Philip Fisher’s scuttlebutt method

For a man like Berkshire Hathaway chairman Warren Buffett who doesn’t personally own an iPhone, one wonders why he more than doubled Berkshire Hathaway’s holdings in Apple to about 2.5 per cent in January 2017. At that point, Mr Buffett owned US$17 billion worth of the tech giant’s stock

In a CNBC report on 27 February 2017 titled “Billionaire Warren Buffett more than doubled his holdings in Apple in 2017”, Mr Buffett, when asked why he raised the stake in Apple, was quoted as saying “because I liked it”. The legendary investor cited Apple’s
consumer-retaining power and CEO Tim Cook’s smart capital deployment strategy.

“Apple strikes me as having quite a sticky product, and an enormously useful product to people that use it,” Buffett said.

What was interesting is that Mr Buffett went on to say that the late investor Philip Fisher’s 1958 book “Common Stocks and Uncommon Profits” had inspired him to research how consumers felt about Apple products.
Mr Fisher talked about something called the “scuttlebutt method“, Mr Buffett said, adding that this method “made a big impression on me at the time, and I used it a lot”.

The “scuttlebutt method”, said Mr Buffett, is essentially going out and finding out as much as you can about how people feel about the products that they use.

Let’s look further into who Philip Fisher was and what his “scuttlebutt method” was all about.

American stock investor Philip Arthur Fisher (September 8, 1907 – March 11, 2004) was best known as the author of the investment guide book known as  Common Stocks and Uncommon Profits. The book has the reputation of staying in print since it  first published in 1958.

Phillip Fisher was referred to by Mr Buffett as “a respected investor and author” in a  letter to Berkshire Hathaway shareholders. Among his best-known  followers is Mr Buffett  who reportedly has said on some occasions that “he is 85% (Benjamin) Graham and 15% (Philip) Fisher”. Benjamin Graham (May 8, 1894 – September 21, 1976) is the father of value investing and Mr Buffett is his best known student.

Back to the “scuttlebutt method”, which provides clues that are needed to find really outstanding investments. Philip Fished said he called it “scuttlebutt method” for lack of a better term.

“The business ‘grapevine’ is a remarkable thing,” said Philip Fisher. “It is amazing what an accurate picture of the relative points of strength and weakness of each company in an industry can be obtained from a representative cross-section of the opinions of those who in one way or another are concerned with any particular company.”

“Most people, particularly if they feel sure there is no danger of their being quoted, like to talk about the field of work in which they are engaged and will talk rather freely about their competitors. Go to five companies in an industry, ask each of them intelligent questions about the points of strength and weakness of the other four, and nine times out of ten a surprisingly detailed and accurate picture of all five will emerge,” said Mr Fisher.

According to Philip Fisher, competitors are only one and not necessarily the best source of informed opinion. Much also can be learned from both vendors and customers about the real nature of the people with whom they deal. Research scientists in universities, in government and in competitive companies are another fertile source of worthwhile data. So are executives of trade associations, according to Philip Fisher.

“The next step is to contact the officers of the company to try and fill out some of the gaps still existing in the investor’s picture of the situation being studied,” said Mr Fisher.

Benjamin Graham on dollar-cost averaging

In Chapter 5 (The Defensive Investor and Common Stocks) of The Intelligent Investor, Benjamin Graham, the father of value investing, touched on various aspects of defensive investment, among which was dollar-cost averaging, an application of a “formula investment”.

Elaborating, he said: “The New York Stock Exchange has put considerable effort into popularizing its ‘monthly purchase plan’, under which an investor devotes the same dollar amount each month to buying one or more common stocks.”

“During the predominantly rising-market experience since 1949 the results from such a procedure were certain to be highly satisfactory, especially since they prevented the practitioner from concentrating his buying at the wrong times,” added Benjamin Graham.

The father of value investing cited a comprehensive study of formula investment plans in which the author Lucile Tomlinson presented a calculation of the results of dollar-cost averaging in the group of stocks making up the Dow Jones industrial index. The average indicated profit at the end of 23 ten-year buying periods was 21.5 per cent, exclusive of dividends received. There were of course some instances of a substantial temporary depreciation at market value.

The author of the study said: “No one has yet discovered any other formula for investing which can be used with so much confidence of ultimate success, regardless of what may happen to security prices, as Dollar Cost Averaging.”

How Berkshire Hathaway selects a new director

Berkshire Hathaway’s four long-standing criteria in selecting a new board director: owner-oriented, business-savvy, interested and truly independent.

Chairman Warren Buffett said: “I say “truly” because many
directors who are now deemed independent by various authorities and observers are far from that, relying
heavily as they do on directors’ fees to maintain their standard of living. These payments, which come in
many forms, often range between $150,000 and $250,000 annually, compensation that may approach or
even exceed all other income of the “independent” director. And – surprise, surprise – director
compensation has soared in recent years, pushed up by recommendations from corporate America’s
favorite consultant, Ratchet, Ratchet and Bingo. (The name may be phony, but the action it conveys is
not.).

“Charlie and I believe our four criteria are essential if directors are to do their job – which, by law,
is to faithfully represent owners. Yet these criteria are usually ignored. Instead, consultants and CEOs
seeking board candidates will often say, “We’re looking for a woman,” or “a Hispanic,” or “someone from
abroad,” or what have you. It sometimes sounds as if the mission is to stock Noah’s ark. Over the years
I’ve been queried many times about potential directors and have yet to hear anyone ask, “Does he think like
an intelligent owner?”

