Guest post by Larry Harmych of intelligentinvestors.org
While I am sure many of you have heard of Philip Fisher, how many actually recognize the name Kenneth Fisher? My guess is Ken will always be hidden, to a large extent, in his father’s shadow. For us this is a good thing because his method of investing is better off largely hidden from the public eye, just as if you came across an abandoned gold mine you wouldn’t want everyone else knowing about it.
One of the reasons I decided to look into Kenneth Fisher in the first place is because I was sure that his father had taught him plenty about investing. If you can’t learn anything more from Phil, who better than his son? In fact, Forbes publishes Fisher’s stock pick performance and has shown he has beaten the S&P 500 11 out of 14 years https://www.cxoadvisory.com/individual-gurus/forbes-evaluates-ken-fishers-stock-picking/. In addition to being an excellent investor, he is also an accomplished businessman, author, and runs his own company, Fisher Investments. On top of that, he’s a nice guy as well as a moral beacon for those of us in the business and investment world. He is also on a mission to save the redwood tree.
Kenneth Fisher was the first value investor to use P/S ratios as an analytical tool. However, instead of just casually glancing at them, Fisher used them almost religiously. Fisher, today, largely believes that his P/S ratio method may be obsolete because of its widespread use. However, given the extreme volatility of this market, as of late, I have found this method quite useful in finding undervalued companies.
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In Fisher’s book, Super Stocks, although he talks mainly about his P/S ratio methodology he also discusses some other important elements of successful investing. He reiterates the use of scuttlebutt, Phil Fisher’s term for talking to all parties involved with a company from the CEO down to the janitor in order to find out critical information which might influence your investment in said company. Another important element Fisher addresses is the stability of a company’s profit margin. Fisher believes a company’s profit margin should be at least 5% and should not deviate significantly from this value in the downward direction. A high stable profit margin, he believes, reflects that the management is doing its job for investors and always striving to beat competition. Fisher strongly believes management is the most important aspect of any investment, echoing his father. This belief has well-served many investors, Warren Buffet included. The bottom line, if management is not committed and shareholder-friendly, two musts, then your long-term investments are doomed to failure. He also discusses price-to-research ratios and this has helped me to identify a few stocks I would have normally written off more quickly (one that comes to mind in particular is Nanosphere).
In other writings he talks about how an investor’s worst enemy is largely himself, believing that investors are hard-wired to perform poorly. Myopic loss aversion so drives investors that they sell too early and permanently lock in losses. He also refers to the stock market as “The Great Humiliator” as it unabashedly takes money from anyone, rich or poor, without discrimination. He has studied PE ratios and firmly believes they are utterly useless for investment analysis, a finding that John Neff would surely disagree with. However, he strongly advocates earnings yields in evaluating the stock market (taking the PE and flipping it) to determine whether it makes sense for companies to borrow money to buy back their own stock. Fisher believes in the American economy and also believes that the trade deficit is nothing to worry about. He believes an account deficit only indicates that the world thinks America is a better place to invest than any other.
When asked about his investment philosophy Fisher states:
“You’re not going to like what I’m going to tell you here. People have always believed that the kind of equity they invest in is superior to other kinds. ‘I’m a growth guy,’ ‘I’m a value guy,’ ‘I’m a small cap guy,’ ‘I’m an emerging markets guy.’ The fact of the matter is these people share a spiritual core with Osama Bin Laden. They’re narrow minded fanatics. And, they miss the big picture. In the long term all major categories of equity must have almost identical real risk adjusted returns. Because if you don’t believe that, you believe that a category of equity is more powerful than capitalism itself.”
And with that I will leave you.