Philip Fisher started his money management firm in 1931 in San Francisco, California. Like Warren Buffett this is a man who lived inside his head. His office was sparse, almost barren. Brilliant beyond belief Philip fisher was a man who could pick growth stocks. He was an original player in Texas Instruments when it went public. He owned a company called FMC, which went up a 100 times in value through the years. FMC stood for Food Machinery Corporation.
As you are probably aware, California is the nation's largest producer of fruits and vegetables. Even back in the 1930's, farmers were starting to employ machinery to harvest crops. Philip Fisher would visit the companies, interview management and do a thorough financial analysis. He loved superbly managed growth companies. He also wrote a book called "Common Stocks and Uncommon Profits", which I have probably read a half dozen times, and you should read as soon as you can to advance your understanding of the investment process. You can buy it in paperback for about to through Barnes & Noble, or Amazon.com.
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We want to share with you Philip Fisher's use of what he called the "Scuttlebutt Method", but first we want to distinguish his work from Warren Buffett's MASTER, Benjamin Graham. Buffett's Columbia University Professor, Benjamin Graham believed in buying dirt cheap stocks. He would almost buy them for their cash value, if they held enough cash versus the rest of the balance sheet. He wasn't interested in growth companies, Graham was interested in doing an exhaustive analysis of the balance sheet and income statement and finding what he termed was the "intrinsic value" of the company, which we will define, and discuss when we discuss Graham on another day.
Graham never spoke with management, had no interest in speaking with competitors, or any live human being regarding a stock purchase. He believed the financial analysis of the company would yield whatever information he needs to make a buy decision. Warren Buffett believed that talking to the management team made a difference. More than that, he believed that the executive team was the difference. Graham never bought into this philosophy.
Philip Fisher believed in the "scuttlebutt method". Scuttlebutt is almost like gossip, but several steps higher. Gossip is normally a waste of time, but it depends on who you are getting the gossip from. Philip Fisher would talk to the competitors of a company that he wanted to invest in. He would verbalize it in such a way that it seemed like an afterthought. He was trying to elicit truthful opinions from people in the industry, not directly from the company management team.
Let me illustrate Fisher's method in my own world in two instances. In my 20's, I worked for a world renowned money manager. We got some great information about a company called STP Corporation in Indiana. They made an oil treatment that had started to hit the market. The treatment came in a can and you poured it into your car engine, and it was suppose to make your engine run smoother and last longer.
The money manager and I headed out to Indiana and interviewed the management team. This is something Phil Fisher would do also. At noon we went to the local tavern across the street from the company's plant. The guys working on the assembly line came in for their lunch and a couple of drinks and we started up a conversation. We talked about everything but STP, the company across the street that they all worked for. The workers left at the end of lunch and went back to work.
We spent the next few hours analyzing the company. At the end of the factory shift, the workers came back to the tavern to end their day. They saw us, and here's the key point, by now we were all old friends, since they had known us for a couple of hours. Here's where scuttlebutt comes in. We all started talking about everything and anything. At one point the money manager I was with said, "Hey, how's it going over there in the factory."
One of the workers responded, "You see that fence over there, we are going to knock it down and run the railroad tracks right up to the factory, because we can't keep up with the orders coming in." The stock was selling for per share and based on our analysis had not factored in an explosion in sales coming. We knew we had a winner; we went back to NY and loaded up. It took 6 months to hit per share.
That's how you use scuttlebutt. You talk to people other than the management team and inquire what's going on. A stock is a puzzle. You have to put the pieces of the puzzle together to see what the picture looks like that it is making. Philip Fisher used this method to put the picture together. Talk to the competitors, talk to the stores where the products are sold. Talk to people that know the company personally. What is their reputation? What is the service like? Do the employees care about the company? Does the company care about their employees?
I have been involved with Home Depot since the private offering a year before we took them public at Bear Stearns in New York City. I still go into a Home Depot at least once a week to see what's happening. I have watched the customer experience change, and not for the better either. I have talked with the employees. I have watched the aisles become cluttered. I have noticed an increase in the number of products that have no price on them. These things are telling you something. You walk into a Home Depot and you walk into a Lowe's, and you know why one stock has exploded in value over the last couple of years, and the other has languished.
In our work at StocksAtBottom.com, we use the scuttlebutt method all the time. We think it is so additive to the fundamental analysis we perform in analyzing what a stock is worth, what is selling for, and where it should at over a period of time. Using this method we were able to buy Tyco when it collapsed and doubled our money. We were able to step in the Walt Disney Company when the Bass brothers in Texas were selling and double our money. We also used it to identify McDonalds as a turnaround candidate when the stock was per share. It is now several times that amount.
Philip Fisher - Fabulous Growth Stock Picker BARNES AND NOBLE TEXTBOOK STORE NYC
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