The Wisdom of Phil Fisher, Part II

Chapter 9, section 1 is potentially my favorite discussion of the entire work, Common Stocks and Uncommon Profits.

It is what really drives my philosophy, and risk tolerance, as an investor. At my age and station in life, I'm looking for home runs with as many runners on base as possible.

I spilled a little wine tonight pouring it into my glass [not drunk, just a little clumsy]. It was an interesting metaphor for practicing focused investing. Spilling a little is OK -- you can still get the intended effect if you are mostly right [and with proper pouring dexterity]. You just don't want to knock over the whole bottle -- or pick a less than outstanding company. So be careful, but don't worry if you miss out on a few percent here or there because you should be playing for keeps and multi-baggers.

On proper diversification and not spreading oneself too thin

No investment principle is more widely acclaimed than diversification. (Some cynics have hinted that this is because the concept is so simple that even stock brokers can understand it!). Be that is it may, there is very little chance of the average investor being influenced to practice insufficient diversification. The horrors of what can happen to those who "put all their eggs in one basket" are too constantly being expounded.

Too few people, however, give sufficient thought to the evils of the other extreme. This is the disadvantage of having eggs in so many baskets, and it is impossible to keep watching all the baskets after the eggs get put into them. For example, among investors with common stock holdings having a market value of a quarter to a half million dollars, the percentage who own twenty-five of more of which itself is appalling. It is not this number of twenty-five or more which itself is appalling. Rather it is that in the great majority of instances only a small percentage of such holdings is in attractive stocks about which the investor or his advisor has a high degree of knowledge. Investors have been so oversold on diversification that fear of having too many eggs in one basket has caused them to put far too little into companies they thoroughly know and far too much in others about which they know nothing at all. It never seems to occur to them, much less their advisors, that buying a company without having sufficient knowledge of it may be even more dangerous than having inadequate diversification.

Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself. If the investor owns stock in so many companies that he cannot keep in touch with their managements directly and indirectly, he is rather sure to end up in worse shape than if he had owned stock in too few companies. An investor should always realize that some mistakes are going to be made and that he should have sufficient diversification so that an occasional mistake will not prove crippling. However, beyond this point he should take extreme care to own not the most, but the best. In the field of common stocks, a little bit of a great many can never be more than a poor substitute for a few of the outstanding.

Mike Arnold

full-time investor searching for talented operators, clean capital structures & scalable growth. no cigar butts or conventional wisdom. // hiker. hooper. writer

Portland, Oregon