The One Good Reason Why David Sokol Is Clean (NYSE: BRK; LZ)

Even if it is widely discussed that the former Berkshire Hathaway (NYSE BRK.A, BRK.B) executive David Sokol acted in an unethical manner in the Lubrizol Corporation (NYSE: LZ) deal, people seem to forget one important matter.

A lot of the buzz is generated by the fact that Sokol took his position after that meeting with investment bankers at Citigroup on December 13th 2010. those who are in such a ruch to throw accusations at Sokol seemed to miss that there were 18 companies proposed to David Sokol on that day.

Even if he acknowledged that Lubrizol was the most interesting company out of that list. There is no way he could have known in advance which of those 18 companies Berkshire Hathaway's Chairman Warren Buffet would come to chose in the end. It is also interesting to note that Buffet was pretty cold about buying Lubrizol until near the end of January 2011.

A way to know that Sokol acted in a way to profit from an acquisition by Berkshire Hathaway would have been for him to buy all of the 18 companies. One must remember that before the acquisition, as he said in an interview on CNBC, David Sokol purchased those Lubrizol stocks for his own account because he thought that the company had a good long term potential. He also mentioned that he trades pretty rarely. That is also the same reason why he was pressing for a deal between Berkshire Hathaway and Lubrizol. He was just acting in the interest of Berkshire Hathaway shareholders according to his duties. 

This all just seems to be a matter of bad timing and probably bad judgement about the perception of those moves from David Sokol if we take into account that his portfolio turnover is dismal on a yearly basis.

On the right is a timeline of the deal between Berkshire Hathaway and Lubrizol from an article provided by the Wall Street Journal.

Buffett's Successor Revealed (NYSE: BRK.A, BRK.B)

For those who have already had the opportunity to get through the 2010 Letter to Shareholders by Warren Buffett, it is obvious that a plan to his succession is clearly taking shape. It has made sense for him that there will have to be a split for his position in the coming years and there has been great mystery as to who will be in charge of investment decisions when Buffett retires.

As he had already officially revealed in October 2010, it seems that the position of chief investment officer will be split into many persons and the first person to be nominated for the task is former hedge fund manager Todd Anthony Combs. As Berkshire Hathaway revealed results for 2010, he went into great lengths to explain his choice of manager, as this person is relatively unknown to the financial markets.

Here is what Warren Buffet had to say about Todd Combs in his 2010 Letter:

Four years ago, I told you that we needed to add one or more younger investment managers to carry on when Charlie, Lou and I weren’t around. At that time we had multiple outstanding candidates immediately available for my CEO job (as we do now), but we did not have backup in the investment area. 

It’s easy to identify many investment managers with great recent records. But past results, though important, do not suffice when prospective performance is being judged. How the record has been achieved is crucial, as is the  manager’s understanding of – and sensitivity to – risk (which in no way should be measured by beta, the choice of too many academics). In respect to the risk criterion, we were looking for someone with a hard-to-evaluate skill: the ability to anticipate the effects of economic scenarios not previously observed. Finally, we wanted someone who would regard working for Berkshire as far more than a job.

When Charlie and I met Todd Combs, we knew he fit our requirements. Todd, as was the case with Lou, will be paid a salary plus a contingent payment based on his performance relative to the S&P. We have arrangements in place for deferrals and carryforwards that will prevent see-saw performance being met by undeserved payments. The hedge-fund world has witnessed some terrible behavior by general partners who have received huge payouts on the upside and who then, when bad results occurred, have walked away rich, with their limited partners losing back their earlier gains. Sometimes these same general partners thereafter quickly started another fund so that they could immediately participate in future profits without having to overcome their past losses. Investors who put money with such managers should be labeled patsies, not partners.

As long as I am CEO, I will continue to manage the great majority of Berkshire’s holdings, both bonds and equities. Todd initially will manage funds in the range of one to three billion dollars, an amount he can reset annually. His focus will be equities but he is not restricted to that form of investment. (Fund consultants like to require style boxes such as “long-short,” “macro,” “international equities.” At Berkshire our only style box is “smart.”)

