More Praise for The Warren Buffett Way, First Edition

Security Analysis,
Philip Fisher was begin-
ning his career as an investment counselor. After graduating from Stan-
ford’s Graduate School of Business Administration, Fisher began work as
an analyst at the Anglo London & Paris National Bank in San Francisco.
In less than two years, he was made head of the bank’s statistical depart-
ment. It was from this perch that he witnessed the 1929 stock market
crash. After a brief and unproductive career with a local brokerage
house, Fisher decided to start his own investment counseling firm. On
March 1, 1931, Fisher & Company began soliciting clients.
Starting an investment counseling firm in the early 1930s might have
appeared foolhardy, but Fisher figured he had two advantages. First, any
investors who had any money left after the crash were probably very un-
happy with their existing broker. Second, in the midst of the Great De-
pression, businesspeople had plenty of time to sit and talk with Fisher.
At Stanford, one of Fisher’s business classes had required him to ac-
company his professor on periodic visits to companies in the San Fran-
cisco area. The professor would get the business managers to talk about
their operations, and often helped them solve an immediate problem.
Driving back to Stanford, Fisher and his professor would recap what they

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observed about the companies and managers they visited. “That hour
each week,” Fisher said, “was the most useful training I ever received.”
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From these experiences, Fisher came to believe that people could
make superior prof its by (1) investing in companies with above-average
potential and (2) aligning themselves with the most capable manage-
ment. To isolate these exceptional companies, Fisher developed a point
system that qualif ied a company by the characteristics of its business and
its management.
As to the f irst—companies with above-average potential—the char-
acteristic that most impressed Fisher was a company’s ability to grow
sales over the years at rates greater than the industry average.
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That
growth, in turn, usually was a combination of two factors: a significant
commitment to research and development, and an effective sales organi-
zation. A company could develop outstanding products and services but
unless they were “expertly merchandised,” the research and develop-
ment effort would never translate into revenues.
In Fisher’s view, however, market potential alone is only half the
story; the other half is consistent prof its. “All the sales growth in
the world won’t produce the right type of investment vehicle if, over
the years, prof its do not grow correspondingly,” he said.
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Accordingly,
Fisher examined a company’s prof it margins, its dedication to main-
taining and improving those margins and, f inally, its cost analysis and
accounting controls.
No company, said Fisher, will be able to sustain its prof itability un-
less it is able to break down the costs of doing business while simultane-
ously understanding the cost of each step in the manufacturing process.
To do so, he explained, a company must instill adequate accounting
controls and cost analysis. This cost information, Fisher noted, enables a
company to direct its resources to those products or services with the
highest economic potential. Furthermore, accounting controls will help
identify snags in a company’s operations. These snags, or ineff iciencies,
act as an early warning device aimed at protecting the company’s over-
all prof itability.
Fisher’s sensitivity about a company’s prof itability was linked with
another concern: a company’s ability to grow in the future without re-
quiring equity f inancing. If a company is able to grow only by selling
stocks, he said, the larger number of shares outstanding will cancel out
any benef it that stockholders might realize from the company’s growth.

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he explained, is to uncover as much about a company as possible from
those individuals who are familiar with the company. Fisher admitted
this was a catchall inquiry that he called “scuttlebutt.” Today we might
call it the business grapevine. If handled properly, Fisher claimed, scut-
tlebutt could provide the investor with substantial clues to identify out-
standing investments.
Fisher’s scuttlebutt investigation led him to interview as many
sources as possible. He talked with customers and vendors. He sought
out former employees as well as consultants who had worked for the
company. He contacted research scientists in universities, government
employees, and trade association executives. He also interviewed com-
petitors. Although executives may sometimes hesitate to disclose too
much about their own company, Fisher found that they never lack an
opinion about their competitors.
Most investors are unwilling to commit the time and energy Fisher
felt was necessary for understanding a company. Developing a scuttle-
butt network and arranging interviews are time consuming; replicating
the scuttlebutt process for each company under consideration can be
exhausting. Fisher found a simple way to reduce his workload—he re-
duced the number of companies he owned. He always said he would
rather own a few outstanding companies than a large number of average
businesses. Generally, his portfolios included fewer than ten companies,
and often three to four companies represented 75 percent of his entire
equity portfolio.
Fisher believed that, to be successful, investors needed to do just a few
things well. One was investing only in companies that were within their
circle of competence. Fisher himself made that mistake in the beginning.
“I began investing outside the industries which I believed I thoroughly
understood, in completely different spheres of activity; situations where I
did not have comparable background knowledge.”
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J O H N B U R R W I L L I A M S
John Burr Williams graduated from Harvard University in 1923 and
went on to Harvard Business School, where he got his first taste of eco-
nomic forecasting and security analysis. After Harvard, he worked as a
security analyst at two well-known Wall Street firms. He was there

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T H E W A R R E N B U F F E T T W AY
through the heady days of the 1920s and the disastrous crash of 1929 and
its aftermath. That experience convinced him that to be a good investor,
one also needs to be a good economist.
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So, in 1932 at the age of 30 and already a good investor, he enrolled
in Harvard’s Graduate School of Arts and Sciences. Working from a
f irm belief that what happened in the economy could affect the value of
stocks, he had decided to earn an advanced degree in economics.
When it came time to choose a topic for his doctoral dissertation,
Williams asked advice from Joseph Schumpeter, the noted Austrian
economist best known for his theory of creative destruction, who was
then a member of the economics faculty. Schumpeter suggested that
Williams look at the “intrinsic value of a common stock,” saying it
would f it Williams’s background and experience. Williams later com-
mented that perhaps Schumpeter had a more cynical motive: The
topic would keep Williams from “running afoul” of the rest of the
faculty, “none of whom would want to challenge my own ideas on in-
vestments.”
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Nonetheless, Schumpeter’s suggestion was the impetus
for Williams’s famous doctoral dissertation, which, as