CONSERVATIVE INVESTORS SLEEP WELL SUMMARY (BY PHILIP FISHER)


The fifth most important takeaway from Conservative Investors Sleep Well, by Philip Fisher, is the ability to identify: What is a conservative investment? In a world where we have central banks with monetary policies never witnessed before and where global trade is constantly being threatened by protectionism, it’s quite tough to be an investor in the stock market What if I lose it all? What if there will be better buying opportunity in the future? At times like these it’s a good thing to study legendary investors, such as Philip Fisher Fisher was one of the two major inspirations of the world’s greatest investor, Warren Buffett, and Fisher argues that there’s a type of investments that will perform well almost no matter what the economy hits them with: It’s the conservatively picked stocks I thought that the term “conservative” was a bit boring, until I realized that Phillip Fisher thinks that offense is the best defense Conservative stocks have four unique dimensions that you should look for: 1. Superiority in production marketing research and financial skills 2. Outstanding people 3. Protection of profits; and 4. A low price The first dimension is pretty much just listing the most important activities for a company’s profitability Production, marketing, research and financial skills, are all vital for the survival and prosperity of a company You can learn more about this in my summary of Philip Fisher’s other book, Common Stocks and Uncommon Profits The second dimension is about the quality of the people that are governing these activities As we shall see, the process of identifying such top management is quite counterintuitive In relation to the third characteristic, there are a few types of businesses that can maintain profits almost indefinitely, thanks to for inherit company traits, but more on this later Philip Fisher is one of the pioneers of growth investing, which means looking for companies with exceptional growth prospects He always preferred quality business over cheap ones So even though he thought of price as an important factor, he found that the first three dimensions are more important, which we shall see next Number 4: The conservative investment scale Using these four dimensions, we can create a scale and rank which the most attractive stocks are for conservative investors If you want to sleep well at night, while your investments create a passive income for you, look for stocks in the leftmost part of the spectrum and avoid those to the right The best option is of course to invest in a company that is superior in the first three dimensions, and, which has a low price to earnings ratio when considering these factors This is a quite uncommon situation though, which is why we also have to consider investments further down the scale for our portfolio The second best option is to invest in a company that is, still superior in the first three dimensions, but which is also priced relatively fairly As we shall see in takeaway number three, such a company can still give wonderful returns over the long run Next up, and this is where it shows that Philip Fisher truly preferred quality over price, is the company that is, once again, superior in the first three dimensions, but that even taking this superiority into account, is too expensive Fisher suggests that if you don’t own one of these stocks previously, you should stay away But if you have one of them in your portfolio already, stay put There are two reasons for treating a stock that you already own differently: The first one is that it’s quite uncommon to find stocks that are superior in the first three dimensions So the risk of switching into something that ranks lower on the conservative investment scale is very high The second reason is due to tax purposes Next up, which is a stock that Phillip Fisher does not suggest for the conservative investor, but that many speculators (ie traders) seem to find attractive, is a company that is mediocre in the first three dimensions, but that sells at a cheap price In a fast moving world, the risk is just too high in this type of companies Warren Buffett agrees, as he says that: “It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price” And finally, probably no surprise here, we have a company that is mediocre or even weak from the standpoint of the first three dimensions and selling at a price that is too high – even for such mediocre prospects Number three: The interplay: growth – PE – investment returns Let’s consider three hypothetical companies within the same industry In this industry, a company without any growth prospects is valued by the market at a price to earnings ratio, a P/E ratio, of 10 A company which seems likely to double its earnings in the next five years, on the other hand, is valued at a P/E ratio of 20 We have company A, B and C Now, let’s pretend that the market was correct in its observation and five years later, company A still earns as much as it did five years ago. while B and C managed to double their earnings Here’s the interesting part. What do you think that the returns of these companies will be? Is it 0% for A and 100% each for B and C? Not necessary We must also consider if the valuations of the companies have changed at the end of year five Let’s pretend that the market still values and no growth company at P/E 10 and one which seems likely to double its earnings in the next five years at a P/E of 20 Company A continues to have no growth prospects at all, so it is still valued at a P/E of 10 by year 5 Therefore, the investment returns on the stock has been 0%, plus dividends of course, if the company is profitable Company B is still regarded as a strong growth company, so it continues to hold a P/E ratio of 20 Therefore, the investment returns on the stock has been 100% The earnings have doubled in five years and the valuation of the earnings remains the same Company C is the interesting one It is no longer considered a growth company, as, there’s been a lot of problems among employees and managers lately Therefore, at the end of year 5, it holds a P/E ratio of just 10, down from previous 20 Even though it managed to fulfill the expectations of the market and double its earnings over the last five years, the investment returns on the stock has been 0. The earnings doubled, but the valuation was cut in half, so the net result for the investor is 0 Here, Fisher explains an important investment rule: “The further into the future profits will continue to grow, the higher the price to earnings ratio an investor can afford to pay” Number 2: Weaknesses in management that are easy to spot People is the difference between an outstanding business and a mediocre one As I mentioned earlier, this point is quite counterintuitive To find great management, it’s easier to look for weak management, and then avoid those companies, rather than go looking for the great ones straight-out Here are 6 weaknesses in management that are easy to spot A CEO from the outside Promotions from within is something that Philip Fisher emphasizes You want to invest in companies that are profitable and difficult to copy for competitors. If the company can hire a CEO from the outside, that’s able to operate the business well in just a couple of months, it’s not complex enough to hold a sustainable competitive advantage in this regard An excessive CEO salary If the CEO earns much more than the second or third man in the company, it is a red flag Media complaints Hello, Amazon? While this is not enough to exclude a stock on its own, you want everyone in a company to feel that It’s a good place to work In the long run, this creates motivation, innovation and a competitive advantage Unfulfilled promises Compare the results of the company to what the CEO promised in previous shareholder letters Promising results in itself is kind of like an orange flag, but promising them and then not delivering upon them, definitely qualifies as a red one A board with only the CEO If the CEO of the company also holds a position among the board of directors, you want at least another person from the executive management there with him Otherwise, it may be a sign that the CEO doesn’t want anyone to question him about the operations of the company in front of the board, which is a poor trait in a leader Engaged in unrelated activities Especially if it’s a smaller company, it should be focused on doing one thing only, and doing that thing very well The jack-of-all-trades is the master of none Number 1: Investment characteristics for indefinite growth For a company to be able to grow, it needs profits These profits can be reinvested in marketing efforts, training programs for employees, research on new products, better production, etc Therefore, high profitability is a very desirable trait in conservative stocks But … Imagine that you put out an open jar of honey, in the middle of the summer What will happen to this jar? It will attract flies High profitability in a business is just like that jar of honey, but instead of flies, it attracts competition A company must protect its jar of honey, and there are four proven ways of doing this: – Economies of scale To produce in higher quantities, typically results in a lower cost per unit This lower cost can protect the business from competitors that per definition must be small before they can become big Think… Walmart Brand name A strong brand name gives pricing power Pricing power gives higher profitability, which in turn can be invested in growth Branding is more than just spending millions of dollars on Super Bowl ads, which is why it’s difficult to steal the honey from companies such as Coca-cola, McDonald’s and Disney Combined scientific disciplines You’re investing Swede owned a company named Cellavision a couple of years ago, which develops and sells solutions for analyzing blood in the healthcare industry Without going into too much detail about the company, its solutions require extensive knowledge within the scientific discipline of both machine learning and of hematology According to Fisher, it is much more difficult to organize and combine deep knowledge in multiple disciplines, which in this case acts as a strong competitive advantage for Cellavision Automatic reorders Subscription models are much more common today than they were back when Philip Fisher wrote this book, so companies seem to have snapped this up quite well But … Subscription alone is not enough to protect your honey. It’s all too easy for a customer to switch from Netflix to HBO to Disney+ and then back again The company must provide the customer with a product that is critical for its operations, yet, the cost of the product can only be a small part of the customers budget Also, the customers of the company must be many smaller ones, rather than a single large one, and the company itself must be the dominant player in the market Finally, the market must be specialized enough so that the only way to reach out to customers in an efficient way is through targeted sales calls Actually, I think that Cellavision fits these criteria quite well. Damn – I should never have sold that one … Warren Buffett, who is the richest investor in the world is Philip Fisher’s most famous disciple Learn how he took Fisher’s growth investing to the next level by clicking on my playlist of Warren Buffett investing books Cheers guys

