Investing beyond numbers: Philip Fisher's legacy of growth-oriented strategies

Benjamin Graham, known for value investing, and Philip Fisher, the father of growth investing, shaped different paths in the investment world.

Fisher gained fame as a significant American stock investor through his book "Common Stocks and Uncommon Profits." His strategy centred on investing in high-quality companies for the long haul and on conducting detailed research before making any investment. When choosing where to invest, he mainly considered a company's quality rather than its numbers alone.

One of his most famous investments was Motorola, which he bought in 1955 and didn’t sell for the remainder of his life. According to Fisher,

“If the job has been correctly done when a common stock is purchased, the time to sell it is almost never.” — Philip Fisher.

Though my focus leans toward value investing, Fisher's principles resonate. It helps me avoid value traps and prioritise a company's growth potential.

Fisher's approach included 15 points to consider when evaluating a stock, yet he emphasised that a company didn't necessarily have to fulfil all of them. Instead, meeting most of these points was sufficient to justify an investment in that company.

Let us go through this list and by the end of it, write down which point resonates with you the most.

Philip Fisher 15-point checklist

Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?

A good example that Fisher gives is the boom in TV sales when they were new. However, once almost every home had one, demand plummeted since people didn't need multiple TVs.

His point emphasises a company's potential for sales growth.

He distinguishes between lucky companies and those that create their luck through their capabilities, stressing the need for sustained market potential for future growth.

Does the management have a determination to continue developing products or processes that will further increase total sales potential, even as the growth potential of currently attractive product lines has largely been exploited?

Many failed businesses suffered because they either exhausted their product lines or neglected innovation.

Nokia serves as an example: it grew complacent and failed to create new products. When competitors like Apple and Samsung emerged, Nokia couldn't catch up.

Fisher highlights that successful businesses focus on developing related areas rather than pursuing entirely new ventures.

How effective are the company's research and development efforts in relation to its size?

This question assesses whether a company invests effectively in innovation given its resources. You can figure this out by dividing revenue by R&D spending.

But keep in mind that results vary widely among companies, so it's important to compare with industry peers for a meaningful assessment.

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Does the company have an above-average sales organisation?

Even if a product is great, it needs effective sales and investors often overlook sales efficiency.

Fisher looks at whether a company has a standout sales team. He emphasises the importance of sales training, seen as a key measure of a company's success.

Does the company have a worthwhile profit margin?

Fisher examines whether a company's profit margin supports its operations and rewards investors. He recommends analysing earnings across several years, not just recent ones.

He warns against companies that wildly swing with industry trends, calling them red flags. Don't be swayed by flashy percentage increases; scrutinise real numbers to gauge sustainability versus hype in profits.

What is the company doing to maintain or improve profit margins?

Fisher emphasises that a stock's success after purchase isn't tied to its past performance. While it seems obvious, we often rely on history for evaluations.

His point urges us to focus on the future; past performance, though important, doesn't guarantee future success.

Does the company have outstanding labour relations and personnel?

Fisher seeks to determine whether the company maintains excellent, positive interactions with its workforce, fostering a conducive, productive environment.

Strong labour and personnel relations often indicate better morale, productivity, and stability within the company.

Good relations mean a lower risk of strikes or high turnover, saving the company money.

Does the company have outstanding executive relations?

It is about finding companies with top-notch leadership for better returns.

Strong leaders are drawn to promising opportunities. They value merit-based achievements, rewards, and promotions over politics. They’re not much different from us, seeking success based on performance and opportunity.

Does the company have depth to its management?

Succession planning matters; things may not always go as expected. Larger companies usually handle this better. Fisher advises grooming C-level talent between $15-$40 million in revenue.

Micromanaging hinders growth; delegation empowers employees to grow. Listening to and valuing diverse ideas cultivates future leaders. Without these, a company risks a lack of strong future leadership, which can affect investors.

How good are the company's cost analysis and accounting controls?

Understanding costs is crucial for business success. Without knowing the costs, it's hard to pinpoint expensive products or processes. This knowledge helps manage expenses effectively.

In addition to that, you won’t know which products are your valuable products, which will keep you from promoting them and maximising profits.

Are there other aspects of the business, somewhat peculiar to the industry, that will give the investor important clues about how outstanding the company will be relative to its competitors?

This question looks beyond standard measurements to identify signs of how well the company might outshine competitors in its field.

These unique aspects give investors key insights into how the company might perform against its industry rivals.

Does the company have a short- or long-term outlook for profits?

It examines whether a company prefers quick profits or steady, long-term growth.

Companies willing to forgo short-term gains for lasting success are commendable and worth exploring. Amazon stands out as a bold and visionary example of such a company.

In the foreseeable future, will the company's growth require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefits from this anticipated growth?

Fisher wants you to check if the company's cash and potential borrowing can cover future projects. If not, it is a problem.

The company's future growth might demand so much equity financing that issuing new shares could diminish the benefits current shareholders expect from the company's anticipated growth.

Does the management talk freely to investors about its affairs when things are going well, but “clam up” when things go wrong?

This is a significant warning sign when evaluating a company. Do the executives openly address issues, or do they hide them when things go wrong? Concealing problems rarely solves them.

Just like in personal matters, hiding information erodes trust. If you can't trust a company, it's wise to reconsider investing in it immediately.

Does the company have a management of unquestionable integrity?

This question, like the one before, examines the honesty of the management. Fisher assesses whether they adhere to high ethical standards, demonstrating honesty and transparency.

He highlights red flags, such as management owning land and renting it to the company at high rates. He also warns of potential employee kickbacks from vendors, urging investors to exercise caution.

This checklist of 15 questions isn't a quick-and-easy tool; it requires time and careful consideration. Over-analysing may lead to feeling pressured to invest.

While the checklist offers a framework, it's flexible. Embracing better ideas and updates is key. Investors should customise it based on their investment philosophy and risk tolerance.

Let me know which point resonates most with you and why in the comments below!

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