Zenith Asset Investment Education Foundation - Contrarian Thinking

Zenith Asset Investment Education Foundation: Portfolio concentration

Philip A. Fisher, the father of growth stock investing strategies, was credited by Warren Buffett for 15% of his investment philosophy.

Philip Fisher advocated for a concentrated portfolio, suggesting buying only one or very few types of stocks. In his lifetime, he made significant profits from just 14 stocks, with the smallest gain being 7 times and the highest being thousands of times his initial investment.

Let's get inspired by revisiting eight classic answers Philip Fisher gave in an early interview with «Forbes».

[Question 1: It seems you don’t like buying too many stocks?]
Fisher: I have four core stocks that I truly want. These represent my investment portfolio. Additionally, I use a small amount of money to buy stocks that have the potential to enter my core pool, usually about five. Right now, if I had to buy, I would only pick two of them and skip the other three.

I’ve been doing this every decade since the 1930s, starting with two stocks. Altogether, I’ve identified 14 core stocks, which is a very small number. But over the years, they’ve made me a lot of money, with the smallest return being 7 times my investment, and the highest returns reaching thousands of times.

I’ve also bought 50-60 other stocks that made me money. Of course, I’ve also lost money; twice my investments shrank by over 50%, and many times I lost 10%. That’s just the cost of doing business in investing.

However, in most cases, if a stock declines moderately, I buy more, and it eventually brings substantial returns.

But these examples pale compared to the 14 big winners. I held them for long periods, the shortest being 8-9 years, and the longest being 30 years.

I don’t like wasting time making many small gains, I need huge returns, and I’m willing to wait for them.

[Question 2: What kind of stocks do you consider core stocks?]
Fisher: They should be low-cost producers; world-class leaders in their industry or fully meet my other criteria; they should currently have promising new products and above-average management.

[Question 3: You seem to emphasize company management a lot, right?]
Fisher: Understanding a company's management is a bit like marriage: to truly know a girl, you must live with her. Similarly, to understand a company's management, you need to "live" with them.

Look for companies you like, those that can help you and solve problems for you and your clients.

I focus on manufacturing companies (I don’t like the term "tech companies") because they always expand markets through discoveries in natural sciences.

Other fields like retail and finance are great opportunities, but I’m not good at them. I think many investors’ flaws lie in wanting to dabble in everything without mastering any.

[Question 4: Do you still look for other stocks now?]
Fisher: I spend a lot of time researching and am in no hurry to buy. In a continuously declining market, I don’t want to buy stocks I’m not familiar with too quickly.

[Question 5: Besides good management, what other factors do you consider?]
Fisher: When I argue strongly for an investment with a client, and they reluctantly agree, saying, "Okay, if you say so, let’s do it," that’s usually the right investment.

If I say, "Let’s buy 10,000 shares," and they say, "Why not buy 50,000 shares?" it indicates that the stock is already too late to buy.

I also don’t buy market-favored stocks. If I attend a meeting for a particular tech stock and the room is packed, that’s a clear signal: it’s not the time to buy that stock.

[Question 6: You sound like a contrarian investor?]
Fisher: True success isn’t about being a 100% contrarian. When people in town saw new cars replacing old streetcars, some might think, "Since nobody wants to buy streetcar stocks, I will." That’s obviously absurd.

But being able to discern the flaws in widely accepted behavior is one of the keys to achieving great investment success.

[Question 7: As an investor, what’s the most important lesson you’ve learned in your career?]
Fisher: Being anxious about buying today and selling tomorrow is the worst situation. It’s a strategy inclined towards "small wins". If you’re truly a long-term investor, your gains will be much greater.

One of my early clients used to say, "No one ever went broke taking profits," which is true but also unrealistic.

You won’t go broke taking profits, but the premise is that every move you make is profitable, which is impossible in investing because you will inevitably make mistakes.

Interestingly, I see many people who think they’re long-term investors, yet they continue to trade in and out of their favorite stocks without realizing it.