What Philip Arthur Fisher Taught Warren Buffett About Investing

This article is an excerpt from the Shortform book guide to "The Warren Buffett Way" by Robert G. Hagstrom. Shortform has the world's best summaries and analyses of books you should be reading.

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Beyond its financial statements, what indicates a company’s health? How can you evaluate the subjective qualities of a company?

If you learn investing from Warren Buffett, you indirectly learn a vital principle from Philip Arthur Fisher. Fisher taught that, when you consider whether to invest in a company, you must look beyond its quantitative factors; you must also assess its qualitative factors such as its potential and management.

Keep reading to discover what Warren Buffett learned from Philip Arthur Fisher.

Philip Arthur Fisher & Warren Buffett

Buffett learned a numbers-driven approach to evaluating companies from his mentor Benjamin Graham. But, he learned to be sensitive to the qualitative factors that underlie promising companies from Philip Arthur Fisher.

Fisher held that the more subjective aspects of a company could provide valuable investing guidance. According to Hagstrom, Buffett specifically embraced Fisher’s views on the importance of assessing a company’s potential and management when deciding whether to invest.

Hagstrom points out that Buffett was persuaded to embrace Fisher’s views by Charlie Munger, the current vice chairman of Buffett’s company, Berkshire Hathaway, and a longstanding friend. However, because we’re concerned with Buffett’s intellectual influences rather than personal influences, we’ll be focusing on Fisher’s views in particular.

(Shortform note: Fisher is best known for his seminal work Common Stocks and Uncommon Profits, in which he introduced his “scuttlebutt method” of performing due diligence by speaking with as many people associated with the company as possible rather than only poring over financial reports. In so doing, he suggested that you can develop an edge over the average investor who isn’t willing to do that level of analysis.)

Assessing a Company’s Potential

Hagstrom suggests that Fisher defines a company’s potential as its ability to significantly increase its intrinsic value over the long term. Even if such companies aren’t currently undervalued—as Graham would desire in an investment—Fisher reasons that their share prices are likely to drastically increase over the long term because share price roughly tracks intrinsic value. This prospect makes them attractive investments.

According to Hagstrom, Fisher used two proxies to determine potential: increasing sales and increasing profits. On the one hand, Fisher thought that growth in sales indicated a strong research and development team, as a company’s sales won’t easily increase if it doesn’t continue refining its product. But, Fisher also recognized that increasing sales means nothing without increasing profit since profit most closely correlates with shareholder value. So, he also sought companies that relentlessly cut costs, as cutting costs translates directly to greater profit margins.

(Shortform note: In addition to sales and profits, other experts point out that a company’s potential is partially constrained by its industry. For instance, companies that are in burgeoning industries–like the tech industry in the late twentieth century–are more likely to have high potential, whereas those in languishing industries–like the newspaper industry–will likely have less growth potential.)

Assessing a Company’s Management

Along with potential, Hagstrom notes that Fisher valued honest management since companies with solid business models can nonetheless flounder under shoddy management. After all, self-centered executives are liable to act out of self-interest rather than the interests of the company; for instance, they might pay themselves an outsized salary that cuts into company profits. Similarly, management teams that mistreat their employees can foster resentment which, ultimately, can make the company less successful.

(Shortform note: In publicly traded companies, shareholders themselves have the authority to indirectly appoint new management, as they’re allowed to elect a board of directors that can vote to remove the CEO. However, some experts note that this can unfairly target management, as shareholders often take out their frustrations on CEOs whenever the company experiences any turbulence.)

What Philip Arthur Fisher Taught Warren Buffett About Investing