Farewell, Philip Fisher
One of the world’s seminal investment thinkers passed away recently — Philip Fisher, author of the classic “Common Stocks, Uncommon Profits” (Wiley, $20). Here are the eight points of his investment philosophy:
1. Buy stock in companies with disciplined plans for achieving dramatic long-term growth in both profits and revenues. These firms must also have inherent qualities that make it difficult for new entrants into that business to share in such growth.
2. Aim to find such companies when they are out of favor — when market conditions are not favorable, or the financial community does not properly perceive the true worth of such companies.
3. Hold the stocks you buy until there has been either a fundamental change in the company’s nature or it has grown to a point where it will no longer be growing at a faster rate than the economy as a whole. Don’t sell your most attractive stocks for short-term reasons.
4. If your primary investment goal is long-term appreciation of capital, then de-emphasize the importance of dividends.
5. Recognize that mistakes are an inherent cost of investing. Recognize them as soon as possible, understand their causes, and learn from them so they’re not repeated. A willingness to take small losses in some stocks while letting profits grow bigger and bigger in your more promising stocks is a sign of good investment management. Don’t just take profits for the satisfaction of taking them.
6. Realize that there are a relatively small number of truly outstanding companies. Concentrate your money in the most desirable opportunities. Holding more than 20 companies is unmanageable (and “a sign of financial incompetence”). Aim for 10 or 12.
7. Have more knowledge than others and apply your judgment after thoroughly evaluating specific situations. You should also have the moral courage to act against the crowd when your judgment tells you that you are right.
8. One of the basic rules of life also applies to successful investing — success is highly dependent upon a combination of hard work, intelligence and honesty.
Ask the Fool
Q: What’s “front-running”? — P. C., Huntsville, Ala.
A: Front-running is a shenanigan practiced by some unscrupulous folks in the financial realm. A mutual fund manager, for example, may buy shares of a company for her personal portfolio and then begin buying many shares for her fund, driving the price up and generating profits for herself. A talking head on television may talk up a company after having bought into it. A broker, knowing that his firm will be releasing a positive report on a company, may buy shares of it for himself. These are all examples of front-running, which in some cases is illegal.
Q: What does a company’s CFO do? — L.V., Chicago
A: A company’s chief financial officer (CFO), such as PepsiCo’s Indra Nooyi, Home Depot’s Carol Tome and Merck’s Judy Lewent, is responsible for all things financial at the firm. These include determining what its financial needs are and will be, how best to finance those needs, and informing all stakeholders (investors, creditors, analysts, employees, management) of the firm’s financial condition.
The CFO is also focused on creating and maintaining the best mix of internal cash, debt financing and equity financing for the company (this is known as a firm’s “capital structure”). As part of those responsibilities, the CFO plans and oversees the forecasting and budgeting process, maintains relationships with funding sources such as commercial and investment banks, and oversees the process of developing and communicating the quarterly and annual financial statements. Finally, the CFO has ultimate accountability for maintaining the books and records of the company, ensuring that the company’s assets are protected.
My dumbest investment
My dumbest investment came from a stock tip in a hallway several years ago. I had stock in Microsoft and had made 20 percent on the shares. I sold them, though, to invest in the recommended company, System Software. System Software shortly thereafter filed for Chapter 11 bankruptcy protection. I know I’ll never make this mistake again, but it still hurts. — K.W., via e-mail
The Fool Responds: Many people sold shares of Microsoft over the past many years, and most of them are kicking themselves. Still, there are other stocks that have fared as well or better than Microsoft — especially in recent years. Your job, if you’re considering investing based on a hot tip, is to do enough research into the proposed investment to determine whether it’s worthy of your money. Find out if you understand its business and how it makes money. Read through an annual report or two, and look for signs of management integrity. Examine its track record, growth potential and advantages versus competitors.
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