Over time, we may add one or two investment managers if we find the right individuals. Should we do that, we will probably have 80% of each manager’s performance compensation be dependent on his or her own portfolio and 20% on that of the other manager(s). We want a compensation system that pays off big for individual success but that also fosters cooperation, not competition. 

When Charlie and I are no longer around, our investment manager(s) will have responsibility for the entire portfolio in a manner then set by the CEO and Board of Directors. Because good investors bring a useful perspective to the purchase of businesses, we would expect them to be consulted – but not to have a vote – on the wisdom of possible acquisitions. In the end, of course, the Board will make the call on any major acquisition.

One footnote: When we issued a press release about Todd’s joining us, a number of commentators pointed out that he was “little-known” and expressed puzzlement that we didn’t seek a “big-name.” I wonder how many of them would have known of Lou in 1979, Ajit in 1985, or, for that matter, Charlie in 1959. Our goal was to find a 2-year-old Secretariat, not a 10-year-old Seabiscuit. (Whoops – that may not be the smartest metaphor for an 80-year-old CEO to use.)

He hints that there will probably other managers added to the team and even a compensation structure already in place. The investment results of Berkshire Hathaway's equity portfolio will therefore present the performance of Todd Combs.


Another interesting part of his letter is the update on the equity put contracts that Berkshire Hathaway carries in his books.


You can access his full letter here.

Jim Chuong's 2010 Letter to Partners

A couple weeks ago, I came out with an article depicting the performance of the stock portfolio of Canadian value investor Jim Chuong for the past decade. With a lot of humility, he attributed his outstanding 2010 57% performance to just sitting there and watching his portfolio rise. Here are of his own words:

The return I achieved in 2010 is not repeatable, should not be considered a reflection of my investment skill and, if anything, foreshadows a very bad 2011 for me.

In fact, in 2010, aside from picking up a small handful of shares in The Buckle, my activity was non-existent. Readers should expect inactivity in the face of rising prices. For me, it makes no sense to buy at increasingly higher prices. In fact, it appears more profitable to start looking in areas where prices are declining or, even better, have collapsed.

This year my letter will be short because nothing happened – everything rose in price and I sat dumbfounded - gawking at all the businesses that I was suddenly priced out of.

He his very modest indeed and as many will have guessed, his task has not been so easy. In his 2010 letter, he explains his views about investing and the method he uses to find attractive stocks for his portfolio.

He talks about the effect of diversification and asset allocation. He shines the light on the reason why many companies decided ti distribute a special dividend in 2010. As a value investor he shuns companies that have debt on their balance sheets and he gives a lengthy argument to support his view.

He also candidly compares poker to investing in a very light way. And reminds us of the effect of taxes on different ways to earns money, ranging from earned income to dividends.

He also insists on the importance of retirement and what it implies for any person facing the dilemma of immediate gratification versus long term wealth. He thankfully ends with a description of the performance of his portfolio, and the companies in it.

Here are his holdings at the end of 2010:

Company	% of Portfolio
Fossil (NASDAQ: FOSL) K-Swiss (NASDAQ: KSWS)	49.5% 14.6%
The Buckle (NYSE: BKE)	12.0%
Columbia Sportswear (NASDAQ: COLM)	8.8%
American Eagle (NYSE: AEO)	6.6%
Berkshire Hathaway (NYSE: BRK.B)	6.4%
Cash	2.1%
General Employment (AMEX: JOB)	0.1%

You can access his full letter and his insights right on his website.

Jim Chuong Investing Performance in 2010

A little over a year ago, I wrote an article about a young canadian investor who had been showcasing outstanding returns over the past decade. It seems than he fared very well since the last time I wrote about him.

