Long list of securities

Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself.

- Philip Fisher 

What can be too much

I have owned one stock since 1969, two since 1988 and one I started buying in 1986 or so. That's my portfolio. Six stocks. I once owned 17, but that was way too much.

- Philip Fisher

The Fifteen Points to look for in a Common Stock

1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will further increase total sales potentials when the growth potentials of the current attractive product lines have largely been exploited?
3. How effective are the companies research and development efforts in relation to it size?
4. Does the company have an above average sales organization?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company's cost analysis and accounting controls?
11. 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?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. 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?
14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
15. Does the company have a management of unquestionable integrity?

- Philip Fisher
from Common Stocks and Uncommon Profits

Diversification of the best, not the most

An investor should always realize that some mistakes are going to be made and the he should have sufficient diversification so that an occasional mistake will not prove crippling. However, beyond this point he should take extreme care to own not the most, but the best. In the field of common stocks, a little bit of great many can never be more than a poor substitute for a few of the outstanding.

- Philip Fisher

The purpose of diversification is to protect from the mistakes and not for the sake of it. By keeping the list minimum (probably less than 20), the investor keeps the list of seats available to fill to the bare minimum. Thus if a new stock looks much more attractive than your existing holdings, one of them has to give way to new stock instead of simply increasing the stock count by 1. This places an onerous responsibility on the investor to judge his decision before a new stock is added to the portfolio. I am not saying that the investor should steadfastly stick to certain limits.

This blog writer knows the fallacy of the diversification. At points in time when the list of stocks was more than 100, I found it difficult even to identify whether I own the stock or not!!!. Once I understood the foolishness of too much diversification, I took the step of moving out of the marginal stocks. Further investments were made only in the existing holdings, while I slowly eliminated the unwanted ones one by one. I deviated from the above decision only twice, when I took the conscious decision to add two wonderful stocks. While I don't have any fixed nos for my portfolio in my mind I would like to reduce it to less than 30.

How to overcome inflation

... when a depression does occur it is apt to be shorter than some of the great depressions of the past. It is almost bound to be followed by enough further inflation to produce the type of general price rise that in the past has helped certain industries and hurt others. With this general economic background, the menace of the business cycle may well be great as it ever was for the stockholder in the growth company with sufficient financial strength or borrowing ability to withstand a year or two of hard times, a business decline under today’s economic conditions represents far more a temporary shrinking of the market value of his holdings than the basic threat to the very existence of the investment itself that had to be reckoned with prior to 1932.

- Philip A. Fisher

The words look prophetic as the famous author wrote in his first book "Common Stocks and Uncommon Profits" more than 50 years back.

Warren Buffett has double confirmed this through is own words as a follow up of Burlington Northern Santa Fe Railroad purchase. “I'd be more worried holding cash. I think that if you look at the side effects of the incredible dosage that we've had to give -- and I think that dosage has been 100 percent appropriate; I'm not knocking that. But when you apply the kind of medicine we've applied, you may have sort of unprecedented aftereffects, too. But the one thing about those unprecedented after effects is they're going to be very bad for cash. I would much rather own working assets than have cash in a period that well could become inflationary down the road.”

Now for the small time investors like us what are we supposed to learn from these experts whose quotes are nearly 50 years apart but still mean the same?

1. Cash is not the king during inflationary period. Keeping idle cash is the worst thing to do when the inflation is ruling the roost.
2. If not cash, how about fixed-income securities? While they look better than cash in absolute terms, they are in no way have the power to protect the investor’s capital from the daemon called inflation.
3. How about “real-assets”? A piece of land, which doesn’t earn a penny of rent to the investor or biscuits of gold locked deep inside the bank locker. While these are far better than the earlier two, they still don’t allow them to “earn” an income, particularly if his earnings are poor.
4. Commodities? These are buzz words which appear on the pink magazines over the last few years. As the experts say, commodities seem to have the real protection against the inflation. But caution is advised not to touch this asset class if you don’t know how the commodities behave. I really don’t have a clue on how to price a commodity to see whether they are cheap or expensive.
5. Working Assets? Any asset which has the capacity to earn as it is put to use has the capacity to overcome the effect of inflation. These assets could be classified under soft asset or as a hard asset. If you are consultant, the knowledge you possess is the soft asset which allows you to earn the “rent” for the service you provide. As the inflation rises, you can increase the “rent” nullifying the loss caused by the inflation. The ratio of increase depends on the uniqueness of the soft asset you possess. A real estate property which earns a rental income is a hard asset. The beauty of this asset is it provides the flexibility to increase the “rent” during the inflationary period and also the capital value rises as the years go by. Thus it retains the value adjusted to inflation. Another hard asset is a “good company” which has the financial strength and pricing power in the market. If you have learnt to deal with Mr. Market with respect and caution, and know how to select a good company with the above characteristics, you are pretty much ready to deal with the inflationary situation.
   

While high inflation has a devastating effect on the economy and the poor who are hurt more than others, nearly all the economists and governments and even ordinary people are comfortable with moderate inflation. If you don’t have inflation, the asset you bought ten years back would quote the same price even now. Nearly no one is ready to accept this principle.

How about deflation? Deflation leads to a down word spiral which is hard to control than inflation. In a deflationary situation every consumer knows that the price of a discretionary good will cost him less in next one month than the current price. He will postpone the purchase until he can carry on without buying that goods. This in turn leads to shrinking economic pie and job losses aggravating the pain the consumer is already going through. Japan is a classic example of the deflationary situation which has been aggravated by its political leaders for the past 10 years.

Allow the profits to grow bigger and bigger

Willingness to take small losses in some stocks and to let profits grow bigger and bigger in more promising stocks is a sign of good investment management. Taking small profits in good investments and letting losses grow in bad ones is a sign of abominable investment judgment. A profit should never be taken just for the satisfaction of taking it.

- Philip Fisher

Ego

There is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us. None of us likes to admit to himself that he has been wrong. If we have made a mistake in buying a stock but can sell the stock at a small profit, we have somehow lost any sense of having been foolish. On the other hand, if we sell at a small loss, we are quite unhappy about the whole matter. This reaction, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

- Philip Fisher

The people in the stock market

The stock market is filled with individuals who know the price of everything, but the value of nothing.

- Philip Fisher

Deterioration in companies

When companies deteriorate, they usually do so for one of two reasons: Either there has been a deterioration of management, or the company no longer has the prospect of increasing the markets for its product in the way it formerly did.

- Philip Fisher

Time to sell

If the job has been correctly done when a common stock is purchased, the time to sell it is - almost never.

- Philip Fisher