It’s Quality That Counts: The Fisher Approach to Stock Investing

Philosophy and style


Investment in “outstanding” companies that over the
years can grow in sales and profits more than industry
as a whole. The key features of “outstanding” companies
are: strong management that has a disciplined approach
designed to achieve dramatic long-term growth in profits,
with products or services that have the potential for
sizable sales long term, and with other inherent qualities
that would make it difficult for competitors and newcomers
to share in that potential growth.


Universe of stocks

No restrictions on universe of stocks from which to
select. Over-the-counter stocks should not be overlooked,
but “outstanding” companies are not necessarily
young and small.


Criteria for initial consideration

Prospective companies should pass most of the following
15 points, which can be divided into three main
dimensions:

Functional factors:
• Products or services with sufficient market potential for
sizable increase in sales for several years. Major sales
growth, judged over series of years.
• Superiority in production—lowest-cost production (for
manufacturing firms) or lowest-cost operation (for
service firms or retailers).
• Strong marketing organization—efficiency of sales, advertising,
and distributive organizations.
• Outstanding research and development efforts—amount
expended relative to its size, effectiveness of effort as
indicated by ability to bring research ideas to production
and to market and by how much research contributed
to net profits.
• Effectiveness of company’s cost analysis and accounting
controls, and choice of capital investments that will
bring the highest return.
• Financial strength or cash position—sufficient capital
to take care of needs to exploit prospects for next
several years without the need to raise equity capital.


Excellence in Management
• Attitude of management to continue to develop products
or services that will further increase sales.
• Development of good in-house management and teamwork.
• Management depth.
• Good labor and personnel relations: Affiliation with an
international union may be an indication of bad relations;
labor turnover relative to competitors.
• Long-range outlook by management even at the expense
of short-term profits.
• Good investor relations, and willingness to talk freely
about problems.
• Management of unquestionable integrity—salaries and
perks in line with those of other managers.


Business characteristics
• Above-average profitability: Compare profit margins
per dollar of sales—compare within industry and examine
for several years, not just single years. Older and
larger firms are usually the best in their industry.
Younger firms may elect to speed up growth by spending
all or a large part of profits on research or sales; for
these, make sure a narrow profit margin is due to
spending in these areas alone.
• Ability to maintain good profit margins: Good position
relative to competition—for instance, skill in a particular
line of business, or patent protection for a small
business.


Secondary factors
Once an “outstanding” company is found, purchase
stock when it is out-of-favor either because the market
has temporarily misjudged the true value of the company,
or because of general market conditions. “Outstanding”
companies can also be purchased at fair value, but
investor should expect a lower (but respectable) return.


Stock monitoring and when to sell
• Use a three-year rule for judging results if a stock is
underperforming but no fundamental changes have
occurred.
• Hold stock until there is a fundamental change in its
nature or it has grown to a point where it will no longer
be growing faster than the overall economy.
• Don’t sell for short-term reasons.
• Sell mistakes quickly, once they are recognized.
• Don’t overdiversify—10 or 12 larger companies is
sufficient, investing in a variety of industries with different
characteristics.


https://www.aaii.com/journal/article/it-s-quality-that-counts-the-fisher-approach-to-stock-investing