Phil Fisher growth investors ch. 1- 3

Question 0

How would bonds perform in a recession

Answer 0

Temporarily outperform stocks

But a train of major deficit producing actions will then be
Triggered that will cause another decline in true purchasing
Power

Question 1

Research and development, how often is it profitable?

How long does a successful project take to be profitable?

Answer 1

Profitable a minority of the time

Takes 7 to 11 years to add to shareholder value

Question 2

3 characteristics of outstanding management

Answer 2

1 continually grow sales and profits in important areas

2 bring long term plans to completion

3 management doesn’t allow long term planning to prevent
Vigilance in day to day tasks of ordinary business

Question 3

Scuttlebutt: competitors, research studies

Answer 3

Go to 5 companies in an industry and ask them intelligent
Questions that point out the strengths and weaknesses
Of other 4 competitors

Find research studies about customer and vendor opinions
Of companies done by universities and government

Question 4

Scuttlebutt: trade organizations

Answer 4

Must make clear source of info will never be revealed

And live up to this policy

Question 5

Scuttlebutt: former employees

Answer 5

Provide inside view of employer’s strengths and weaknesses

Must take into account why employees left company to
Determine their degree of prejudice

Question 6

Scuttlebutt: final step

Answer 6

Contact company officers to fill in the missing pieces

Question 7

Fifteen points to look for in a common stock: #1 Does the company have products of services with sufficient market potential to make possible a sizable increase in sales for at least several years?

Answer 7

Not possible to make the greatest possible gains from steady
Or declining sales or temporary increase in sales

Good management required to have continuos growth in
Sales, luck only lasts for so long

Ex. Microsoft sold computers and huge profits were made
Until most households had computers

Question 8

Fortunate and able

Answer 8

Companies where management is good and can adapt
But the highest growth results from luck

Ex. Alcoa managers couldn’t envision the future of the market
But we’re able to take advantage of opportunities to grow
The company

Question 9

Fortunate because they are able

Answer 9

Management is so good they can create the market for
Products

Ex. DuPont

Question 10

What long run trend must an investor judge relating to the potential of significantly increased sales of goods and services?

Answer 10

Investor must correctly judge the long run sales curve of

Company

Question 11

15 points to look for In a common stock: #2 does management have a determination to continue to develop products or processes that will still further increase total sales potentials when growth potentials of currently attractive product lines have largely been exploited?

Answer 11

Constant stream of research and development to improve
Old products and develop new ones

Best if newly developed products from R&D have business
Relationship with scope of company activities

Question 12

What is Best for companies with divisions for different products to have?

Answer 12

A research center around each of these divisions

Question 13

15 points to look for In a common stock: #3 How effective are the company’s research and development efforts in relation to its size?

Answer 13

Bad when management prematurely stops long term R&D
Projects and has history of doing this (waste of money)

Beneficial when the government covers the costs of
R&D, good for investors

Question 14

3 other ways to discover how companies demonstrate effect deployment of research and development

Answer 14

1 learn number of employees that hold Science degrees

2 use scuttlebutt to learn how companies engage in research
Activities

3 in 10 year period if company produced a good flow of
Profitable new products they will continue to do so if they
Operate under same general method

Question 15

15 points to look for in a common stock: point 4 Does the company have an above-average sales organization?

Answer 15

Can find this out from scuttlebutt asking customers and
competitors

Find organizations with aggressive distribution and a constantly
Improving sales organization

Ex. IBM salesmen spends a third of his time training in the company sponsored schools

Question 16

15 points to look for in a common stock: point 5 Does the company have a worthwhile profit margin?

Answer 16

Sales are of value when they grow profits

Should study profit margins over a series of years for different
Companies across industries

Question 17

What happens to profit margins of mediocre companies (those with smaller profit margins) during the business cycle?

2) Are the greatest long range investment profits obtained from investing in these companies?

Answer 17

They always increase their profit margins by a greater percentage
In good years than lower cost companies

Profit margins decline more rapidly in bad years, 2) therefore
The greatest long range profits are not obtained from investing
In these companies

Question 18

It becomes evident that nearly all companies have broader profit margins and greater total dollar profits in years when…

Answer 18

An industry is unusually prosperous

Question 19

When can companies with marginal profit margins become potentially good investments?

Answer 19

When efficiency and new products take it out of the marginal
Category

Activities (such as sales development and R&D) are justified to
Decrease profit margins currently to generate future profits

Question 20

15 points to look for in a common stock: point 6 what is the company doing to maintain or improve profit margins?

Answer 20

Some companies are in the fortunate position of maintaining
Profit margins merely by raising prices (industries w/high demand
Or competitors selling prices increased)

Companies do this using capital improvement or product
engineering departments

Question 21

What is the sole function of maintaining capital improvement or product engineering departments?

Answer 21

Design new equipment that will reduce costs and offset rising
Trend of wages

Question 22

How to use scuttlebutt/ inquiry to learn of the improvement of profit margins ?

Answer 22

Give attention to companies new ideas for cutting costs and
Improving profit margins, through direct inquiry of company
Personnel

Question 23

What generally causes profit margins to shrink in our economy?

Answer 23

Competitive production capacity increases supply, so when

Costs increase they can’t be passed on as price increases

Question 24

15 points to look for in a common stock: point 7 does the company have outstanding labor and personnel relations?

