 46p 101% Northamber22.8.13 £0.287 1.6p Sold Oct 2016 £0.303 11% Titon5.9.13 £0.379 6.5p Sold May 2016 £1.06 197% Mallett12.11.13 £0.7682 12.7p Sold Nov 2014 £0.60 -5% AVERAGE 75%The 2014 NCAV portfolio CompanyPurchase date Purchase price Divs to 31 Dec 2021 Price 31 Dec 2021 Return to 31 Dec 2021 Holders Tech10.10.14 & 3.11.14 £0.47 1p Sold March 2017 £0.33 -28% Airea4.11.14 £0.1195 0.9p Sold Sept 2016 £0.309 166% Northamber17.11.14 £0.4265 0.7p Sold Oct 2016 £0.303 -27% Caledonian T30.12.14 £1.39 zero Sold April 2020 £1.391 0 AVERAGE 28%The 2015 NCAV portfolio CompanyPurchase date Purchase price Divs to 31 Dec 2021 Price 31 Dec 2021 Return to 31 Dec 2021 PV Crystalox15.1.15 £0.122 zero Sold Dec 2016 £0.237 94% Arden Partners1.9.15 £0.422 1p Sold May 2018 £0.364 -11% Northamber4.9.15 £0.443 0.4p Sold Dec 2016 £0.303 -31% AVERAGE 17%The Buffett-style portfolio This type of share is rarer than the others, and so I combine all years. CompanyPurchase date Purchase price Divs to 31 Dec 2021 Price 31 Dec 2021 Return to 31 Dec 2021 Dewhurst9.4.14 £3.18 70.5p Sold February 2020 £7.217 149% MS International9.10.19 £1.723 11.75p £2.10 29% Character20.1.20 & 5.6.20 £2.811 19p £6.20 127% Dewhurst11.11.20 £5.94 13.5p £6.20 7% MS International16.12.20 £1.292 8.25p £2.10 69% AVERAGE 76%(I bought some more of Dewhurst in June 2014 at £3.11, December 2014 at £3.75, November 2017 at £5.46, February 2019 at £5.54 and April 2019 at £5.64. These were sold Feb 2020). Modified price earnings ratio portfolio 2015/16 CompanyPurchase date Purchase price Divs to 31 Dec 2021 Price 31 Dec 2021 Return to 31 Dec 2021 Haynes11.2.15 £1.159 33.5p Sold 2.10.19 £2.9175 181% AGA11.3.15 £1.002 zero Taken over June 2015 £1.456 45% Hogg Robinson10.4.15 £0.4709 2.37p Sold June 2016 £0.656 44% MS International3.7.15 £1.86 44.25p £2.10 37% BHP Billiton24.9.15 £10.43 127p Sold May 2018 £16.90 74% TClarke5.11.15 £0.7916 13.61p Sold Feb 2020 £1.1215 59% Premier Farnell8.4.16 £1.222 3.6p Taken over 20.6.16 £1.632 36% AVERAGE 68%The AGA holding was doubled 30 April 2015 at a price of £0.9466. Modified price earnings ratio portfolio 2017 CompanyPurchase date Purchase price Divs to 31 Dec 2021 Price 31 Dec 2021 Return to 31 Dec 2021 Braemar28.6.17 £2.848 20p Sold June 2018 £2.639 0% Caffyns10.8.17 £5.012 52.5p Sold July 2020 £2.389 -42% Connect/Smiths News27.9.17 £1.046 10.8p £0.376 -54% MS International14.11.17 £1.84 28.25p £2.10 29% AVERAGE -17%The 2017/18/19 NCAV portfolio Purchase date Purchase price Divs to 31 Dec 2021 Price 31 Dec 2021 Return to 31 Dec 2021 Caledonian Trust7.11.17 £1.23 zero Sold April 2020 £1.391 13% J Smart30.1.19 £1.13 4.14p Sold Mar/Apr 2020 £1.101 1% Northamber6.12.19 £0.504 0.3p Sold Mar 2020 £0.5717 14% AVERAGE 9%More Caledonian Trust shares bought in February 2019 at £2.29. More J Smart bought 30.4.19 at £1.16 The 2018/2019 modified price-earnings ratio portfolio Purchase date Purchase price Divs to 31 Dec 2021 Price 31 Dec 2021 Return to 31 Dec 2021 Connect/Smiths News14.6.18 £0.285 4.1p £0.376 46% N Brown17.8.18 £1.42 9.93p Sold Sept 2021 £0.557 -54% Spaceandpeople31.10.18 £0.224 0.5p Sold Dec 2020 £0.128 -43% Tandem2.4.19 £1.59 9.49p Sold Aug 2020 £3.707 139% MS International6.6.19 £2.22 18.25p £2.10 3% Character25.10.19 £3.506 24p £6.20 84% AVERAGE 29%More Connect Group shares bought in February 2019 at 40.86p, March 2019 at 38.29p and May 2019 at 39p. More N Brown bought May 2019 at £1.30. The 2020/21 modified price-earnings ratio portfolio Purchase date Purchase price Divs to 31 Dec 2021 Price 31 Dec 2021 Return to 31 Dec 2021 Wynnstay7.1.20 & 29.12.20 £3.33 29p £5.70 80% Daejan5.2.20 £52.90 zero Sold 21 Feb 2020 £79.41 50% Connect/Smiths News18.3.20 £0.151 zero £0.376 149% Lloyds Bank12.3.21 £0.4169 1.24p £0.4819 19% AVERAGE 75%The 2020/21 NCAV portfolio Purchase date Purchase price Divs to 31 Dec 2021 Price 31 Dec 2021 Return to 31 Dec 2021 McCarthy & Stone1.10.20 £0.718 0 Sold Dec 2020 118.5p 65% Capital & Counties Properties6.11.20 £1.032 0 Sold 19 Aug 2021 £1.743 69% J Smart18.3.21 & 24.3.21 £1.253 0.95p £1.43 15% Fletcher KingFeb 20 – May 2021 £0.3265 0.5p £0.40 24% Orchard Funding7.6.21 £0.568 3p £0.50 -7% Caffyns22.6.21 £4.65 zero £5.00 8% Highcroft22.7.21 £8.75 22p £8.50 -1% Town Centre Securities10.8.21 £1.426 zero £1.37 -4% AVERAGE 21%The return reversal portfolio Purchase date Purchase price Divs to 31 Dec 2021 Price 31 Dec 2021 Return to 31 Dec 2021 Havelock Europa20.5.15 £0.14609 zero Sold Dec 2016 £0.0915 -37% AVERAGE -37%Brief description of criteria for the portfolios Shares are allocated to portfolios designed around ideas flowing from research conducted when my PhD students and I asked the question “what works in investment?” These investigations were often inspired by the ideas of great investors such as Benjamin Graham. More detail on these ideas is presented in earlier posts (if you put key words into the search box those Newsletters will appear). Net current asset value, NCAV, criteria
Return reversal
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Glen ArnoldI'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact [email protected] investing is about making the right decisions, not many decisions.
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