In 1928, radio shares excited investors. Philip Fisher wanted to hear from the people buying radios for stores. He spoke with buyers in several San Francisco retail departments, and their accounts broadly agreed. Philco had attractive models, efficient production, and profitable gains in market share. RCA was holding its position. Another manufacturer, a stock-market favorite, was losing ground badly.
Financial reports were useful, but they could not interpret themselves. Fisher's answer was to combine them with management's explanation and independent evidence from people who knew the business. An overlooked company needed a credible account of what investors had missed. A persuasive story needed the same scrutiny, however many people repeated it.
The radio investigation had an awkward result. Philco, the strongest operator he found, was privately owned. He could not buy its shares. Still, over the following year, the troubled favorite's stock weakened while the wider market continued rising. The buyers had described a business problem that the enthusiastic commentary had missed. One had previously been an engineer at a manufacturer and understood the industry particularly well.
Fisher approached a share as participation in a business's future profits. That made the company's capacity to grow more consequential than excitement around its quotation. Different sources could illuminate different parts of that capacity. Customers knew whether a product worked. Distributors knew whether it sold. Management could explain its plans; competitors, employees, and specialists could help test whether those plans were plausible. The managers' ability and integrity also needed investigation. These checks had to continue after purchase, when a good result might tempt the owner to stop asking difficult questions. A company's familiar products could even determine its market label while investors overlooked a more promising division. Research could reveal that they were comparing it with the wrong businesses.
Who benefits from the story?
Fisher's first investment job showed him why apparently independent research deserved inspection. At a bank, he wrote reports by paraphrasing financial manuals. The bank earned substantial commissions selling new securities without seriously evaluating their quality. Salespeople could present the reports as the work of a department examining customers' investments. Nobody needed to tell the young analyst explicitly to promote the latest offering. The incentives already pointed that way.
The reports also routinely treated large sales as evidence of good management. Size answered a different question. It did not establish whether the people running the company made good decisions; small businesses could have capable leaders and strong prospects too. A polished report could conceal how little anyone had investigated.
Fisher later found greater freedom to judge securities individually and eventually charged clients for managing their investments. That arrangement gave him room to pursue his own research. Fees alone, however, could establish neither competence nor loyalty to clients. The quality of the work still mattered.
Even a rising share price could become part of the sales pitch. Fisher described stock pools whose members traded shares among themselves at increasing prices, hoping the activity would attract outsiders to buy at still higher prices. Manufactured enthusiasm could resemble confirmation that the company was improving. Following the quotation back to the business required a separate investigation.
When everyone can hear the explanation
What if all the relevant information is already public? Fisher challenged the claim that prices fully and realistically reflected known company information. He accepted the difficulty of profitable short-term trading, especially after costs. His argument concerned judgments about a business over years.
Raychem supplied a revealing case. Investors had once expected almost uninterrupted growth from its research. A major product failed commercially, and an organizational change temporarily hurt earnings. Admiration became distrust. Management explained the decisions and the prospects of other research, but explanations had to compete with memories of disappointment.
In January 1978, after profits had already reached a new high, Raychem held a day-long meeting for institutions, brokers, and advisers. Ten senior executives discussed their operations' prospects and problems. Fisher attended. Everyone there could hear the same account; his interpretation did not depend on a secret disclosure.
The stock showed no particular response in the following weeks. Over the next year or two, earnings developed as the presentations had suggested, and the shares more than doubled. Fisher believed earlier disappointments still shaped investors' judgments. He also thought confidence in automatic market efficiency could discourage institutions from investigating possible errors. Those were his explanations for the delay. The later return was not something the audience could know in advance.
That distinction matters in Fisher's classroom comparisons too. His students found enormous differences between individual stock returns over the same period. Choosing the eventual winners would have mattered greatly. But portfolios selected with hindsight could not show that anyone could identify those winners beforehand, or by themselves disprove market efficiency. Fisher believed informed selection could anticipate some differences, while allowing for luck and unforeseen developments.
An unpopular company therefore faced the same test as a fashionable one. Was there evidence that its products, competitive position, and managers could produce the profits the investor expected? Investigation could vindicate the crowd. If it contradicted the crowd, the investor still needed to explain why. Fisher's method demanded an account of the business that could survive fresh evidence, including evidence that made his own preferred story harder to believe.
Three things to keep
Check a company's promises against people who know how its business works.
Public information can be available long before investors agree on its meaning.
Neither popularity nor disagreement proves that a stock is mispriced.