Phil Fisher & The 15-Point System
15 questions to answer before making an investment
Phil Fisher
In 1958, Phil Fisher wrote arguably the best investment book, Common Stocks and Uncommon Profits. Fisher advocated for a buy-and-hold approach for growth stocks based on fundamental analysis. He recommended that investors invest in a concentrated, low-turnover portfolio. To isolate companies for investment with both an above-average potential and competent management, Fisher developed a 15-point system to qualify a company according to its business and management characteristics.
The 15-Point System
Does the company have products or services with sufficient market potential to make a sizable increase in sales possible for at least several years?
Does management want to continue developing products or processes that will further increase total sales potential when the growth potentials of currently attractive product lines have largely been exploited?
How effective are the company's research and development efforts in relation to its size?
Does the company have an above-average sales organization?
Does the company have a worthwhile profit margin?
What is the company doing to maintain or improve profit margins?
Does the company have outstanding labor or personnel relations?
Does the company have outstanding executive relations?
Does the company have depth in its management?
How good are the company's cost analysis and accounting controls?
Are there other aspects of the business that are somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be compared to its competition?
Does the company have a short-range or long-range outlook regarding profits?
In the future, will the company's growth require sufficient equity financing so that the new number of outstanding shares essentially cancels the existing benefit from this anticipated growth?
Does management talk freely to investors about its affairs when things are going well but clam up when troubles and disappointments occur?
Does the company have management of unquestionable integrity?
Key Takeaways
The one characteristic of a company that most impressed Fisher was its ability to grow sales and profits over the years at rates greater than the industry average. He was not so much concerned with a consistent annual increase in sales. Instead, he judged a company's success over many years.
Fisher believed that two types of companies would, decade by decade, show promise of above-average growth:
(1) Those that were fortunate and able, and
(2) Those that were fortunate because they were able.
A company is considered able if its management consists of great people with great ability. A company is considered fortunate because events outside management's immediate control positively impact the company and the market. A company's research and development efforts contribute to the sustainability of above-average sales growth. Even non-technical businesses need a dedicated R&D effort to produce better products and more efficient services. A company can develop outstanding products or services, but the research and development effort will never translate into revenues unless they are marketed and sold. The sales organization is responsible for monitoring its customers' buying habits and spotting changes in customers’ needs. Sales is the invaluable link between the marketplace and R&D.