As stated previously, Jim Chuong started seriously managing funds in 1998 with a staggering 68% return for the period. His objective was to beat the S&P 500 index and he has managed to do it 9 times since then. An investor who started with 10 000$ invested with him at the beginning of his career would have found himself with  a whooping sum of more than 66 000$ at the end of 2010.

As can bee seen in the chart below, his fund got hit in 2008, as many did, but Jim Chuong still managed to generate positive returns even for investors who got in at the beginning of 2008.

For those who have not done it yet, his website contains the annual letters he provides to explain his performance for the year. They are very insightful as he even adds explanations about the topics that prevailed during the year. He has not yet completed the 2010 letter but he will post it shortly. One can also find the rare copies available on the internet of the partnership letters of Warren Buffett and Benjamin Graham.

FairFax Financial Spots a Deal

Fairfax spots a deal - The Globe and Mail

After months of issuing preferred shares and debentures, the insurance giant Fairfax Financial Holdings Limited is initiating one of the largest share buybacks of it's history. At yesterday's closing price, it would be valued at over $600 million. Over the next 12 months, the company will buy close to 1.6 million shares, almost 10% of the current float. This means that the average daily volume of the company will be greatly influenced by the actions of the company.

The company's Chairman and CEO, Vivan Prem Watsa, has developed a reputation of value investor over the past 20 years. Having the company dedicate more than half a billion dollars to buying it's own shares instead of increase it's current investments is a clear sign that the FFH is currently trading under or close to it's book value. This is an hypothesis that will be confirmed on the next quarterly filing of the holding company. Note also that this move will greatly increase the seize of the CEO's control stake in the company, which is already pretty close to 50%.

However, before buying the stock, one should consider taking this news with care, as the final amount of the operation is not yet known. Some companies will issue such statements to stimulate a downbeat stock price. Fairfax is up a mere 2% for the year, this is therefore another possibility. If the transaction is completely filled, the remaining shareholders will be greatly rewarded as the company will showcase higher EPS.

This might not be a good time to buy the company's stock, but for those who already own it, it is definitely a great idea to hold on to it.

Full disclosure: Long FFH.TO

The "Equity Puts" Bet of Berkshire Hathaway

The 2008 and Q1 2009 reports of Berkshire Hathaway (NYSE: BRK.A, NYSE:BRK.B) has showcased many of the downsides of investing in derivatives. Many things remain unclear for most people so I thought it would be important to transmit the message, as clearly as Warren Buffett wanted it to be, about the phenomenal derivative position currently held by Berkshire.

I provide here an excerpt of Buffett’s most recent letter to shareholders, in the 2008 annual report of Berkshire Hathaway, where he explains why he got into that derivative position and explains what are his plans regarding it. I chose to show it because there is now way I could have but it in better words than he did. It is pretty hefty, mostly due to the amount of details regarding how equity puts work:

Considering the ruin I’ve pictured, you may wonder why Berkshire is a party to 251 derivatives contracts (other than those used for operational purposes at MidAmerican and the few left over at GenRe). The answer is simple: I believe each contract we own was mispriced at inception, sometimes dramatically so. I both initiated these positions and monitor them, a set of responsibilities consistent with my belief that the CEO of any large financial organization must be the Chief Risk Officer as well. If we lose money on our derivatives, it will be my fault.

Our derivatives dealings require our counterparties to make payments to us when contracts are initiated. Berkshire therefore always holds the money, which leaves us assuming no meaningful counterparty risk. As of yearend, the payments made to us less losses we have paid – our derivatives “float,” so to speak – totaled $8.1 billion. This float is similar to insurance float: If we break even on an underlying transaction, we will have enjoyed the use of free money for a long time. Our expectation, though it is far from a sure thing, is that we will do better than break even and that the substantial investment income we earn on the funds will be frosting on the cake.

