Phil Fisher Conservative Investing Flashcards
Conservative investing
Understand what a conservative investment consists of
Relating to specific investments: course of action in finding
Out if conservative investment vehicles are conservative
investments
Conservative investment
Investment most likely to conserve purchasing power at minimum
Risk
Conservative investment: low cost production (manufacturing)/operation (service industries)
Company for majority of its product lines must produce as
Cheaply as it’s competitors
Recessions and low cost producers
High cost producers close down during recessions and low cost
Producers gain market share
2 vital conditions being a low cost producer creates?
1 have sufficient leeway below break even point of most
Competition
2 greater than average profit margin enables a company to
Earn enough to internally finance it’s growth
Conservative investing: Strong marketing
Company able to capture demand in the future though sales
And advertising
Requires strong management in this area
3 things that will happen if management is poor at marketing
1 losing significant business
2 higher costs resulting in smaller profit
3 failure to maximize profits in product line
Conservative investing: outstanding research and technical effort
Products continually developed that have significant customer
Demand
Research teams competent working alone and on a team
Marketing department can sell products right after development
Conservative investing: financial skill
Companies know how much they make on each product sold,
Intimate knowledge on extent of costs, cost reduction
Skillful budgeting allows excellent company to detect early
Unfavorable influences that affect profit plan
Financial skill: company’s capital investment
Company has superior business acumen to bring in the highest
Return on capital investment
4 characteristics of the first dimension of conservative investment
1 low cost producer/operator 2 outstanding marketing ability 3 outstanding financial ability 4 managerial superiority in getting results from research/technological development
Companies with the best investment merit, establishing job positions?
Why is this important?
Promote from within, newcomers at top management leave
After a couple of years
People within the company are more familiar with doing the
Peculiar things that get the job done
A large company’s need to bring in a new chief executive from
Outside is…
A damning sign something is wrong with existing management
What is a red flag in management compensation
When management is a one man team
Detected by the top Management salary is significantly higher
Than the second or third man,(if compensation goes down gradually
That’s good)
What shows Management depth within large companies?
They have management training school programs
Company is unique in it’s management policies
Worthy as being held as a long term investment: company must recognize world changes at fast rate
Decentralized managements that continually find ways to
Improve how company operates
Divisions in the same company productively compete
Conscious and continuos effort to make every range or worker in company feel like it is a great place to work
This increases worker productivity and lowers costs outweighing
The cost of the policy
The best companies allow their workers to feel 2 things, that lead to spectacular results
1 they are genuinely participating in decisions, not just being
Told what to do
2 being rewarded both financially and with honors/recognition
Management must be willing to submit itself to the disciplines required for sound growth
True growth oriented can not bring every possible cent to the
Bottom line to show profit in an accounting period
It’s focus must be to earn sufficient current profits to finance
Costs of expanding business
What actions can management take to show it is oriented to sound growth?
Develop new products/product lines, training new personnel
To grow business to maintain customer loyalty
Why is above average profitability important to the investor?
As a source of further gain and protection for what investor
Already has
Profitability during inflationary periods
Profitability becomes more important during inflationary periods
2 ways to measure profitability
1 return on invested assets
2 profit margins per dollar of sales
Return on invested assets
Yardstick for management
Helps decide which product or process to go with based on
Past returns
One thing to keep in mind when comparing profit margins per dollar of sales
Companies that high rate of sales in relation to assets may be
A more profitable company
compared to 1 with higher profit margin to sales but slower
Rate of sales turnover
From the standpoint of profitability, return on investment must be considered as well as…
Profit margin on sales
From standpoint of safety of investment all emphasis is on…
Profit margin on sales
Economies of scale, define,
who is it used to the advantage of?
Having lower production costs per unit because more units are produced
Used to advantage of large efficiently run businesses
Third dimension of conservative investing
Company’s ability to maintain and increase market share
What enables a company to maintain market share
Getting there first with a new product or service that meets
Demand and backing it up with good marketing, servicing,
Product improvement, advertising
Leading competitors and advertising and shelf space
Spend lower percentage on advertising
Get more shelf space to sell products easily
Too high a profit margin is dangerous
Because it gives too many companies an incentive to enter
The industry
Profit margins that are 2 to 3% greater than competitors
Sufficient to ensure a quite outstanding investment
Question you need to ask to uncover the 3rd dimension of conservative investment
What can the particular company do that others would not be able to do about as well?
(If answer is nothing, this company will lose to competition)
Every significant price move o any individual common stock in relation to stocks as a whole occurs because…
A changed appraisal of that stock by the financial community
What should the investor do about stocks that have strong fundamentals but have appreciated to prices that seem too high because they are legendary in the financial community
They should be held onto as they will increase their earnings with
Time
The conservative investor must be aware of the current financial community…
Appraisal of any industry he is interested in
Constantly probe if appraisal is significantly more or less favorable
Than the fundamentals warrant
The more closely the financial communities appraisal of a particular stock approaches the 3 dimensions of conservative investment the…
Higher the price to earnings ratio
2 stocks appear to have growth prospects of 10%. One stock has a PE of 10 and the other has a PE OF 20. Which stock is a better deal?
It depends, the cheaper company may have leveraged
capitalization (interest charges and preferred dividends)
That must be earned before anything accrues to the
Common stockholder, creates danger of interrupting growth rt.
The further into the future profits will continue to grow…
The higher a price to earnings ration an investor can afford to
Pay
Great growth is likely to be undiscounted in a stock when it experiences…
Temporary setbacks, this creates the best opportunity for
The patient investor
An interest invest approach of analyzing a companies and it’s divisions?
Calculate the current and future price to earnings ratio of
One division in a company
Financial community’s downward appraisal vs. upward appraisal
A change for the worse gets accepted a lot quicker than a
Change for the better in financial community’s opinion
The only true test of whether a stock is cheap or high is not its current price in relation to former price but…
Whether the company’s fundamentals are significantly more
Or less favorable than the current financial community appraisal
3rd financial community appraisal to take into consideration after the appraisal of the industry and the stock
The general stock market appraisals
Ex. 1927-1929, majority of the financial community believed
We were in a new era, 1946-1949 the financial community believed
Good earnings were temporary and would shrink in the depression that was sure to come
What is the most important financial factor that ultimately determines stock prices
Interest rates