“The questions I instead get would sound ridiculous to someone seeking candidates for, say, a
football team, or an arbitration panel or a military command. In those cases, the selectors would look for
people who had the specific talents and attitudes that were required for a specialized job. At Berkshire, we
are in the specialized activity of running a business well, and therefore we seek business judgment.
“That’s exactly what we’ve found in Susan Decker, CFO of Yahoo!, who will join our board at the
annual meeting. We are lucky to have her: She scores very high on our four criteria and additionally, at 44,
is young – an attribute, as you may have noticed, that your Chairman has long lacked. We will seek more
young directors in the future, but never by slighting the four qualities that we insist upon.”

Source: Chairman Warren Buffett’s FY2006 letter to Berkshire Hathaway shareholders

When it comes to stocks, Berkshire Hathaway looks for wonderful companies

“Woody Allen once explained that the advantage of being bi-sexual is that it doubles your chance of finding a date on Saturday night,” Warren Buffett said in his FY2015 letter to Berkshire Hathaway. Why did the Berkshire Hathaway chairman say this?

“In like manner – well, not exactly like manner – our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for Berkshire’s endless gusher of cash. Beyond that, having a huge portfolio of marketable securities gives us a stockpile of funds that can be tapped when an elephant-sized acquisition is offered to us,” Mr Buffett continued.

A stockpile of funds from marketable securities?

Yes a stockpile. “Berkshire increased its ownership interest last year in each of its “Big Four” investments – American Express, Coca-Cola, IBM and Wells Fargo. We purchased additional shares of IBM (increasing our ownership to 8.4% versus 7.8% at yearend 2014) and Wells Fargo (going to 9.8% from 9.4%). At the other two companies, Coca-Cola and American Express, stock repurchases raised our percentage ownership. Our equity in Coca-Cola grew from 9.2% to 9.3%, and our interest in American Express increased from 14.8% to 15.6%. In case you think these seemingly small changes aren’t important, consider this math: For the four companies in aggregate, each increase of one percentage point in our ownership raises Berkshire’s portion of their annual earnings by about $500 million.”

The legendary investor’s subsequent FY2016 letter to Berkshire Hathaway shows the stakes in these Big Four as at end-2016 were: American Express 16.8%, Coca-Cola 9.3%, IBM 8.5% and Wells Fargo 10%. Apple Inc stocks also came into Berkshire Hathaway’s radar screen, with the group owning a stake of 1.1%, which, according to a CNBC report on Feb 27, 2017, had grown in January 2017 to 2.5%. “At this point, Buffett owns US$17 billion worth of the tech giant’s stock,” said the report.

What does Berkshire Hathaway look for in marketable securities?
On the Big Four in the FY2015 letter, Mr Buffett said that the four investees possess excellent businesses and are run by managers who are both talented and shareholder-oriented. “Their returns on tangible equity range from excellent to staggering. At Berkshire, we much prefer owning a non-controlling but substantial portion of a wonderful company to owning 100% of a so-so business. It’s better to have a partial interest in the Hope Diamond than to own all of a rhinestone,” said Mr Buffett.

The Berkshire Hathaway chairman said that if Berkshire’s yearend holdings were used as the marker, its portion of the “Big Four’s” 2015 earnings amounted to US$4.7 billion. “In the earnings we report to you, however, we include only the dividends they pay us – about $1.8 billion last year. But make no mistake: The nearly $3 billion of these companies’ earnings we don’t report are every bit as valuable to us as the portion Berkshire records.”

The earnings of Berkshire’s investees retain are often used for repurchases of their own stock – a move that increases Berkshire’s share of future earnings without requiring it to lay out a dime. “The retained earnings of these companies also fund business opportunities that usually turn out to be advantageous. All that leads us to expect that the per-share earnings of these four investees, in aggregate, will grow substantially over time. If gains do indeed materialize, dividends to Berkshire will increase and so, too, will our unrealized capital gains.”

This investment philosophy gives Berkshire Hathaway a significant edge, explained by Mr Buffett this way: “Our flexibility in capital allocation – our willingness to invest large sums passively in non-controlled businesses – gives us a significant edge over companies that limit themselves to acquisitions they will operate.”

Seven stock investing mistakes to avoid: Pat Dorsey

It takes many great stock picks to make up for just a few big errors, says Pat Dorsey, author of The Five Rules for Successful Stock Investing. So even before one goes into any analysis process, care should be taken to avoid seven easily avoidable mistakes.
Here is Pat Dorsey’s list of seven mistakes to avoid:
1. Swinging for the fences.
2. Believing that it is different this time.
3. Falling in love with products.
4. Panicking when the market is down.
5. Trying to time the market.
6. Ignoring valuation.
7. Relying on earnings for the whole story.

Warren Buffett loves Apple

Warren Buffett’s FY2016’s letter dated February 25, 2017, to Berkshire Hathaway shareholders showed the group had 61,242,652 Apple Inc shares, a stake of 1.1 per cent costing US$6.747 billion and worth a market value of US$7.093 billion. This has since doubled. According to a CNBC report on Feb 27, 2017, the stake had doubled in January 2017 to 2.5 per cent. “At this point, Buffett owns US$17 billion worth of the tech giant’s stock,” said the report.
Berkshire Hathaway also has stake in IBM. The FY2016 shareholder letter showed that it had 81,232,303 IBM shares as at Dec 31, 2016, a holding of 8.5 per cent costing US$13.815 billion and having a market value of US$13.484 billion.