To The Moon

In order to discover "growth" companies that can grow for decades, Philip Fisher invented the "15 points" theory, which advocates that investors should go back to the real world to understand the company and uncover the "fundamental characteristics" of the company The "15 Points" theory is a way for investors to go back to the real world to understand companies and uncover their "fundamental characteristics.

Source: koniukhchaslau.com

According to Fisher, the 15 Essentials is an art rather than a skill, which requires the user to invest time in honing it on the one hand, and to be creative enough on the other. The importance of the 15 points is not in the questions themselves, but in the way of thinking and the perspective that these questions present, and they should be the beginning of the investor's thinking, not the end of the question.

Below are excerpts from the 15 points.

1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?

Many investors or people looking for cheap stocks are often keen on these types of one-time profits. However, for those who want to seek maximum return on investment for their money, this is not considered an attractive investment opportunity.

Even the most outstanding performing growth companies do not necessarily have higher turnover each year than in the previous one. The company's growth should not be judged by year-to-year changes, but rather as a comparative measure over several years. It is extremely important for investors to be able to correctly interpret the long-term sales curve of a particular company over time.

2. Does management have a determination to continue to develop products or processes that will still further increase total sales potential when the growth potentials of currently attractive product lines have largely been exploited?

If the original product line is expected to grow significantly in the next few years due to new demand, but there is no other business strategy or plan, it may bring investors a short-lived rich income, but it cannot provide a stable payout for 10 or 25 years, so such an investment project is not a sound way to pursue financial success.

3. How effective are the company’s research and development efforts in relation to its size?

A major breakthrough in new products and processes often comes not from a single genius, but from a well-trained and professional team whose members have different strengths. What this team needs more than anything else is leadership, responsible for coordinating members with different backgrounds in order to lead to a common goal.

Establishing a close tripartite relationship between research, production and sales is a very uncomplicated task for the management of a company. However, such a relationship must be established; otherwise, the end result of development may be a product design that fails to reduce production costs or a product that is successfully put into low-cost production but fails to achieve optimal sales results. Products developed in a poorly coordinated environment are often no match for more efficient competitors.

4. Does the company have an above-average sales organization?

The most basic activity of any business is sales; without sales, the business cannot survive. The benchmark of business success is to complete repetitive sales activities to satisfy customers. Outstanding production, sales and R&D can be said to be the three cornerstones of business success. The survival of a business depends on the soundness of all departments. Investment targets that have proven to be excellent have active distribution operations and consistently growing sales teams.

5. Does the company have a worthwhile profit margin?

From an investor's point of view, the only way sales can have concrete value is to bring about profit growth. If the sales growth over the years is not accompanied by profit growth, it is not considered an ideal investment target.

The first step in investigating the company's profits is to review the profit margin, that is, to determine how much operating profit is created by each dollar of sales revenue. Once calculated, the huge differences between companies are instantly visible, even in the same industry is no exception. Smaller companies often enjoy higher margin growth than stronger companies in the industry during exceptionally strong years. However, it must be remembered that once the boom turns, these profits will usually fall faster as well.

6. What is the company doing to maintain or improve profit margins?

It is not the past, but the future profitability that investors should pay attention to. In our era, profit margins seem to be under constant threat. Wage and salary costs are rising year after year, and tax rates are showing a steady increase. Against this backdrop, the trend of profit margin changes will look different from company to company. Some companies are more fortunate to be able to maintain their original profit margins by simply raising their selling prices.

There are other companies, including those within the same industry, that have succeeded in improving margins through far smarter means than price increases. Some companies' success comes from ongoing capital transformation or product engineering efforts. Investors considering buying shares should pay attention to how much ingenuity the company is betting on to find new ways to reduce costs and improve profitability.

7. Does the company have outstanding labor and personnel relations?

Most investors do not fully appreciate the benefits of good labor-management relations, but they are largely aware of the effects of poor labor-management relations. However, the difference in profitability between a company with good personnel relations, and a company with average relations, is extremely large and far greater than the cost loss directly caused by a strike.

