By 
Philip Fisher started his money management company in 1931 in San Francisco, California. Like Warren Buffett, this is a man who lived inside his head. His office was sparse, almost sterile. Brilliant beyond belief, Philip Fisher was a man who could pick growth stocks. He was an original player at Texas Instruments when it went public. He owned a company called FMC, whose value increased 100 times over the years. FMC stands for Food Machinery Corporation.
As you probably know, California is the largest producer of fruits and vegetables in the country. Even in the 1930s, farmers began to employ machinery to harvest crops. Philip Fisher visited companies, interviewed management, and did a thorough financial analysis. He loved superbly managed growth companies. He also wrote a book called “Common Stocks and Uncommon Gains,” which I’ve probably read half a dozen times, and you should read it as soon as you can to improve your understanding of the investment process. You can buy it in paperback for around $10 to $12 through Barnes & Noble or Amazon.com.
We want to share with you Philip Fisher’s use of what he called the “Scuttlebutt Method”, but first we want to distinguish his work from Warren Buffett’s MASTER, Benjamin Graham. Buffett’s Columbia University professor Benjamin Graham believed in buying stocks very cheaply. He would almost buy them for their cash value, if they had enough cash compared to the rest of the balance. Not interested in growing companies, Graham was interested in doing a comprehensive analysis of the balance sheet and income statement and finding what he called the “intrinsic value” of the company, which we will define and discuss when we talk about Graham. on another day
Graham never spoke to management, had no interest in speaking to competitors or any living human beings regarding stock purchases. He believed that the financial analysis of the company would give him all the information he needed to make a purchase decision. Warren Buffett believed that talking to the management team made all the difference. More than that, he believed that the executive team was the difference. Graham never believed in this philosophy.
Philip Fisher believed in the “gossip method.” Scuttlebutt is almost like gossip, but several steps higher. Gossip is usually a waste of time, but it depends on who gets it. Philip Fisher would talk to the competitors of a company in which he wanted to invest. He verbalized it in such a way that it seemed like an afterthought. He was trying to get truthful opinions from people in the industry, not directly from the company’s management team.
Let me illustrate Fisher’s method in my own world in two instances. When I was 20 years old, I worked for a world-renowned money manager. We got some great information about a company called STP Corporation in Indiana. They did an oil treatment that had started to hit the market. The treatment came in a can and you poured it into your car engine, and it was supposed to make your engine run better and last longer.
The fund manager and I headed to Indiana and interviewed the management team. This is something that Phil Fisher would also do. At noon we went to the local tavern across the street from the company plant. The guys who worked the assembly line came over for lunch and a couple of drinks and we struck up a conversation. We talked about everything except STP, the company across the street that everyone worked for. The workers left at the end of lunch and returned to work.
We spent the next few hours analyzing the company. At the end of the factory shift, the workers returned to the tavern to end the day. They saw us, and here’s the key point, we were all old friends now, as they had known each other for a couple of hours. This is where the scuttlebutt comes in. We all start talking about everything and anything. At one point, the money manager I was with said, “Hey, how’s it going at the factory?”
One of the workers replied, “You see that fence over there, we’re going to tear it down and take the train tracks to the factory, because we can’t meet the orders that come in.” The stock was selling for $15 a share, and our analysis hadn’t factored in a looming selloff. We knew we had a winner; We went back to New York and loaded up. It took 6 months to reach $69 per share.
This is how the scuttlebutt is used. Talk to people other than the management team and ask what’s going on. An action is a puzzle. You have to put the puzzle pieces together to see what the picture you are making looks like. Philip Fisher used this method to put together the image. Talk to the competitors, talk to the stores where the products are sold. Talk to people who know the company personally. What is your reputation? How is the service? Do the employees care about the company? Does the company care about its employees?
I have been involved with Home Depot since the private offering a year before we went public at Bear Stearns in New York City. I still go to Home Depot at least once a week to see what’s going on. I’ve seen the customer experience change, and not for the better either. I’ve talked to the employees. I’ve seen how the halls get crowded. I have noticed an increase in the number of products that are priceless. These things are telling you something. You walk into a Home Depot and a Lowe’s, and you know why one stock has skyrocketed in value in the last two years and the other has languished.
In our work at StocksAtBottom.com, we use the rumor method all the time. We think it’s very additive to the fundamental analysis we do when looking at the value of a stock, what it’s selling for and where it should be over a period of time. With this method we were able to buy Tyco when it crashed and double our money. We were able to get into the Walt Disney Company when the Bass brothers in Texas were selling and double our money. We also used it to identify McDonalds as a recovery candidate when the stock was $12 a share. Now it’s several times that amount.