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First, I finally ordered THE book and can't wait to have it in my li'l hands.

In the meantime, I received a newsletter/teaser-to-buy-more from Michael Murphy (5 High-Tech Stocks Every Investor Must Own) that I got from a mail-out in Kiplinger's.

Anyways, Mr. Murphy had an interesting idea that I wanted to bounce off the experts in here:

His "Growth Flow" strategy looks at tech companies and equals earnings per share plus R&D per share. Specifically, he wants to "own companies that are reinvesting a good chunk of their profits in Research & Development for the future... As a rule of thumb, look for R&D spending equivalent to at least 7% of sales."


Any thoughts on this? It sounds like a good thing to look at. But, where do you find a companies R&D figures? Is that in the Balance Sheet or where?

jle
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Two things:

a) In Phil Fisher's classic (and wonderful) book "Common Stocks and Uncommon Profits," he reccommended a similar approach, although I believe he used R&D/Share, not (R&D+E)/Share. This brought him to two little-known companies called Texas Instruments and Motorola.

b) Obviously, this metric needs to be used carefully, as it can obscure economic reality. For instance, it's widely felt that Cisco's acquisition strategy is a way to outsource R&D. How do you effectively capture that? (Just costing the price paid won't work). Also, this might (might) penalize companies who are simply very effective at R&D. I would suggest that a more thorough (read: hard) approach would be to look at R&D/share and understand why it's what it is, and whether it's the appropriate level.

Great idea! (And if you haven't read Fisher, I'd reccommend it. Buffett counts him as a huge influence)

best,
Ethan
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