Special Report

This is the fourth and the final instalment of Philip Fisher’s “Four Dimensions of Investing” series. The first three were discussed as part of Value Investing Almanack’s special reports (previous three issues). It’s recommended that you read the first three parts before reading this one.

The first three dimensions of conservative investment were essentially about the quality of the business itself. However, a great business becomes a great investment only when it’s acquired at a reasonable price. That means, without considering the price, the conservativeness of an investment process is still questionable. So, price is the fourth dimension of conservative investing.

Now, price alone doesn’t reveal much information. One needs to compare the price to something else to be able to make any sense out of it. That brings us to the price-earnings ratio (P/E).

A stock trading at P/E of 15 means that Mr. Market is willing to pay Rs. 15 for every rupee of earning the business generates. So, a corollary to this statement would be – P/E is roughly the number of years an investor will need to hold the stock to recover his or her original investment in the business. In the above example, it would take 15 years to recoup the initial investment.

P/E multiple is the most popular metric tracked by the investment community and perhaps the most misunderstood one too. The purpose of P/E isn’t just to capture two independent data points – price and earnings – into a single one. Price-earnings ratio is the barometer of Mr. Market’s expectations. In other words, P/E

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If I were to rank the books that changed my life, Poor Charlie’s Almanack would be right up there. Even after reading the book a few times, every time I turn its pages, I can feel a sense of wonder and amazement at the immense wisdom these pages carry.

Unlike what many people think, this book is not a ready reckoner on how to become a successful investor. In fact, it’s much more than that.

It’s a book on how to live a happy, sensible and rich life and in the process become a better thinker and investor. As you read through the book, some of Munger’s ideas will inspire you, and some will make you uncomfortable. But all will challenge you to think outside the box.

The third chapter of Poor Charlie’s Almanack captures “Mungerisms”, where Munger dispels hundreds of ideas on subjects ranging from life, investing, academia, financial engineering, accounting, money management business, and managements.

Here are a few of those ideas I have pulled out verbatim about being happy and getting rich. These ideas have inspired me for years, and I am sure these will inspire generations of people that read this book in the future.

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This is the third leg of the “Four Dimensions of Investing” series. The first two were discussed as part of Value Investing Almanac’s special reports (previous issues). It’s recommended that you read the first two parts before reading this.

Philip Fisher’s investment classic Common Stocks and Uncommon Profits ranks pretty close to Benjamin Graham’s The Intelligent Investor and for many years, it has been part of the curriculum in the investment class at the Stanford Graduate School of Business. Fisher is also known for his scuttlebutt approach. In the book’s introduction, Kenneth Fisher, Philip Fisher’s son, describes the Scuttlebutt approach thus –

Scuttlebutt means avoiding malarkey mills and seeking information from competitors, customers, and suppliers, all of whom have a vested interest in the target company, and few of whom have any reason to see the firm unrealistically. It means talking to the sales representatives of a company’s competitors, who inherently have a basis to see the target company negatively but typically don’t if the target is great. It means talking to the research people and management people of competitors as well. If all those folks see reality and strength in the target’s operations and respect it and even fear it, well, simply said, it isn’t Enron. You can count on it.

Today we’re going to look at the third dimension of conservative investing that Fisher has discussed in this lesser known book – Conservative Investors Sleep Well – about which Kenneth writes, “It is simply the best treatise I know on how to buy and hold growth stocks without taking much risk.

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Have you heard the famous parable of the Mexican fisherman? Perhaps you have in some form but let me rehash it for it’s such an eye-opener.

An American investment banker was taking a much-needed vacation in a small coastal Mexican village when a small boat with just one fisherman docked. The boat had several large, fresh fishes in it. The American complimented the Mexican on the quality of his fish and asked how long it took to catch them.

The Mexican replied, “Only a little while.” The American then asked why didn’t he stay out longer and catch more fish? The Mexican said he had enough to support his family’s need for the day.

“So, what do you do with the rest of your time?” asked the American.

“I sleep late, fish a little, play with my children, take siestas with my wife, Maria, stroll into the village each evening where I sip wine, and play guitar with my amigos. I have a full and busy life,” the fisherman replied.

The American scoffed, “I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat. With the proceeds from the bigger boat, you could buy several boats. Eventually, you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing, and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually New York City, where you will run your expanding enterprise.”

The Mexican fisherman asked, “But, how long will this all take?”

To which the American replied, “15-20 years.”

“But what then?” Asked the Mexican.

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What does it take to be the best? The best manager, the best website designer, the best boxer, the best marketer, or the best investor?

The off-the-cuff answer is 10,000 hours, popularized by the Malcolm Gladwell book Outliers As per Gladwell, 10,000 hours is what you need to become a renowned concert violinist, a brilliant mathematician, a chess grandmaster, a Pulitzer-winning novelist.

In other words, that’s 20 hours a week (or 3 hours a day) for 10 years. Well, you may look at this in one of two ways. You might get depressed looking at the 10,000 hours number and re-consider trying to be great in what you aspire to be. Or you may decide to sit down and start working away those hours.

But there are some serious problems with both of those approaches.

The problem with the first approach i.e., giving up, is that it assumes there’s nothing to be gained between hour 1 and hour 10,000.

“I will be nothing until I’ve mastered greatness,” you might say to yourself, “And the road is too hard and long, so what’s the point?”

The problem with the second approach i.e., settling in to grind the hours out, is that it matters ‘a lot’ what kind of practice you put in for 10,000 hours.

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