July 21, 2024 • 1hr 9min
TIP646: How To Understand A Business Like A Pro w/ Kyle Grieve
We Study Billionaires - The Investor’s Podcast Network
Key Takeaways
- Philip Fisher's investing philosophy focuses on buying high-quality growth companies and holding them for the long-term. This approach greatly influenced Warren Buffett's evolution as an investor.
- Deep research and "scuttlebutt" are critical for truly understanding a business. Fisher advocates talking to competitors, customers, former employees and others to gain insights beyond just financial statements.
- Look for companies with products/services that have a large multi-year growth runway and management teams capable of developing new products once current growth initiatives are complete.
- Effective R&D spending that translates into profitable new products is a key indicator of a quality growth company. Analyze R&D spend relative to sales and profits generated.
- Strong profit margins that are maintained or improved over time often indicate a company with competitive advantages or "moats".
- Outstanding labor and personnel relations are vital for long-term success. Companies that empower employees and align incentives tend to outperform.
- Conservative investing means buying high-quality growth companies at reasonable prices, not just buying statistically cheap stocks.
- The further out you can project earnings growth, the higher a multiple you can justify paying while still earning acceptable returns.
- Focus on whether a company's fundamentals are more or less favorable than the current market appraisal, not just on whether the stock price seems high or low.
- Continuously monitor your investments and reassess your thesis, even for big winners. Complacency can be very costly.
Introduction
In this episode, Kyle Grieve discusses Philip Fisher's influential investing book "Common Stocks and Uncommon Profits". Fisher's growth-oriented approach had a major impact on Warren Buffett's evolution as an investor. The book provides a framework for thoroughly researching companies, identifying high-quality growth businesses, and holding them for the long-term.
Kyle breaks down Fisher's key principles and methods, including his famous "scuttlebutt" technique for gaining deep business insights. He also explores how Fisher's philosophy developed over time and its relevance for investors today.
Topics Discussed
Philip Fisher's Background and Early Lessons (47:11)
Fisher began developing his investing philosophy while attending Stanford's Graduate School of Business in 1928. Key early lessons included:
- Never invest in a business where you can't speak to management
- Learn about management's strengths and weaknesses through direct conversations
- The importance of sales capabilities, not just having great products
After graduating, Fisher worked briefly at a bank but was disillusioned by the lack of real analysis being done. This experience motivated him to develop more rigorous methods.
The Scuttlebutt Method (08:02)
Fisher advocated using the "business grapevine" or "scuttlebutt" to thoroughly research companies:
- Talk to competitors about a company's strengths and weaknesses
- Gather insights from vendors, customers, trade associations, former employees and others connected to the business
- Ask the right questions to build a comprehensive picture beyond just financial statements
"Go to five companies in an industry, ask each of them intelligent questions about the points of strength and weakness of the other four, and nine times out of ten, surprisingly detailed and accurate picture of all five will emerge." - Philip Fisher
Fisher's 15-Point Checklist for Evaluating Companies (09:29)
Kyle highlights several key points from Fisher's famous 15-point checklist for analyzing potential investments:
1. Large Multi-Year Growth Runway
- Look for products/services with potential for sustained growth over many years
- Determine if there will continue to be a market for them in the future
2. Management Capable of Developing New Products
- Assess management's ability to innovate and create new growth initiatives
- Look at track record of past product releases and current pipeline
3. Effective R&D Efforts
- Analyze R&D spending relative to company size and results produced
- Compare dollar sales/profits contributed by R&D over time
4. Strong and Improving Profit Margins
- Stable or rising margins often indicate competitive advantages
- Example: Copart grew net margins from 15% to 33% over time
5. Outstanding Labor and Personnel Relations
- Good employee relations and aligned incentives drive long-term performance
- Example: Nucor's incentive system dramatically improved productivity
Conservative Growth Investing (38:09)
Fisher advocated a "conservative" approach focused on high-quality growth companies:
- Conservative investment = maintains purchasing power at minimum risk
- Conservative investing = ability to systematically discern degree of risk
- Growth is necessary in a changing world - "impossible to stand still"
- Look for businesses with:
- Paranoia about advancing tech/competition
- Great employee relations
- Disciplined, sustainable growth initiatives
Valuation and Paying Up for Quality (41:33)
Fisher argued that the price paid for a stock is less important than the quality and growth prospects of the underlying business:
- The further out you can project earnings growth, the higher multiple you can justify
- Focus on whether fundamentals are more/less favorable than current market appraisal
- Stock price fluctuates more than business fundamentals - focus on the right thing
"If a company consistently improves its fundamentals year in and year out, you will observe that the stock price fluctuates more than the fundamentals do. This means you must be prepared to focus on the right thing, the fundamentals, and most importantly, ignore the wrong thing, the stock price."
Fisher's Eight Key Investing Principles (59:05)
- Invest in businesses with disciplined, profitable growth plans and competitive advantages
- Buy when undervalued due to weak markets or misperception
- Hold until fundamental changes for the worse or inability to outpace economy
- Focus on capital gains over dividends
- Accept mistakes will happen, but learn from them
- Concentrate holdings in 10-12 outstanding companies
- Form your own opinions, whether contrarian or not
- Success requires hard work, intelligence and honesty
Impact on Warren Buffett (1:00:08)
Fisher's philosophy had a major influence on Warren Buffett's evolution as an investor:
- Buffett started more focused on Benjamin Graham's teachings
- Over time, shifted towards Fisher's quality growth approach
- Robert Hagstrom estimates Buffett is now "50/50" Graham and Fisher
- Fisher's book was key in Buffett's move from "cigar butts" to quality
Conclusion
Kyle concludes by sharing his key takeaways and how he plans to apply Fisher's teachings to improve his own investing approach:
- Amplify "scuttlebutt" research efforts by talking more to lower-level employees, customers, suppliers
- Maintain ongoing check-ins with management of owned companies
- Improve industry due diligence to identify hidden upsides/downsides
- Stay curious and ask questions to uncover opportunities others may miss
- Continuously reassess all holdings, even big winners, to avoid complacency
Overall, Fisher's growth-oriented approach centered on deep research and long-term holding of high-quality companies remains highly relevant for investors today. His methods for gaining true business insights beyond just financial statements are particularly valuable for individual investors looking to compete with professional analysts.
