Most of the great investors are divided over the need for qualitative analysis. The two biggest areas are measuring management and moats.
Both sides make solid arguments because you’re trying to assess something that can’t be easily measured. That’s why qualitative analysis is more art than science. Put simply, some people got it, some people don’t (like me).
Those who are gifted in the art — like Buffett, Fisher, and Lynch — have an innate ability that normal humans don’t have…and their returns show it.
However, the likes of Graham and Schloss did quite well despite taking the other side of that argument. They didn’t think they could successfully do it, so they avoided talking to management like the plague.
Of course, both sides are correct…investors do better when they stick with what they’re (honestly) good at and avoid the rest.
That said, Phil Fisher mastered qualitative analysis. He wanted a company with great management at a reasonable price. He felt management was the most important ingredient to separate a business from its rivals.
It’s not what industry you’re in, it’s what you’re doing right that your rivals haven’t yet figured out.
So he talked to employees, ex-employees, customers, and competitors — his scuttlebutt method — to suss out the strengths and weaknesses of a company. Then he would use that to weigh the management side of that equation.
And the management didn’t need to come up with brilliant ideas all the time to improve what they’re already doing. Sometimes, they just had to be smart enough to know not to screw with what works. He shared some insights on his process in a rare interview:
Q: It’s a cliche, “good management.” How would you describe the quality?
It’s not just are they doing the currently fashionable things like quality control, speeding up the cycle between development and introduction of new products. If you’re not doing those things, you are out of business; that’s rearview-mirror stuff. I want to know: Who is working on the things that others are barely aware of? I want companies that welcome dissent, rather than stifle it, that don’t penalize people who criticize what management is doing.
Q: I can’t recall seeing any of that in a brokerage report. Where does one get that kind of information?
The only way I know is to stick my long nose in and ask questions. And use judgment. Managements will try to answer my questions by making a fairly shrewd guess at what I want to hear. I have to figure out whether they’re answering with real conviction. The things most companies boast about are yesterday’s story.
Q: Okay, what is tomorrow’s?
Here’s an example. With growth of two-earner families, it’s apparent that companies that can work out a system whereby people can pick their work hours, that company is going to do well. If I were rewriting my book, I would strengthen the part about how important it is to find management working on things that are just starting to have potential.
Q: Anything else you would change?
I am proud of that book, but there are a few things I would add. I am now very interested in seeing how a company handles computer hardware and software. What is the degree a company is using each on new product development, inventory control… Outstanding software people keep close contact across company lines and can learn more quickly of developments that could pave the way for alliances or acquisitions.
Q: You’ve told us what you like in a management. What turns you off?
Companies that are firing people right and left to make a good showing on their earnings statements while two or three top people get big boosts in their income. I prefer companies that have taken the route of holding on to their people by working for growth so there are enough legitimate jobs to go around. These will come out enormously better than some of those that go through four or five downsizings. And I don’t like highly leveraged companies, even if they are well run.
The Money Men, Forbes 1996
Philip Fisher’s 15 Points
Phil Fisher: The Art of Holding On
Philip Fisher Explains His Growth Philosophy