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The experience of Philip Fisher, father of rational growth investing, can teach us a lot about the investment process that has great applicability to us today. Even though he was investing a long time ago human nature and the behaviour of markets seem unchangeable so we face the same issues that he did.
Boom times
In 1929 the 22-year old Philip Fisher became increasingly convinced that there was a wild unsustainable boom in share prices. He even wrote a report for the bank he worked for in August 1929 predicting that the next 6 months would see the start of the greatest bear market in 25 years.
Sadly he was one of only a few voices opposing the accepted wisdom that share prices would continue to climb to ever higher prices on the amazing theory that economy and businesses were in a “new era”, where earnings per share were obviously going to rise and rise year after year. These optimists pointed to all the new technologies (e.g. radio, cars, electricity) that were going to propel the economy at a much faster pace than in the past.
I remember a similar sentiment in the late 1990s as people believed the internet, computers and telecommunication will push us to ever greater heights without interruption.
We have had a lot of ‘new eras’ in the last century or ‘this time it’s different’ assertions to explain away very high share prices.
A knowledge of stock market history and the perspective it brings is a pre-requisite for a good investor – the more we understand the past the further we can see into the future.
Despite Fisher’s sound reasoning, he found himself caught by the market frenzy, and spent his carefully acquired savings on shares that were still cheap and had not yet risen, without making enquiries or obtaining information about them, totally ignoring what he had just learned in his successful analysis of which radio stock was still under-priced.
Lessons
After the crash he was left with only a tiny proportion of his original investment. It was a chastening experience and he learned a number of lessons, one of which is that a low price is no guarantor of value.
What the investor needs is a share with a low price relative to its earnings a few years hence. He started to think in terms of predicting (within fairly broad limits) the earnings of firms a few years from now.
In 1930 he joined a regional brokerage firm with the task of finding stocks which were suitable for purchase because of their characteristics, and for eight months he enjoyed putting into ………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