If employees believe they are being treated ideally by the company, driven leaders in such a corporate atmosphere will be able to motivate employee productivity more. Moreover, training new employees requires considerable expenditure, so companies with high staff turnover will spend more than necessary, and well-managed companies can avoid such waste. If investors buy a company, a large part of its profits come from the squeeze so that wages are lower than the standard salary in the region where the company is located, such an investment will sooner or later go badly wrong.

8. Does the company have outstanding executive relations?

From the grassroots to senior staff believe that promotion relies on ability rather than partisanship, the family members in power will not be promoted to a higher rank than more talented people.

The company regularly reviews salary adjustments, so that senior executives believe that salary adjustment is their due, and do not need to take the initiative to ask for them. Management can't find suitable employees for promotion in the organization before they directly let new hires take higher positions.

9. Does the company have depth in its management?

The company will reach a certain size sooner or later, the company may not be able to grasp the opportunity of further development unless it starts to cultivate administrative talents of different ranks long time ago. If senior executives have to interfere with the daily operation of the company and do everything themselves, such a company is unlikely to be an attractive investment target.

Whether senior executives are always open to employee input and review it with an open mind, even if it is negative criticism of current company management. Companies need younger and younger managers, but companies that turn a blind eye to opinions like this are unlikely to produce young talent.

10. How good are the company’s cost analysis and accounting controls?

11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?

What is very important in some industries may sometimes not be so important or even dispensable in others. Several to maintain a competitive position, the company's production technology, sales and service organization, customer reputation, and knowledge of customer problems are all important factors and have far more influence than patent rights.

In fact, if a large company relies solely on patent protection to maintain profitability, for investors this should be considered a company's rather than a strong point. Numerous cases have proven time and again that a company's fundamental security comes from product engineering leadership, not patent rights.

12. Does the company have a short-range or long-range outlook in regard to profits?

The style of some companies is to strive for the maximum immediate profit possible. Some companies will deliberately reduce their immediate profits to build up their reputation and therefore get higher total profits in the long run.

If investors want to get the most profit, they should choose those companies that have real long-term profit prospects. Corporate culture is like people's character and values, some people are long-term, some people just can't control themselves to chase short-term interests.

13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth?

A wise investor should not buy common stock simply because it is cheap, but rather decide to buy it because the stock is expected to generate substantial income. There are only a few companies that can claim to fully or almost fully comply with the other fourteen points discussed here.

14. Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?

Even the best run companies occasionally experience sudden difficulties, shrinking profits, loss of demand for their products, etc. This is the nature of business. Even the most successful companies can't avoid such disappointments. If you can face it frankly, together with the ideal judgment, all this will only become one of the costs necessary to achieve final success; these failures in the process, show the company's strengths rather than weaknesses.

The management's attitude in facing these problems can be said to be a precious clue for investors. The management of a company that is used to reporting good news but not bad news is tight-lipped about all kinds of bad things, often for no more than the following reasons. The company may not be able to come up with any plan of action to deal with unexpected difficulties, or may already be in a state of panic. The company's management may also have a weak sense of responsibility and see no need to report such temporary emergency matters to investors. In any case, investors should avoid companies that try to conceal bad news.

15. Does the company have a management of unquestionable integrity?

The management of a company is far more likely to control the assets of the company than the shareholders. Even without breaking the law, there are countless ways that managers who actually control a company's business can privately funnel shareholders' interests to themselves and their family members. There is only one way for investors to truly protect themselves from these abusive practices - by investing only in companies run by management that have a strong sense of responsibility to shareholders and have a fiduciary duty.

Of the 15 points discussed so far, if a company is not ideal or even completely ineffective in any of them, but is exceptionally good at the rest, it is still worth considering. However, no matter how good the other aspects are, as long as the company's management does not have a strong trustee mission, investors should definitely stay away.

Source: GuruFocusCN