I’ve been hearing about Philip Fisher’s book, Common Stocks and Uncommon Profits since I became interested in investing. Warren Buffett has been quoted as saying investors should, “read Ben Graham and Phil Fisher, read annual reports, but don’t do equations with Greek letters in them.” Buffett attributes much of his investing style to Graham, but he almost always mentions Philip Fisher as well. He’s taken the points from both that made sense to him, and added his own unique style. Whatever the exact formula is, it’s made him the best investor of all time.
I’m not going to pretend to review Fisher’s book (which I read over a year and a half ago). He knows more about finance than I do. Many people that have read the book probably know more about finance than I do. I would like to highlight a few of the things that stood out to me about the book, particularly when it comes to Buffett’s influences.
The differences between Fisher and Graham are of particular interest to me. I’m going to talk about three of them. When Buffett talks about investing in “cigar butt” stocks, he’s talking about stocks that are incredibly cheap (for good reason), but some value can still be extracted from them (a puff or two, in Buffett parlance). Graham was great at finding these stocks. He’d find stocks that were incredibly cheap, but, for instance, had more cash on the books than the company was trading for. The company was trading at bargain prices because it was a lousy business, but Graham could extract that last bit of value from it. There was money to be made doing it that way.
Fisher on the other hand, preferred to focus on high quality companies that you could own for extremely long periods of time. This has something that Buffett has obviously adopted. Buffett calls his favorite holding period for a stock “forever.” He’s so firm in his evaluation of a company, that he feels extremely confident that the company will continue to make money and make him money. Because he has a company that will outlive him, he doesn’t care whether the value is unlocked in his lifetime. He has the ability to trust himself and his convictions.
The second interesting distinction I noticed between Fisher and Graham has to do with technology. Graham, like Buffett, had a definite aversion to technology. This is a topic worthy of its own blog post, but Graham and Buffett believe that technology is too risky because of the fleeting competitive advantages involved. Fisher, on the other hand, loved technology. He loved it. Fisher tried to focus on companies that invested heavily in research and development. He felt that this was the way companies could stay on top over the long run. Jim Collins, author of Built to Last, is known for believing (and demonstrating through his findings and research) that investing in R&D is essential to staying on top long term. Buffett won’t touch the stuff, even after acknowledging the competitive advantage of a company like Microsoft, no technology based company makes up a significant part of his portfolio (he did just make a paper bundle off of BYD – not sure if that counts).
The last distinction I’d like to draw between the two is how they feel about dividends. Graham thought dividends were incredibly important. He preferred to invest in companies with a long history of paying and increasing their dividends (see The Intelligent Investor). He searched diligently for those companies. Buffett will tell you that a large percentage of the markets returns over time come from dividends. I am of the opinion that companies should pay out earnings when reasonable, because you should have a choice as to whether you reinvest your money. Fisher was fine with companies reinvesting dividends – in fact, he wanted them to reinvest the money into R&D! I would say over all that Buffett likes dividends for his investments. He doesn’t like them so much that he allows Berkshire to pay a dividend under his watch. Buffett has said that when the time comes that he doesn’t feel he can earn an adequate return on an investors equity, he’ll pay a dividend. Don’t expect one anytime soon;) Good luck emulating these fellows and thanks for reading.
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