21 thoughts on “CONSERVATIVE INVESTORS SLEEP WELL SUMMARY (BY PHILIP FISHER)

  1. Hi Erik, I have watched all of your book summaries and would like to clarify one thing. Whenever I open the cash flow, balance sheet of a company, I don't know the meaning of most terms. By watching your videos, I have got to know about some but not all of them. I am 15 years old and therefore have not been taught( in school)how to read annual reports, balance sheets etc. But I think I have got a good amount of idea about stocks by watching your videos. What's the next step I should take? Also can you please recommend a book and YouTube channel which explains the meanings of terms in annual reports of company.

  2. I think a lot of people are conservative investors. Risk is high and you need a strong stomach to hold on to these stocks. 👍

  3. You don’t have to buy and read a book anymore. You just watch a 14 min video to have all the content for free.

    I love 2019!

  4. If you have an idea, make that idea HAPPEN and start investing. Trust me, it'll be worth it! 🙂 Hi guys! Let me just share with you a quick story. We own a cookie shop business in our college town. When we first started it, we were living in our car with very little direction, just a huge passion to be successful. We just graduated college as well. We started the late night cookie shop out of a local bagel shop in their off hours at night. We were living in our car in the parking lot of the shop at the time with my boyfriend, Bran. It was a crazy experience but it worked! We became a success! And now we have 2 storefront locations in New Jersey and Florida! We started it to fund a year long backpacking trip around the world and to be successful while living the life of our dreams.

  5. Swedish investor u are doing great work and you will become a great investor…. Can you plz upload some summaries on "Real estate books like "Crushing it in Apartments and commercial real eatate "By Brian Murray

  6. Hello Swedish investor, I read a lot of these books but I’m wondering if you have any tips of how to retain more of the information

  7. After watching practically all your books I am really interested in the stocks that you are interested in or in the portfolio you hold.
    Maybe an idea for in the future to make videos about your stock portfolio combined with a market update.
    I think this channel can easily grow to 500k within the next 5 years.

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