Only a small percentage of our contracts call for any posting of collateral when the market moves against us. Even under the chaotic conditions existing in last year’s fourth quarter, we had to post less than 1% of our securities portfolio. (When we post collateral, we deposit it with third parties, meanwhile retaining the investment earnings on the deposited securities.) In our 2002 annual report, we warned of the lethal threat that posting requirements create, real-life illustrations of which we witnessed last year at a variety of financial institutions (and, for that matter, at Constellation Energy, which was within hours of bankruptcy when MidAmerican arrived to effect a rescue).

Our contracts fall into four major categories. With apologies to those who are not fascinated by financial instruments, I will explain them in excruciating detail.

• We have added modestly to the “equity put” portfolio I described in last year’s report. Some of our contracts come due in 15 years, others in 20. We must make a payment to our counterparty at maturity if the reference index to which the put is tied is then below what it was at the inception of the contract. Neither party can elect to settle early; it’s only the price on the final day that counts.

To illustrate, we might sell a $1 billion 15-year put contract on the S&P 500 when that index is at, say, 1300. If the index is at 1170 – down 10% – on the day of maturity, we would pay $100 million. If it is above 1300, we owe nothing. For us to lose $1 billion, the index would have to go to zero. In the meantime, the sale of the put would have delivered us a premium – perhaps $100 million to $150 million – that we would be free to invest as we wish.

Our put contracts total $37.1 billion (at current exchange rates) and are spread among four major indices: the S&P 500 in the U.S., the FTSE 100 in the U.K., the Euro Stoxx 50 in Europe, and the Nikkei 225 in Japan. Our first contract comes due on September 9, 2019 and our last on January 24,2028. We have received premiums of $4.9 billion, money we have invested. We, meanwhile, have paid nothing, since all expiration dates are far in the future. Nonetheless, we have used Black-Scholes valuation methods to record a yearend liability of $10 billion, an amount that will change on every reporting date. The two financial items – this estimated loss of $10 billion minus the $4.9 billion in premiums we have received – means that we have so far reported a mark-to-market loss of $5.1 billion from these contracts.

We endorse mark-to-market accounting. I will explain later, however, why I believe the Black-Scholes formula, even though it is the standard for establishing the dollar liability for options, produces strange results when the long-term variety are being valued.

One point about our contracts that is sometimes not understood: For us to lose the full $37.1 billion we have at risk, all stocks in all four indices would have to go to zero on their various termination dates. If, however – as an example – all indices fell 25% from their value at the inception of each contract, and foreign-exchange rates remained as they are today, we would owe about $9 billion, payable between 2019 and 2028. Between the inception of the contract and those dates, we would have held the $4.9 billion premium and earned investment income on it.

• The second category we described in last year’s report concerns derivatives requiring us to pay when credit losses occur at companies that are included in various high-yield indices. Our standard contract covers a five-year period and involves 100 companies. We modestly expanded our position last year in this category. But, of course, the contracts on the books at the end of 2007 moved one year closer to their maturity. Overall, our contracts now have an average life of 2 1/3 years, with the first expiration due to occur on September 20, 2009 and the last on December 20, 2013.

By yearend we had received premiums of $3.4 billion on these contracts and paid losses of $542 million. Using mark-to-market principles, we also set up a liability for future losses that at yearend totaled $3.0 billion. Thus we had to that point recorded a loss of about $100 million, derived from our $3.5 billion total in paid and estimated future losses minus the $3.4 billion of premiums we received. In our quarterly reports, however, the amount of gain or loss has swung wildly from a profit of $327 million in the second quarter of 2008 to a loss of $693 million in the fourth quarter of 2008.

Surprisingly, we made payments on these contracts of only $97 million last year, far below the estimate I used when I decided to enter into them. This year, however, losses have accelerated sharply with the mushrooming of large bankruptcies. In last year’s letter, I told you I expected these contracts to show a profit at expiration. Now, with the recession deepening at a rapid rate, the possibility of an eventual loss has increased. Whatever the result, I will keep you posted.

• In 2008 we began to write “credit default swaps” on individual companies. This is simply credit insurance, similar to what we write in BHAC, except that here we bear the credit risk of corporations rather than of tax-exempt issuers.

