Kenneth L Fisher

Profile
Ken Fisher is the younger of Philip Fisher's two sons. After graduating from college in 1972, he worked for his father's investment firm for a year. He continued to accompany him on research visits until 1982, learning at first hand the art of interviewing management and employees.

But meanwhile, he set up and ran his own firm, based on a value investing philosophy very different to his father's. Fisher Jr preference was for "a stock that was dirt cheap because it was better than its bad image". Thus he has always bought in a similar contrarian spirit to that of his father. But he tends to sell once the reputation and the share price of his purchases have returned to normal levels.

He has also gained from his father a knowledge and understanding of the American technology sector, where he has scored many of his greatest successes. But he has been equally happy to own US and European stocks in traditional businesses like tobacco. He has set up an office in London to facilitate further investment in Europe.

Ken Fisher pioneered the Price to Sales Ratio, as documented in his 1984 book 'Super Stocks', and the small cap value category equity management and is a top-ranked market forecaster according to CXO Advisory Group.He has been published or written about in most US, British, and German financial newspapers and magazines, and his academic research has been showcased in many financial journals, including The Financial Analysts Journal and The Journal of Portfolio Management.

Long-term returns
Not known.

Biggest success
In early 1981, Ken Fisher bought around 1.5% of the shares of Verbatim Corporation, a producer of computer diskettes. The company had suffered widely-publicised problems with its products. The view on Wall Street was that it was poorly managed and financed, and likely to lose out to its rivals. But within 2 years, its shares had recovered from $3.50 to over $55 - a rise of 1,500% - at which point Fisher sold.

As chronicled in his monthly Forbes column, Fisher called the top of the tech bubble on March 6, 2000, and predicted the last 3 bear markets (’87, ’90, ‘01/’02).

Method and guidelines

First draw up a shortlist of Super Companies:

"A Super Company is a business which distinguishes itself because it can generate internally funded growth at well above average rates."

The main distinguishing features of a Super Company are:

Growth orientation - a management obsession with growth, which is also communicated to and shared with staff.
Marketing excellence - an ability to identify and satisfy customer needs.
An unfair advantage - such as being the lowest-cost producer in a sector
Creative personnel relations - especially listening to the ideas of staff
The best in financial controls - with leading-edge processes and systems.
Source: Super Stocks, K Fisher, 1984

Most companies go through product cycles, as sales of Product A start to sag before those from newly-introduced Product B have had time to grow. This often causes a 'glitch', i.e. sales fall, profits turn to losses and the share price plummets. This is the time to start considering buying the shares.

A product cycle

Lossmaking companies are hard to value. Solve this problem by using Price:Sales Ratios (PSRs):

PSR =Market capitalization ÷ Total sales

(e.g. £100m cap ÷ £200m sales = 0.5)

If you can identify a Super Company

going through a glitch
with a low PSR
with new products on the way, and hence a pickup in sales
- you may be looking at a Super Stock, and an opportunity to make 3-10 times your money in 3-5 years.

Follow these rules for buying and selling:

Rule 1: Try to avoid stocks with PSRs greater than 1.5. Don't consider buying any stock with a PSR greater than 3
Rule 2: Maybe look to seek Super Companies with PSRs of 0.75 or less
Rule 3: Consider selling stock in any Super Company when the PSR rises to between 3.0 and 6.0

Also sell when a company ceases to have the characteristics of a Super Company.

An additional check on Super Stocks is their Price:Research Ratio (PRR):

PRR = Market capitalization ÷ Research and development expenditure

(e.g. £100m cap ÷ £20m R&D = 5)

R&D is not necessarily a highly sophisticated activity. It can be quite basic product development work. The idea is to buy research that is likely to produce good profits in future while it is still cheap. To do this:

Rule 1: Don't ever buy a Super Company selling at a PRR greater than 15.
Rule 2: Find Super Companies with a PRR of 5 to 10.

Research suggests

Low PSRs work best with smaller companies. Very large companies naturally tend to have PSRs of 1.0 or less.
PSRs also work well with Super Companies in businesses unrelated to high technology.
Key sayings

"It is the glitch that makes Super Stocks out of Super Companies. If you learn how to price these correctly, you can reap the profits of a Super Stock - and get rich with the glitch."

"'Fortunes from failures' is a recurrent theme in financial history."

"The largest profits regularly result from buying stocks at low PSRs."

"As a company increases in size, it can look forward to the eventuality of its PSR being no higher than the highest PSRs for other companies of its future size."

Further information

Fisher Jr's first and most important book is Super Stocks, which describes his successes with bombed-out tech stocks in the early Eighties. His other books are Wall Street Waltz, 100 Minds That Made the Market and the NY Times Bestseller 'The Only Three Questions that Count'. You can keep up with his current thinking by reading his excellent column in Forbes magazine (he is the 4th longest running columnist in Forbes' 90-year history), or visit Fisher Investments website www.fi.com.

Fisher Investments have entered a partnership with publisher John Wiley & Sons to do the first ever publishing imprint by a money manager - Fisher Investments Press. The first title is due out late 2008, 'Ten Roads to Riches', by Ken Fisher.