CONSERVATIVE INVESTORS SLEEP WELL SUMMARY (BY PHILIP FISHER) - YouTube

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