If, say, the XYZ company goes bankrupt, and we have written a $100 million contract, we are obligated to pay an amount that reflects the shrinkage in value of a comparable amount of XYZ’s debt. (If, for example, the company’s bonds are selling for 30 after default, we would owe $70 million.) For the typical contract, we receive quarterly payments for five years, after which our insurance expires.

At yearend we had written $4 billion of contracts covering 42 corporations, for which we receive annual premiums of $93 million. This is the only derivatives business we write that has any counterparty risk; the party that buys the contract from us must be good for the quarterly premiums it will owe us over the five years. We are unlikely to expand this business to any extent because most buyers of this protection now insist that the seller post collateral, and we will not enter into such an arrangement.

• At the request of our customers, we write a few tax-exempt bond insurance contracts that are similar to those written at BHAC, but that are structured as derivatives. The only meaningful difference between the two contracts is that mark-to-market accounting is required for derivatives whereas standard accrual accounting is required at BHAC.

But this difference can produce some strange results. The bonds covered – in effect, insured – by these derivatives are largely general obligations of states, and we feel good about them. At yearend, however, mark-to-market accounting required us to record a loss of $631 million on these derivatives contracts. Had we instead insured the same bonds at the same price in BHAC, and used the accrual accounting required at insurance companies, we would have recorded a small profit for the year. The two methods by which we insure the bonds will eventually produce the same accounting result. In the short term, however, the variance in reported profits can be substantial.

We have told you before that our derivative contracts, subject as they are to mark-to-market accounting, will produce wild swings in the earnings we report. The ups and downs neither cheer nor bother Charlie and me. Indeed, the “downs” can be helpful in that they give us an opportunity to expand a position on favorable terms. I hope this explanation of our dealings will lead you to think similarly.

You can also read the full 2008 annual report of Berkshire Hathaway (NYSE: BRK.A, NYSE:BRK.B) on the annual report section of the company’s website.

Full Disclosure: The author does not have a position in BRK.A or BRK.B.

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Warren Buffett and Taxes

Every year, in the month of April, Forbes magazine comes with the list of the billionaires of the planet ranked by wealth in UDS. Warren Buffett came number one in 2008, but for 2009 his friend Bill Gates came back to claim his number one spot of the past 13 years before 2008. It has always amazed me that even for the amount of wealth those two persons own, they are the most avid fighter for an equal distribution of wealth in society, starting with the fairness of the tax system.

Warren Buffett and Bill Gates are known for the more liberal opinions, and it surprised me for a while, since I would expect the richest guys on the planet to be conservatives and protective of their money. I fell on an interview of Buffett explaining his stance on taxes and comparing the lack of fairness between his own tax rate and, for example, the tax rate paid by his secretary.

I also saw a video from the senate finance committee hearing on November 14th 2007 when Warren Buffet showed up to share some of his impressions of about the current tax system and his proposition on what could be change to make taxation more equal.

From these videos, it is good thing to have such a successful and socially responsible investor as Warren Buffett representing value investing. He certainly gives capitalism a good name.

Investment philosophies

Since value investing came to my knowledge over a year ago, i have had the opportunity to read numerous books and publications about the subject from various authors. From Ben Graham to Warren Buffett and closer to Jim Chuoung and Stephen Jarislowsky, I have gained a lot of information and concepts from each of those men. One of the most crucial points I came to understand is that each investor, and mostly in the case of value investors, needs to have some of investment philosophy based on firmly held principles.

Such a philosophy takes time to acquire and being in the process of developing mine for about a year allowed me to understand to a deeper extent what each of the investment gurus are talking about. I have learned a lot by looking at the investment principles of some of them and I will expose those of Philip Fisher and Stephen Jarislowsky.

Starting with Fisher, I understood his principles after reading his most famous book entitled Common Stocks and Uncommon Profits that was first published in 1958 I recently talked about him in this article, but it is important to explain his investment principles in further detail.

