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Subject:  Comparing Fisher to GG (very long) Date:  10/1/2000  2:44 PM
Author:  xerohype Number:  4613 of 8767

Comparing Fisher's Principles to The Gorilla Game

by xerohype

A few weeks ago I had the pleasure to read Philip Fisher's Common Stocks and Uncommon Profits (heretofore referred to as CSUP). Fisher's investment philosophy fits very well with my philosophy of picking the very best companies and holding them for a long time. I think that as Gorilla Gamers we can use some of Fisher's principles as part of our arsenal for evaluating potential Gorillas. Fisher really studies the aspects of businesses that deal with good execution, especially analyzing the management of a company. A Gorilla such as PSFT that stumbles may have been recognized earlier through the application of Fisher's points. Microsoft has failed in some very key Fisher points, most notably when Bill Gates testified in the antitrust trial. A Gorilla that can't execute properly will be weakened, and a King that doesn't execute will be brought down in a big hurry by one or more Princes in its royalty game.

I recently posted a series of original articles in the KP board dealing with LTBH investing. In those articles I discuss LTBH elements from the Gorilla Game and also from Fisher's writings.

LTBH Series Introduction


LTBH II: Selecting LTBH stocks

LTBH III: Jumping into the Market

LTBH IV: Monitoring LTBH stocks

LTBH V: When to sell

There are many elements of Foolish investing that come from Fisher's philosophy:
Hold great companies for the long term
Invest for sustained growth and expanding possibilities.
Invest in companies with excellent management.

Let's take a look at Fisher's 15 Points:

The Fifteen Points to Look for Before Buying a Common Stock

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?

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

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

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

5. Does the company have a worthwhile profit margin?

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

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

8. Does the company have outstanding executive relations?

9. Does the company have depth to its management?

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 competitors?

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

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?

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

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

Rubic in Grape's Fisher Kings board posts these points along with the first paragraph of their discussion:

Mark (mlc11) does an outstanding job of summarizing Fisher's 15 points in these two great posts, that are part of an ongoing CSUP book club study by the graduates from the July RM Seminar:

Here are some examples of recent Fisher analyses of twosome companies we are familiar with:

JDSU by Phileo

NOK by TMFMycroft

The whole Fisher philosophy comes down to researching the heck out of a company before you buy it, picking the very best and sticking with them for the long term (as long as those fundamentals hold) watching your gains compound to big returns.

That really jives with my personal philosophy. In page 7 of CSUP he writes: "These opportunities did not require purchasing on a particular day at the bottom of a great panic. The shares of these companies were available year after year at prices that were to make this kind of profit possible."

Fisher believes in sustainable growth, and also in companies that invest heavily in R&D to sustain that growth. These are my kind of companies, ones that look toward the future and improve all our lives with their products.

The other key subjective criteria with Fisher is that of excellent management, one that looks toward the future, not to short term earnings numbers.

We'll come back to Fisher as soon as we review some of the main concepts from The Gorilla Game.


GG criteria (from GG FAQ):

1. Discontinuous innovation
2. Proprietary open architecture
3. High barriers to entry
4. High switching costs
5. Strong value chain formation
6. Tornado market exists or foreseeable

Ten rules of GG (from the book by Geoffrey A. Moore, Paul Johnson and Tom Kippola):

1. If the category is application software, begin buying in the bowling alley.

2. If the category is enabling hardware or software, begin buying after the tornado has formed.

3. Buy a basket comprising of all the gorilla candidates-usually at least two, sometimes three, and normally no more than four companies.

4. Hold gorilla stocks for the long term. Sell only on proven substitution threat.

5. Hold application software chimp stocks as long as they exhibit potential for further market expansion. Do not hold enabling-technology chimps.

6. Hold kings and princes lightly, selling individual stocks on a marketplace stumble and the category upon deceleration of hypergrowth.

7. Once it becomes clear to you that a company will never become a gorilla, sell its stock.

8. Money taken out of non-gorilla stocks should immediately be reinvested in the remaining gorilla candidates.

9. In a gorilla collision, hold your gorilla candidates until there has been a definitive outcome.

10. Most news has nothing to do with the gorilla game. Learn to ignore it.


mlc11 posts a variation of Fisher's points here:
This is from John Train's chapter on Fisher in The Money Masters:

Train feels that among Fisher's writings are probably about 20 points to examine, which can be grouped under 2 main categories:

Characteristics of an attractive business:

1. Growth from existing products and from new ones.
2. A high profit margin and return on capital, together with favorable trends for both.
3. Effective research.
4. A superior sales organization.
5. A leading industry position giving advantages of scale.
6. A valid "franchise"-proprietary products and services.

Qualities of management:

1. Integrity, implying conservative accounting
2. Accessibility
3. An orientation toward long-range results (if necessary at the expense of this quarter's bottom line) without equity dilution.
4. A recogntion of the pervasiveness of change
5. Excellent financial controls.
6. Multidisciplinary skills (where appropriate).
7. The special skills associated with particular industries.
8. Good personnel policies, including management training. He insists that a company must consciously and continually become a better place to work, from the executive level to union relations, and to be so perceived by its employees.

You may recognize a few of the attributes above in your favorite Gorillas. I'll just comment quickly on some of the similarities between the points above and GG.

The growth must be sustained, that means that the company has good growth from existing products and is looking for other markets in which to tornado in. High profit margins are a good measure of Gorilla power. Effective research to me means that you can take your products across the chasm to start new tornadoes (just like CSCO has done). Superior sales are key during the tornado phase of the technology product cycle, where the land grab for market share is key. Gorillas are known for having leading industry positions, they own that value chain through their proprietary architecture (their franchise so to speak) and the openness of that architecture makes it scalable. The qualities of management are key for great execution in all phases of the company's growth cycle.


Let me continue by discussing the similarities and differences between Fisher's points and GG by taking the Fifteen Points one by one. Let me caution that Fisher's points can apply to any company, while the GG is directed strictly towards technology. Of course, two of Fisher's favorite companies were Motorola (MOT) and Texas Instruments (TXN), leading technology companies to this day (though not Gorillas). The point of this exercise is not to meld the two philosophies, but to compare and contrast them in order to enhance our ability to find the best companies out there, the ones which will produce the outsized returns on our investment that we all crave and that Fisher was able to achieve during his long career as an investor.

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?

This is the whole point of GG, to pick companies that have sustainable growth because they control the rights to an open proprietary architecture. A gorilla company entering its period of hypergrowth (tornado) will have many years of fat profits as it goes into Main Street.

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

This actually goes towards points that Moore addresses in his new book, Living on the Fault Line (LOTFL). Mature Gorillas and Kings must be ready to enter new markets with the possibility of new tornadoes, but this is made difficult by corporate inertia. Discontinuous innovation is usually suppressed in most corporate cultures, and then a new hot startup emerges that can usurp the mature gorilla. For example, IBM taken down by MSFT and INTC. That's one of the reasons that CSCO has been so successful, it acquires companies in the pre-chasm stage and assimilates their technology (can you say Borg-like) to enter new tornadoes.

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

This point is very important for a technology company to maintain its lead. One can either develop techno