Saturday, March 6, 2010

Investment Strategy

One of the all time classic investment books was written by Phillip Fisher. Titled Common Stocks, Uncommon Profits, Fisher produced a "bible" for growth stock investors. Even though it was written decades ago, investors like Warren Buffett still cite the book as one of the most important investment books they ever read.

I could go on about Fisher's writings (and, as you can tell from the number of posts on this blog, I probably will at some point!), but I read something today in the Wall Street Journal that reminded me of Fisher.

Although he was a growth stock investor, Fisher was not a fan of trading. In fact, I remember at the end of one chapter, he wrote that the ideal time frame for an investment was "forever". That is, if you've done the research well, you shouldn't allow the stock market's gyrations to overly influence you, and perhaps sell prematurely.

For example, Motorola was a favorite of Fisher's (remember, this was written in the 1950's). Fisher's fund held Motorola for 25 years.

Jason Zweig's column today highlighted another very strong investment track record turned in by someone who, once they did the research, was reluctant to sell.

Excerpt from the piece, with the full link below:

A Star Trader Who Rarely Ever Traded


This week, one of the great traders of the mutual fund industry, John Laporte of T. Rowe Price New Horizons, stepped down. An investor who put $10,000 in the fund when Mr. Laporte took the helm, three weeks before the crash of 1987, now has $78,000; the same investment in the Russell 2000 Growth index of small-company stocks has grown to just $52,000.

The key to Mr. Laporte's trading greatness? Barely trading at all. He has urged his successor, Henry Ellenbogen, to do the same. Jack Laporte's advice holds a lesson for all investors, large and small.

He held his typical stock for four years; the average small-company fund, according to Morningstar, flips its stocks every nine months.

New Horizons has held two-thirds of its top 20 holdings for at least five years apiece. Mr. Laporte has clung to his largest position, the medical-products distributor Henry Schein, for more than 14 years; he has owned his fourth-largest, O'Reilly Automotive, since 1999.

In seeking the great growth companies of tomorrow, Mr. Laporte looks for creative leaders, a strong corporate culture and innovative ways of doing business. He hunts in service industries and in markets not controlled by a handful of giant firms. He also insists on strong cash flows, high returns on capital and low debt.

But spotting growth companies in their infancy requires patience. "It often takes me years to get confident in the business strategy and the management team," Mr. Laporte says.

And Mr. Laporte chronically beats himself up over the extra profits his fund could have made if it hadn't sold winners too soon. T. Rowe Price owned a small venture-capital stake in Starbucks even before the coffee chain first sold stock to the public in 1992. Two years later, after an analyst convinced him that coffee prices would go up and Starbucks' earnings would go down, Mr. Laporte dumped the stock at a profit.

Since then, Starbucks has gone up more than tenfold. "We left well over $200 million on the table," he says ruefully. "It takes an iron will to hold on when the market declines or companies stumble."