John Train On Warren Buffett Being 85% Fisher, 15% Graham

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Warren Buffett: 85% Fisher, 15% Graham by Steven Towns

In John Train’s The Midas Touch (Amazon; recent post), published in 1987, he describes Warren Buffett as 85% influenced by Benjamin Graham and 15% by Philip Fisher. After re-reading Fisher’s Common Stocks and Uncommon Profits and typing up 15+ pages of notes to substitute for a future re-read, I am convinced that Buffett is much closer to 85%-Fisher and 15%-Graham, and he was arguably already leaning more Fisher-like than Graham when Train began writing about him. Put Common Stocks on your reading list and consider a re-read if it’s already on your shelf.Here’s a first-post (I may post more later) covering some of the ideas from Common Stocks and Uncommon Profits.

I want to mention Fisher’s book dedication, which really sets the stage for what remains today and probably forever, a highly-relevant investment book; remember, it was originally published in 1958.

This book is dedicated to all investors, large and small, who do NOT adhere to the philosophy: “I have already made up my mind, don’t confuse me with facts.”

What stood out even from the first chapter is the importance Fisher puts on corporate (senior) management — as in it needing to be “good” and “able.” Among his 15 investment principles, six of them explicitly mention “management.” While I love that Graham was supportive of part-owners (i.e. minority shareholders) taking activist measures; in the same breath he also said that the intelligent selection of securities is the major factor in investment success. Graham’s criteria were more quantitative and formulaic as concerns balance sheet and earnings metrics. Considering that the concept of “margin of safety” though not in those specific words appears throughout Fisher’s Common Stocks, a company with a strong management team and an attractive stock valuation is obviously an enticing combination — though requisite with attractive valuation in Fisher’s case is a company that has (sustained) growth on the horizon. Fisher was not a “cigar-butt” investor.

Fisher also mentions having good luck and good sense to find an occasional winner. There’s no question one can have a lucky stock pick or string of picks, but that sort of selection strategy is dangerous on multiple levels exposing one to various behavioral/cognitive biases while leaving one on a random walk firmly on the extreme-left of Michael Mauboussin’s luck-skill continuum. Fisher didn’t use the exact term, “circle-of-competence,” but a close read of Common Stocks shows he employed it in his investment selection/allocation and in short, he believed that if investors were not capable themselves of sufficiently researching investments they should have the ability to scrutinize and properly select an investment fund/manager/advisor to do it for them. It’s worth pointing out Fisher’s reference to an occasional winner. It serves as a reminder of Buffett’s reference to not having to swing at every pitch (wait for the fat pitch) and also to imagine having a lifetime punch card with 20 holes representing investment decisions (don’t waste them). Personally, I feel lucky to have just re-read and annotated Fisher’s Common Stocks and now to have the new release, Berkshire Beyond Buffett (by Larry Cunningham), to dig into.

Fisher introduces his investment philosophy, which he called “scuttlebutt,” in chapter two. Scuttlebutt is a curious word and choice of title, but it can simply be understood as a very thorough review of a company’s management and growth prospects via a 15-point checklist. I won’t get into the individual points here, but I did find it encouraging that out of the gate, Fisher says he recognizes most investors will not react positively to the due diligence he outlines given how time consuming and difficult they may be to undertake. Again, his point is to empower investors or to instead allow them to be able to find the best person to manage their investments. What’s interesting is how different Fisher’s approach is to the very successful, extremely passive one of the late Walter Schloss (and his son, Edwin), among the most notable descendants of the Graham value style. Buffett and Charlie Munger undoubtedly process most if not all the factors Fisher did though perhaps not in as direct of an approach with outsiders. Awareness and some degree of application of the 15-points is key, I believe, because over the course of Common Stocks it is clear that Fisher was a concentrator (of investment positions) and a hunter of compounders. In very similar thinking to Buffett, to quote Fisher: “If the job has been correctly done when a common stock is purchased, the time to sell it is — almost never.”

With the word count on the rise, I will try and end soon to revisit more ideas later. Fisher’s 15-points are well-covered in Jae Jun’s post last week at Old School Value. I’m definitely not a scuttlebutt-style investor in terms of the third-party communication and site-visit facets (don’t let that section discourage you — just wait for the chapters on buying, selling, dividends, and “don’ts”), though as much as I’d like to operate like the Schlosses (i.e. rely primarily if not wholly on company’s published financials without seeking discourse with management or relying on other sources), again, I think one has to at least keep in mind Fisher’s fundamental points and how to obtain/ascertain information as needed. Simplistically, to transpose Buffett, among the most important investment criterion surrounds a company’s moat or lack thereof and the quality of the moat. And ranking-in at 15 of 15 on Fisher’s list is an equally important criterion necessitating unquestionable integrity of a company’s management.

There are admittedly some approaches of Fisher’s that have little to no connection with Buffett’s, such as Fisher’s great interest in and focus on a company’s R&D and in turn his comfort (circle-of-competence) with high-tech companies. However, even in this post it must be apparent that in the least Buffett is a 50/50 mix of Fisher and Graham and it wouldn’t be an exaggeration to say that he’s closer to the inverse of the 85/15 that Train noted some 30-years ago.

Fisher’s last words in Common Stocks:

One of the ablest investment men I have ever known told me many years ago that in the stock market a good nervous system is even more important than a good head. Perhaps Shakespeare unintentionally summarized the process of successful common stock investment: “There is a tide in the affairs of men which, taken at the flood, leads on to fortune.”

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