I just finished reading Philip A Fisher’s “Common Stocks and Uncommon Profits” book. Warren Buffett says he’s 85% Graham and 15% Fisher. Warren Buffett incorporates Fisher’s style when he looks into a company. In this part 1 of the post, we will look at the “scuttlebutt” approach and 15 questions to ask before buying into a company.
Fisher has a few methods of determining whether a company is a good buy. The first method he calls it a “scuttlebutt” method. In this method, Fisher recommends investors to talk to competitors, customers, suppliers, former employees (be wary of prejudiced comments), management of company and current employees. By talking to these people, one can determine if the company is a good buy. The investor can also ask this particular question to the management, “What are you doing that your competitors aren’t doing yet?”. Just by asking this one question, the investor can know the management’s style and if the business is worthy to invest in.
The other is the “15 points” method. There are set of 15 questions that the investor has to look into. They are as follows:
- Does the company have 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 organisation?
- Does the company have a worthwhile profit margin?
- What is the company doing to maintain or improve profit margin?
- Does the company have outstanding labour 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 regard 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?
I feel most of these 15 questions are very useful to be used with an investor’s quantitative analysis. These scuttlebutt method and the 15 questions will provide another form of arsenal in a value investor’s war chest.