I just finished “Conservative Investors sleep well” by Phil Fisher. (It is also sold as part of “Common Stocks and uncommon profits”). Its really very good and I enjoyed it a lot. Here is a brief on it.
Fisher talks about Four dimensions of conservative investing.
1. First dimension
Excellence in the following activities
A. Low cost operation. (High profit margins)
B. Stong marketing organisation.
C. Strong research and technical efforts.
D. Good financial skills.
And of course the skill to integrate all of this in the right mix.
2. Second dimension.
This is the people factor. Competent management and good labour force make all the difference. Fisher also talks about 3 elements needed with regards to this dimension. They are
1. Managements need to realize that the world is changing fast.
2. Take efforts to make the employees feel that their co is a good place to work for.
3. Orientation towards sound & long range growth.
3. Third dimension
These are the characteristics that make the business favorable as a conservative investment. They are
This can be expressed in ROIC and OPM. But also the sales turnover is also an important consideration.
2. Economies of scale.
3. Market leader in sales and high OPM
4. Multidisciplinary technology development
5. Well marketed products that have become habit buying now
6. Extremely high ROIC is also a danger, says Fisher as it might attract a lot of new people to start business thereby reducing profits.
4. Fourth dimension.
This dimension talks about how the Financial community
1. values an industry
2. values a company
3. values stocks in general.
A stock price is not only what the financial community thinks of the company, but also of the industry and also of stock picking in general. During a time when the industry is viewed negatively, even a good company would be valued low. And during times when stocks as a whole are considered as bad investments, again, stocks of such companies would be cheap.
This is only a very brief gist. Please do take the time to read this fantastic book.