Tuesday, June 23, 2009

Graham and Fisher

"As long as the company behind the common stock maintains the characteristics of an unusually successful enterprise, never sell it." - Philip Fisher in his book Common Stocks for Uncommon Profits

Many are familiar with Benjamin Graham's style of investing. Buying securities below what they were worth then selling them once they were fully priced (so-called "cigar butts"...not much of a puff, but the puff is all profit). He was also great at explaining how to manage the erratic behavior of markets.

Another influential investor was Philip Fisher. He founded a money management company in 1931 and was author of Common Stocks and Uncommon Profits. Philip Fisher's approach was more about growth and durability. He believed you should buy great companies and hold onto them forever.

Sound familiar?

Graham's emphasis was on the quantitative. In contrast, Fisher looked more at intangibles and the qualitative. For him it was about things like: management, product or service, competition, company culture, sales team, research capacity etc. The ideas of both became a significant part of Berkshire's investment approach.

"If a company is of a high quality, then selling it is rather foolish, at almost any price, because of the scarcity of high quality investments. What will you do, with the proceeds from the sale of a world class company?" - Philip Fisher in his book Common Stocks and Uncommon Profits

If long-term prospects remain attractive for a business don't sell even if it gets temporarily somewhat overvalued (though Fisher would appear to take this further than "somewhat").

"...finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear." - Philip Fisher in his book Common Stocks and Uncommon Profits

Fisher did not think all that highly of most value investors who, he felt, were preoccupied with the numbers. 

As a result, in many ways he is at odds with Graham.

For completely different reasons, both have earned influence in modern investing. I find Graham's ideas more useful in understanding the psychology of "Mr. Market", but for picking individual stocks I lean heavily in favor of Fisher's approach. I'd rather pay a little bit more (though not much more) for a clearly superior and durable business.

With "cigar butt" investing, even if it works out, you never establish the kind of minimal transaction near auto-pilot that is possible with the Fisher approach.


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