Two investment bankers once guessed how many companies Philip Fisher visited for every stock he bought. One suggested two hundred fifty. The other said twenty-five. Fisher's figure was roughly two to two and a half.
That sounds like a remarkably easy search until you count everything that happened before the visit. He estimated that he bought one of every forty or fifty companies he looked at, and one of every two hundred fifty he considered investigating. Most candidates disappeared long before he met management.
His method spends limited time finding reasons to reject companies, then investigates the survivors through people who know their operations. A persuasive executive gets heard late in the process. When reliable evidence remains unavailable, even an attractive business can be left alone.
Find out which questions deserve your time
Fisher starts with substantial growth prospects and a reason competitors cannot easily take the business away. This first judgment uses incomplete information. Demanding a finished investigation before deciding where to begin would leave no time to investigate anything.
He also checks which people send him worthwhile leads. He once thought executives and scientists supplied most of his best ideas. His records showed that a small group of respected investment professionals supplied most worthwhile purchases. Business contacts proved especially useful later, for operating knowledge. He listened less to contacts whose judgment or factual reliability disappointed him.
Published information supplies the next questions. Before approaching management, he wants a basic picture of how the company is financed, which products produce its sales and who competes with them. Fisher examines profit margins, research spending, major shareholders and unusual costs. He checks how depreciation, the allocation of equipment costs over its useful life, affects reported earnings. The aim is to understand commitments and identify gaps worth pursuing.
An attractive annual report cannot fill those gaps. Its president's message may have been written by a public relations specialist. Awkward prose proves just as little about management. Withholding information owners need, however, is a substantive warning.
Ask people who see different parts of the business
Fisher calls this investigation "scuttlebutt." Customers, suppliers, competitors, scientists and former employees encounter different aspects of a company. Their observations can reveal whether its products work, its operations are capable and its advantages can last.
His simple illustration is to ask five companies informed questions about the other four. Compare their accounts, then broaden the inquiry to other knowledgeable people. Each source has interests and limitations. Agreement matters only alongside what people actually know; disagreement calls for explanation. Fisher wants the weight of informed evidence to support further work.
Former employees may know problems outsiders cannot see. They may also have left after a dispute. Find out why they departed and corroborate what they say. A grievance does not make an account false, but it makes relying on that account alone especially unwise.
Access depends partly on trust. Fisher protects identities when he has promised confidentiality; otherwise unfavorable information may never reach him. A trusted banker or customer can help arrange an introduction. Visible preparation encourages executives to offer useful time. Neither effort guarantees access, and information protected by a client's confidence properly remains unavailable.
Management interviews then become more revealing. Fisher wants at least half the knowledge needed for a decision before visiting. That is a working rule, not a measurable completion score. He arrives with particular weaknesses to ask about and favorable evidence to confirm. Management may correct an outside impression or explain how it is addressing a problem. He also examines the team: one impressive executive cannot establish everyone else's competence.
Know when the investigation has reached its limit
A promising company can fail this process because you cannot verify enough about it. Fisher needs sound conclusions about the few businesses he buys. He does not need an opinion on every business he encounters. Rejecting an unsupported purchase is useful work.
Sometimes the evidence does not yet exist. A new venture may have an inventor, a plan and no operating or profit record. Its founder's technical ability says little about whether the missing production, marketing and management functions will develop. Fisher leaves that financing to specialists able to supply managerial talent as well as money.
His approach also demands time, judgment, interest and useful contacts. Deep understanding helps expose risk; it does not remove it. Fisher does not claim his method is uniquely best. He does insist that the work match the decision being attempted.
If you cannot do that work, professional help may be appropriate. You still need enough understanding to evaluate it. Fisher requires honesty and an investment philosophy compatible with your needs, backed by at least five years of experience. He wants a representative record over a meaningful period, compared with the market during the same years. A selected winner or lucky market forecast cannot demonstrate a repeatable method. Even a good record needs an explanation of the risks that produced it.
The same discipline applies to a different sales pitch. Ask how the judgment was formed, what supports it and what remains unknown. The banker story ends with a surprisingly small number of visits because so much was rejected beforehand. You can take the research seriously and finish with your money still uncommitted.
Three things to keep
Independent operating evidence gives you something to test against management's story.
Missing evidence can justify passing on an otherwise promising business.
An adviser's representative record and method matter more than a spectacular success.