Answer 24

Companies with lower rates of labor turnover treat their
Personnel better, have better management, save on training costs

The size of the waiting list of job applicants for company
Against others in same locality

Question 25

Companies with good labor relations usually are ones that…

Answer 25

Settle grievances quickly

Question 26

How do wages signify good company labor and personnel relations?

Answer 26

The companies that make above average profits and pay

Above average wages in area located have good labor relations

Question 27

Significance of strikes

Answer 27

Strikes are a sign of poor labor relations in the company

Question 28

Significance of how good managements treat personnel?

Answer 28

Management is good when they can make an ordinary employee
Feel wanted and a part of the team

Also when they are concerned about the financial well being
Of their employees families

Question 29

15 points to look for in a common stock: point 8 does the company have outstanding executive relations?

Answer 29

Companies with the greatest investment opportunities will be
Ones in which executives have confidence in their presidents
And boards/chairman

This means that from the lowest levels on up there is a feeling
That promotions are based on ability not factionalism

Question 30

Good Executive relations: salaries

Answer 30

Salary adjustments are reviewed regularly so executives feel
Increases are merited

Salaries are in line with the standard of the industry and locality

Question 31

In a good company how will managers treat outside talent?

Answer 31

Management will only bring outsiders into anything other than
Starting jobs only if there is no possibility in promoting anyone
Already in the organization

Question 32

Top management will recognize that wherever human beings work together, some degree of factionalism and human friction will occur. How should management handle this?

Answer 32

They should not tolerate those who do not cooperate in team

Play

Question 33

15 points to look for in a common stock: point 9 Does the company have depth to its management?

Answer 33

The company needs to have someone who can replace the
Outstanding One man manager

Good when lower levels of management are given autonomy
To make their own decisions

Question 34

What’s an important characteristic for top management to have to show that they have depth?

Answer 34

Whether top management asses suggestions from personnel
Even if they carry adverse criticism of current management
Practices

Question 35

15 points to look for in a common stock: point 10 How good are the company’s cost analysis and accounting controls?

Answer 35

Long term success depends of companies ability to break down
Overall costs with sufficient accuracy

Shows cost of each small step in its operation

Question 36

Management’s knowledge of Product costs

Answer 36

Management must have a precise knowledge of the true cost
Of each product in relation to others

This allows management to establish pricing policies that
Insure the maximum obtainable overall profit consistent with
Discouraging undue competition

Question 37

How to learn about a company’s cost accounting?

What should the careful investor note?

Answer 37

Scuttlebutt: talking with company personnel

The careful investor should note that there are limits to finding this
Out

Question 38

15 points to look for in a common stock: point 11 Are there other aspects of the business somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?

Answer 38

In retail: companies skill at handling real estate matters

Companies that have lower insurance costs compared to
Competitors broaden their profit margins

Question 39

How should insurance matters be evaluated .

Answer 39

Through ratios and discussions with knowledgable insurance
People

Index of insurance costs in relation to coverage points out
Clearly how well companies in a given field are run

Question 40

Significance of patents

Answer 40

For large companies a strong patent position is usually a point
Of additional strength rather than basic strength

Patents are usually only able to block off a few rather than all
The ways of accomplishing the same design process

Question 41

What 4 attributes do companies need to depend on more than patents in a competitive market?

Answer 41

1 manufacturing know how
2 sales and service organization
3 customer good will
4 knowledge of customer problems

Question 42

Large companies that depend chiefly on patent protection for the maintenance of their profit margin is usually…

Answer 42

More a sign of investment weakness than strength

When the patent protection is no longer there the company’s
Profit may suffer badly

Question 43

Patent positions for small companies

Answer 43

Should be closely scrutinized by the investor

Without patents it’s products might be copied by large
entrenched enterprises,

which could use their distribution channels and customers to put
the small company out of business

Question 44

15 points to look for in a common stock: point 12 Does the company have a short rage or long range outlook in regard to profits?

(Note: Use scuttlebutt to favor the long term companies)

Answer 44

Companies with great customer care may show lower profits
In the near term but higher profits over the long term

Companies may pay suppliers a premium for raw materials
So when the market gets tight, they have better access

Question 45

15 points to look for in a common stock: point 13 In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares outstanding will largely cancel the existing shareholders’ benefit from this anticipate growth?

Answer 45

Important that the company’s cash and further borrowing
Ability is sufficient to take care of capital needed to exploit
Prospects in future

Avoid companies that have track record of diluting their shares

Question 46

When calculating the real number of common shares outstanding it is important to…

Answer 46

Consider all senior convertible issues have been converted

And all options and warrants have been exercised

Question 47

15 points to look for in a common stock: point 14 Does management talk freely to investors about its affairs when things are going well, but “clam up” when troubles and disappointments occur?

Answer 47

How management reacts to setbacks is valuable to investor,
Investor should avoid companies where management tries to
Withhold info/bad news

If management clams up, they may not have an effective
Program worked out to solve the problem

Question 48

15 points to look for in a common stock: point 15 Does the company have a management of unquestionable integrity .

Answer 48

Not good when relatives are put on payroll with salaries far
Above the normal work performed

Or put properties they sell or rent to Corporation at above
Market rates (hard to detect from small companies)

Question 49

Stock options

Answer 49

Management can enrich themselves far beyond what they

Deserve at stockholder’s expense

Question 50

What is the only real protection against management abuses?

Answer 50

Confine investments to companies where the managements of
Which have highly developed sense of trusteeship and moral
Responsibility to their stockholders