He suggested to buy companies that have disciplined plans for achieving dramatic long-range profit growth and have inherent qualities making it difficult for newcomers to share in that growth. What we see today as barriers to entry.

He also said to buy those companies when they are out of favour. I guess it is from Fisher that Buffett got his quote: “Be fearful when others are greedy and be greedy when others are fearful”. He also suggested to hold a stock until either: there has been a fundamental change in its nature (e.g., big management changes), it has grown to a point where it no longer will be growing faster than the economy as a whole or, it is trading at a high P/E ratio because of mass market speculation only.

Philip Fisher also advised keeping the size of a portfolio at 20 companies or less and to never accept blindly whatever may be the dominant current opinion in the financial community; however warning that nor should investors reject the prevailing view just for the sake of being contrary. He finally insisted on the fact that serious investors had to understand that success greatly depends on a combination of hard work, intelligence, and honesty.

Stephen Jarislowsky, put himself on the public scene more recently when he published in 2005 his book called The Investment Zoo: Taming the Bulls and the Bears. The astonishing fact is that his writings are rarely about the precise subject of investing but tend to talk about the wider economy and his disagreement with the ways of the North American financial services industry. But I manages to find some interesting notes about what he looks for when investing in a company.

Stephen Jarislowsky talks about wait at least 6 months after the official announcements of a recession to make purchases on the open market and justifies that during that period, mutual funds, which are big players in the stock market, are dumping their shares to satisfy the redemption requests of their clients. He also notes that, at the same time, panicked investors pull their money out of the market and sit on the sidelines waiting for signs of an early bull run.

He does not invest in what he considers to be failing industries. Jarislowsky means by that industries that have not created value for their investors overall: citing commercial flight and car manufacturing. The events of the last decade sure show him right.

But as for many value investors, the most important think he looks for in a company is able and honest management, no matter the operating performance of the company. Stephen wants to know that the managers of companies he invests in are shareholder oriented above all.

The investment principles are very insightful and I hope they will put you on a road to learn more about value investing and the outstanding results showcased by those who follow it.

Who is that Benjamin Graham Anyways?

It is pretty obvious that this page focuses on Ben Graham and the influence he has had on the investing community. Any person claiming to be a value investor knows the fundamentals of his approach and any person doing transaction in the stock market have heard about him as the Dean of Wall Street. More precisely, with his colleague David Dodd, he initiated the idea of fundamental analysis and the value investing philosophy.

He started his career as a teacher at the Columbia Business School teaching about investing. The Great Crash of 1929 severely affected the performance of the Graham-Newman Partnership, which he had started a couple years ago with his partner Jerry Newman. Disappointed whit those results he pondered for years on a way to invest in the stock market but rationally and changed his teaching methods. His assistant, the professor David Dodd was mostly taking notes during those classes. In 1934, they decided to publish Security Analysis. With a staggering 770 pages, it laid the foundation for what would later be called value investing and since then, it has been considered by many investors to be a book that cannot be passed by. In 1949 he published the Intelligent Investor, which was a lighter version of Security Analysis, for some of the concepts had to be explained in further details. It is also from The Intelligent Investor that he publicized the character of Mr. Market.

The most fundamental statement he initiated in his book is that stocks were not just pieces of paper that went up and down in value, in responses to the forces of supply and demand; he stated that they were first and foremost parts of ownership in a business. Benjamin Graham insisted on the fact that if an investor comes to an approximation of the intrinsic value of the company per share and bought those share at a discount the their value, in the long haul, the market would converge to the fair value of those stocks, regardless of short term price fluctuations. And to date, many people still seem to ignore that because value investing is not the mainstream methodology.

Ben Graham also believed that there was a distinction between speculation and investment by a short statement with huge implication for the long standing definition of an investor. On page 18 of the fourth edition, it reads: “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” In other words, fundamental analysis is crucial of an investor.

