Read nearly any profile of Warren Buffett and you’ll soon come across the name Benjamin Graham. Sometimes called the “father of value investing,” Graham was Buffett’s college professor, investment idol and early mentor. Another critical influence on Buffett’s investment philosophy was Phillip Fisher. In fact, either by choice or due to Berkshire Hathaway’s tremendous size, Buffett’s current investment approach probably has more in common with Phil Fisher than Ben Graham. In contrast to Graham, Fisher thought far more qualitatively about businesses and was more interested in potential future developments than simply finding assets trading below accounting value, as favored by Graham.
Fisher laid out his philosophy in a 1958 book entitled Common Stocks and Uncommon Profits—a text that remains on Buffett’s recommended reading list. Unlike Graham, who focused mostly on financial statements to derive a conservative value of the business, Fisher emphasized the overall financial strength, competitiveness and profitability of the business as well as the quality of its management. Fisher wanted to understand the business well enough to confidently project its likely operating performance into the future. He believed that financial statements, while very useful, could only tell investors part of the story, writing: “It’s not the profit margins of the past but those of the future that are basically important to the investor.” He focused on buying shares of companies likely to compound earnings over long periods of time rather than buying stocks trading below their asset value. Phil Fisher’s ideal business was a sort of compounding machine, continually plowing profits into attractive capital projects over time, resulting in consistent and attractive earnings growth. Due to Fisher’s high standards of business quality, his portfolios tended to be fairly concentrated, containing around 20-30 stocks. And though he advocated buying only strong companies with attractive future prospects, Fisher was sensitive to price and suggested investors “focus on buying these companies when they are out of favor.”
It’s easy to emphasize the differences between these two great investment thinkers, but they are similar in at least one respect. While no one can match Ben Graham’s colorful description of “Mr. Market,” (which we have long written about), Fisher repeatedly cautioned his readers against following the crowd: “One should be extra careful when buying into companies that are the current darlings of the financial community so that he is not paying a fancy price for something which, because of too favorable an interpretation of basic facts, is the investment fad of the moment.” This passage and others in his book place Fisher, like Graham, in the camp of contrarian investors.
Fisher didn’t use terms like “moat” or “sustainable competitive advantage” often used by Buffett and others today, but it’s clear he was thinking along those lines in describing his deeply qualitative investment approach. While Ben Graham continues to enjoy favorable press, and deservedly so, it’s clear that Phil Fisher also contributed a number of important investment ideas that remain valuable today.