Kenneth Fisher is a high profile investment manager and one of the richest people in America. He is credited with establishing the price-to-sales ratio as a hugely influential indicator in the valuation of stocks. His extensive research, numerous books, including the highly regarded Super Stocks, and the success of his investment firm Fisher Investments, have made him among the most widely-followed and respected professional investors in the world.
Fisher was born in 1950 and after graduating in 1972 he worked for his father, the notable investment analyst, Philip Fisher. He founded Fisher Investments in 1979 and has gone on to produce seven book, numerous research papers and articles and continues to write a long-running portfolio strategy column for Forbes magazine.
In Super Stocks, Fisher set out his views on how individual investors should approach and value stocks. Since then, his views have broadened in line with the expansion of his investment firm, which now manages $42 billion of client money. However, the success of his price-to-sales ratio approach, combined with other quantitative and qualitative factors, continues to appeal to value investors.
The investment formula proposed in Super Stocks is a value-based approach that aims to invest in good quality companies (Super Companies) at an attractive price. The result is what Fisher describes as Super Stocks – stocks that increase 3 to 10 times in value in three to five years from their purchase.
His initial screening of the market involves looking for companies that are suffering from “glitches”, which he says frequently occur in young companies as they grow. He cites temporary setbacks in earnings performance, often caused by management teams that make mistakes during the growth cycle. He says the damage to share valuations caused by glitches can represent buying opportunities for investors.
He explains: “Very few investors have a rational basis for valuing growth stocks in the face of a lack of earnings. The stock loses supporters and falls, in time, much too far. The best managements react to difficulties and overcome them. In time, sales pick up. Later, profits begin to pick up. Simultaneously with the profit resurgence, the stock price begins to rebound.”
Like his father, Fisher is sceptical of using earnings or asset-based metrics such as the P/E ratio to value stocks. He believes that earnings…