Fishers 15 Questions 1. Does the companys product or service promise a big increase in sales for several years?

He cautions against firms that show big jumps due to anomalous events, like a temporary shortage. Still, judge a companys sales over several years because even sales at outstanding companies may be somewhat sporadic. Check on management regularly, to make sure its still top-notch. 2. Is management determined to find new, popular products to turn to when current products cool off?Check what the company is doing in the way of research to come up with the newer and better. 36 THE INFLUENCE OF PHILIP FISHER A Bonanza Company It has capable management, people determined that the company will grow larger and able to carry out their plans. The companys product or service has a strong potential for robust, longterm sales growth. The firm has an edge over its competitors and any newcomers. 3. How good is the companys research department in relation to its size? 4. Does the company have a good sales organization? Production, sales, and research are three key ingredients for success. 5. Does the company have an impressive profit margin? Avoid secondary companies. Go for the big players. The only reason to invest in a company with a low profit margin is if theres powerful evidence that a revolution is in the offing. 6. What steps is the company taking to maintain or improve profit margins? 7. Does the company have excellent labor and personnel

relations?A high turnover is an unnecessary expense. Companies with no union, or a company union, probably have good policiesotherwise, they would have been unionized. Lots of strikes, and prolonged strikes, are obviously symptoms of sickness. But dont rest easy if a company has never had a strike. It might be too much like a henpecked husband (too agreeable). Be dubious about a company that pays below-average wages. It may be heading for trouble. 8. Does the company have a top-notch executive climate? Salaries should be competitive. While some backbiting is to be expected, anyone whos not a team player shouldnt be tolerated. 9. Does management have depth?Sooner or later, a company will grow to a point where it needs more managers, ones with different backgrounds and skills. A good sign: Top management welcomes new ideas, even criticism, from below. FISHERS 15 QUESTIONS 37 Quotable One of my favorite passages from Fishers book is: Beware of companies, too, where management is cold blooded. Underneath all the fine-sounding generalities, he writes, some managements have little feeling for, or interest in, their ordinary workers. . . . Workers are readily hired or dismissed in large masses, dependent on slight changes in the companys sales outlook or profit picture. No feeling of responsibility exists for the hardships this can cause for the families affected. No wonder Buffett admired him when he met him in person! 10. How good is a companys cost analysis and accounting? Management must know where costs can be cut and where they probably cant be cut. Most companies manufacture a large variety of products, and management should

know the precise cost of one product in relation to others. One reason: Cheap-to-produce products may deserve special sales efforts. 11. Are there any subtle clues as to how good a company is? If a company rents real estate, for example, you might check how economical its leases are. If a company periodically needs money, a spiffy credit rating is important. Here, scuttlebutt is an especially good source of information. 12. Does the company have short-range and long-range plans regarding profits?A company thats too short-term oriented may make tough, sharp deals with its suppliers, thus not building up goodwill for later on, when supplies may be scarce and the company needs a big favor. Same goes for treatment of customers. Being especially nice to customersreplacing a supposedly defective product, no questions askedmay hurt in the short run, but help later on. 13. Might greater growth in the future lead to the issuance of more shares, diluting the stock and hurting shareholders?A sign that management has poor financial judgment. 14. Does management freely own up to its errors?Even fine companies run into unexpected problems, such as a declining demand for their products. If management clams up, it may not have a rescue plan. Or it may be panicking. Worse, it may be contemptuous of its shareholders. Whatever the reason, forget about any company that withholds or tries to hide bad news. 15. Does management have integrity?Does management require vendors to use brokerage firms owned by the managers themselves, or their friends or relatives? Does management

abuse stock options? Put its relatives on the payroll at specially high salaries? If theres ever a serious question whether the management is mindful enough about its shareholders, back off.

Buffet principles 1. Dont gamble. 2. Buy securities as cheaply as you can. Set up a margin of safety. 3. Buy what you know. Remain within your circle of competence. 53 4. Do your homework. Try to learn everything important about a company. That will help give you confidence. 5. Be a contrarianwhen its called for. 6. Buy wonderful companies, inevitables. 7. Invest in companies run by people you admire. 8. Buy to hold and buy and hold. Dont be a gunslinger. 9. Be businesslike. Dont let sentiment cloud your judgment. 10. Learn from your mistakes. 11. Avoid the common mistakes that others make. 12. Dont overdiversify. Use a rifle, not a shotgun.

RULES TO CONSIDER 1. Look for companies with high and growing return on equity (ROE). Equity is the net worth of all of a companys assets. To calculate

return on equity, divide the equity into net income, also called operating earnings. (Net income is calculated after removing preferred stock dividendsbut not common stock dividends.) ROE = net income/(ending equity + beginning equity/2) This formula calculates ROE for a specific time period, typically a year. You add the value of the company at the beginning of the pe-62 BUY SCREAMING BARGAINS riod to the value at the end of the period, then divide by two to get the average yearly value of the company. Example: ROE = $10,000,000/($35,000,000 + $45,000,000/2), or 22.2 percent You must be careful about the number on top, the numerator there are many ways to calculate it. Buffett excludes from yearly earnings any capital gains and losses from a companys investment portfolio, along with any unusual items. He wants to focus on what management did with the company assets during what might be an ordinary year. A companys yearly return on equity tells you whether its management has been using its assets profitably and efficiently.

2. Look for those rare companies with regular 15 percent growth in their earnings. Buffett wants a minimum of 15 percent to compensate him for taxes, the risk of inflation, and the riskiness of stocks in general. Simple math will help you determine whether a stock may bless you with 15 percent or more a year. Look at (1) its current price, (2) its earnings growth rate in the past few years, or (3) look up analysts estimates on various financial web sites. Remember that the 15 percent return should include dividends. Earnings growth can be misleading. What if revenues grew faster, meaning that profits actually declined? Or if earnings grew because

of the sale of assets? What if the companys prosperity is already reflected in the stock price? Check the companys current price-toearnings ratio, compare it with its competitors ratios, and compare it with its historical price-to-earnings ratio. 3. Look for companies with high profit margins.

Well-managed companies are always trying to cut costs, and a rising profit margin may indicate that costs have indeed come down. The question is: Will the profit margin be sustainable? Maybe the price of a raw material, like paper, came down temporarily. Or the company enjoyed a one-time tax write-off. 4. Buy companies without worrisome debt. A debt/equity ratio of 50 percent or lower is considered the industry standard, although many other measures are available. A rising debt/equity ratio may be a cause for concern. Also be wary of a big jump in accounts payablebills that havent been paid.