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A pointer to appraising the management of a company
Philip Fisher, was a great investor based in California, who made a fortune for his clients over the years. He was also a strong influence on Charlie Munger’s and Warren Buffett’s investment philosophies.
Fisher laid great store by really getting to understand the qualities of the managerial team. He was looking for a company that would have great growth potential for many decades ahead – not weeks or months, but decades ahead!
For this to be possible the managers had to be very able people and to have high integrity. Because each investment required an enormous amount of work Philip Fisher made very few investments.
You see, he believed in spending a great deal of time in “scuttlebutt” – that is, obtaining knowledge of a company by talking to a wide range of people who have had dealings with it: customers, suppliers, trade bodies, journalists, employees, ex-employees, etc. The following quote gives some insight into the kinds of questions he asked (note: this is just one aspect of good management he examined):
“When a management can instil a belief, not just among a few top people but generally among the employees, that it is doing everything reasonably to be expected to create a good working environment and take care of its employees’ interests, the rewards the company receives in greater productivity and lower costs can vastly outweigh the costs of such a policy.” (Philip Fisher)
Business quality
Appraising the capability and integrity of the managers is one key aspect of an investment operation. Another is the quality of the economic franchise, which is pricing power, usually facilitated by strong barriers to entry to the industry.
The strength and durability of an economic franchise is determined by (a) the structure of the industry, and (b) the ability of the firm to rise above its rivals in its industry and generate exceptional long-run rates of return on capital employed.
Warren Buffett put it more pithily:
“In appraising a business; how I would like, assuming I had ample capital and skilled personnel, to compete with it rather than wrestle grizzlies.”
Warren Buffett (B.H. 1983)
Take Coca Cola. How would you like to enter its market……..To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
