Philip Fisher, author of the classic book such Common Stocks and Uncommon Profits was known for his successful career investing in growth stocks and for his "scuttlebutt" approach to investing, which is not unlike what Peter Lynch used to do when he managed Fidelity's Magellan fund.
In chapter 10 of Common Stocks and Uncommon Profits Fisher explains how he went about making investment decisions. Here's a summary. First, he needed an idea. About one-fifth of his ideas came from investment houses, analysts, businessmen and scientists who happen to know about a particular industry. The other four-fifths came from reputable and respected professional investors themselves. Then, with the idea in mind, he did not pour over past annual reports and spends hours on detailed financial data. He simply checked the balance sheet and took a first look at the financials, to make sure the company was sane. He also did not talk to management at this point. He did instead go out doing his "scuttlebutt" method.
The "scuttlebutt" method consists of calling his network of business executive-scientists, calling competitors, suppliers, former employees, and customers of the company in question. He asked questions and used the answers to form a picture about the company and its future, often cross-referencing pieces of information from different sources, to validate its veracity. He found out how well-managed the company was, what its competitive advantages were and how well it was respected by competitors, customers and suppliers. If Fisher could not get at least 50% of his required investment criteria at this point, he would give up and move on to something else.
Only when he had at least 50% (and typically, much more) of the information needed to form a positive view on a company was when he would call the company, talk to management and visit factories and assembly lines. Typically, at that stage, about one in two companies he visited he actually invested in. But that only happened if he had enough positive information from his "scuttlebutt" approach first.
When asked whether retail investors should be expected to devote that amount of time and energy to investing, Fisher would say "absolutely" and ask the following question: "In what other line of activity could you put $10,000 in one year and ten years later be able to have an asset worth from $40,000 to $150,000? Is it either logical or reasonable that anyone could do this with an effort no harder than reading a few simply worded brokers' free circulars in the comfort of an armchair one evening a week?"
In a future post, I will talk about Fisher's 15-point investment criteria and discuss some of his other insights.