Key Insights
1. Look for healthy margins
As with many value investors, Fisher believed that companies with long-term profit strategies are more likely to deliver sustainable results. He cautioned investors to look for healthy margins across extended timeframes, such as a series of years. Ideally, these companies would also have the best margins in their industry.
Fisher mentioned that the exceptions to his rule are healthy young companies that are foregoing profits today for accelerated growth in the hope it will pay off tomorrow. These companies might allocate spending to research, sales, or other activities to improve their future by investing in themselves. This approach is still in line with Fisher’s overall long-term strategy rule.
2. Use available data
Fisher lived in a period when financial data was not as accessible, but he was ahead of his time because he knew even then that data was king. Fisher was aware that current good growth or a good P/E (price-to-earnings ratio) multiple was not an accurate indicator of future growth of a particular stock. More data points are necessary to help investors fully analyze the stock and its potential. You should then reevaluate its dynamics over a longer timeframe to determine whether it is worth investing in.
3. Have a manageable number of stocks
Another key insight from Fisher is not to overestimate diversification. Although it is a time-tested strategy for mitigating risk and realizing the highest returns, he advocates balancing diversification and over-diversification – not having too many stocks in your portfolio. Fisher’s rule of thumb is to aim for 7 to 12 stocks. Each of these stocks should be well-researched and manageable. Aim for an overall level of diversification to allow room for error, but not so much as to indicate the insecurity of its owner. Find the right balance.
4. Know your stocks
Should you focus more on trends in the stock market or on your stocks? According to Fisher, the latter is more important for two primary reasons. Firstly, invest based on your knowledge. Secondly, if there's a market plunge, but you have strategically selected your stocks, the price decline will be less severe. This means mitigating risk by limiting the unknown factors. If you truly understand your stocks and have more data points, you will be better able to make informed decisions.
5. Do not sell in times of crisis
Fisher would say the worst thing you can do is to sell your securities in times of crisis. Instead, buy cheaper shares and add reliable securities to your portfolio based on your research. It’s a simple rule that will stay with you throughout your investing journey.