Those assumptions lead to think that investing in the stock market is a time consuming activity to take seriously; they imply going through the financial statements of interesting companies and doing your own research.

The teachings of Benjamin Graham have impacted his students and associates in a deep way. Warren Buffett is the one with the most impressive track record. The late William J. Ruane of the Sequoia Fund was also greatly influenced by his teachings and those are just a few of the great investors to have taken their framework from Ben Graham. Value investing is a very interesting way of looking at stocks and I greatly anticipate the results of its use, in the coming years, on my portfolio.

An Investor with a bright future

Value investing is a discipline that is thoroughly practiced by very few money managers and the fact the performance of any given fund is measured quarterly while value investing is an approach that is long-term oriented.

In Canada, I have heard of very few “to the core” value investors. The most infamous of them is certainly Stephen A. Jarislowsky, who has been involved in money management for almost half a century, providing his clients with outstanding returns and at the same time becoming one of the few billionaires of the country.

The second notable value investor in Canada is Vivan Prem Watsa, the chairman and CEO of Fairfax Financial, a company I have talked about in another article that can be found here and that is advantageously positioned to make a lot of money on investment income in the coming years!

Curiosity is a big plus when you want to use the value investing method and as I was going through a MoneySense magazine in 2007; I fell on an article talking about a young money manager in Toronto, named Jim Chuong, who had accomplished a compounded average rate or return of roughly 20% on his investments! I decided to take a look at his website and I was simply astonished by the amount of value investing wisdom that was available there. For the whole period he has been investing, he wrote an annual letter to his partners... pretty much like Warren Buffett did in his early days. The following graph shows how 10000$ invested with him when he began investing in 1997 would have fared compared to the S&P500:



As you can see, he did not achieve such results by sheer luck. His performance has been affected by the broad market meltdown of 2008, but it is normal, since very few managers showed positive returns for the year. If you want to learn more about him and his strategies, his website www.ticonline.com

Fisher’s Growth investing

In the investment world, value investing and growth investing seem to be perceived as opposites, but I often wonder why. I recently fell on a book by Philip Arthur Fisher, who is considered by many to be the father of growth investing and has been one of the two persons to have inspired famed investor Warren buffet, the other one being the father of value investing, Benjamin Graham. In the 1950’s he wrote a phenomenal book called Common Stocks and Uncommon Profits. The book was, and still is, a very comprehensive guide to the way he went at discovering companies in the stock market and how an individual investor could do the same. A rational investor will gain a lot by getting acquainted with his investment principles.

From what I understood, Phil Fisher wanted to “buy companies that had disciplined plans for achieving dramatic long-range profit growth and had inherent qualities making it difficult for newcomers to share in that growth”. This might seem pretty fuzzy as a concept but if we take a more precise look at what he meant, it comes clearer that the differences between value investing and growth investing, at their core, are not many.

I first understood where Warren Buffett got his tendency to keep companies that he liked for a long time, it is pure Fisher! There are only three reasons that would have caused Phil fisher to sell the stock of a company.

1. There has been a fundamental change in its nature (e.g., big management changes),
2. It has grown to a point where it no longer will be growing faster than the economy as a whole or,
3. It is trading at a very high P/E ratio because of mass market speculation.

If I am not mistaken, those events usually take a while before happening, a lot more than a couple days, probably years. A good example of his habit not to sell is his position in Motorola; he bought common stock of the company in 1955 and kept it until his death in 2004. In my view, that is the closest to forever.

I also noticed that he was keen to keep his portfolio at no more than 20 companies, which is a lot less than the number of companies in the average mutual fund. I also noted the tint of a prudent contrarian investor in him, since he would never accept blindly whatever may be the dominant current opinion in the financial community. But he also notes that he did not reject the prevailing view just for the sake of being contrary.

His process might seem complicated and unclear, but that is only because his philosophy can’t be summarized on a single page. For those interested in acquiring his book, you will find the necessary details here. In my point of view, what is good for Warren Buffett is very likely good for me too.