Lesson 1 of 7
Fisher: scuttlebutt and 15 points
Fisher's fifteen points and scuttlebutt method judge a business on what a filing alone cannot answer, plus his three narrow reasons to sell.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Fisher's method has two tools used together: fifteen points to judge a business by, and scuttlebutt, asking around a company's own world for what its filings do not say.
- A business need not pass every point, since failing a few is not disqualifying but failing many is.
- He allowed exactly three reasons to sell: a mistake in the original purchase, decline against the fifteen points, or a clearly better opportunity elsewhere.
Philip Fisher's Common Stocks and Uncommon Profits (1958) set out a way to judge a business that a set of accounts cannot finish on its own. Fifteen points tell you what to look for. Scuttlebutt, asking customers, competitors, suppliers and former employees what they know, tells you how a specific company actually measures up.
What a filing can answer against what scuttlebutt can answer
A filing can answer
- Revenue growth over the past ten years.
- Gross margin against the rest of its industry.
- Whether management stays candid across a downturn, read year over year.
Scuttlebutt can answer
- Whether customers rate the product above the alternatives.
- How competitors describe the sales organisation.
- Whether former employees left on good terms or bitter ones.
The fifteen points ask both kinds of question. Only some of them are filed.
Fifteen points, judged by exclusion
Fisher is explicit that a company need not pass every point: failing a very few can still leave a bonanza, but failing many rules it out. The points work less like a scorecard to add up and more like a set of doors a business has to walk through without too many closing on it.
| # | The question, paraphrased | Where the answer mostly comes from |
|---|---|---|
| 1 | Products with enough market potential for years of sales growth? | Filing and scuttlebutt |
| 2 | Will management keep developing new products once current ones mature? | Management and scuttlebutt |
| 3 | How effective is research and development, relative to its size? | Filing, and scuttlebutt on quality |
| 4 | Does it have an above-average sales organisation? | Scuttlebutt |
| 5 | Does it earn a worthwhile profit margin? | Filing |
| 6 | What is it doing to maintain or improve that margin? | Filing and management |
| 7 | Does it have outstanding labour and personnel relations? | Partly filed; mostly scuttlebutt |
| 8 | Does it have outstanding executive relations? | Scuttlebutt |
| 9 | Does management have depth, beyond one or two people? | Scuttlebutt and management |
| 10 | How good are its cost analysis and accounting controls? | Scuttlebutt; rarely filed in detail |
| 11 | Are there other clues specific to its own industry? | Varies by industry |
| 12 | Does it plan for the near term or the long term? | Management and scuttlebutt |
| 13 | Will future growth dilute today's shareholders through new equity? | Filing |
| 14 | Does management stay candid in bad times, not only good? | Filing, read over several years |
| 15 | Does management have unquestionable integrity? | Scuttlebutt |
Failing a very few need not rule a company out; failing many does.
Scuttlebutt: asking around before you ask management
Fisher's own description is plain: the business grapevine is remarkable, and most people involved with a company, rivals included, will discuss it surprisingly openly once you find them. He used it before ever meeting a company's own executives, not instead of meeting them. Scuttlebutt gathered first tells you who is worth pressing to meet, and gives you a rough estimate of the management to check your later impression against.
Three reasons to sell, and no others
Fisher names three reasons, and says they are the only ones that follow from buying on his own principles.
The first is a mistake: the facts turn out less favourable than believed at purchase. The honest response is to sell and move on, rather than wait to get back to the purchase price.
The second is deterioration against the fifteen points themselves, whether management has weakened or the growth that justified the purchase has run out.
The third is rare: switching out of a satisfactory holding, often one bought when little else was available, into a clearly better one, and only when the investor is very sure of the comparison. Fisher warns against doing it readily.
What this changes about a screen
A screen built only on filed figures can rank the points that are visible: margin trends, research spending, the ten-year sales record. It cannot ask a customer, a competitor or a former employee anything, which is why Fisher's own method treats scuttlebutt as necessary rather than optional. The gap is not a flaw in the filed data; it is a different kind of question, and no amount of additional accounting detail closes it.
Check yourself
How many of Fisher's fifteen points does a company need to pass?
- All fifteen, with no exceptions
- Most of them; failing a few is not disqualifying, failing many is
- Any three are enough on their own
Show the answer
Answer: B.
Fisher says a company failing on a very few points can still be a bonanza, but one failing on many does not meet his standard.What does Fisher's scuttlebutt method mainly add that a filing cannot?
- A more precise revenue forecast
- What customers, competitors and former employees say about the business
- A restated set of accounting figures
Show the answer
Answer: B.
Scuttlebutt is asking around a company's own world, not recomputing what is already filed.Which of these is one of Fisher's three reasons to sell?
- The stock has already risen a great deal
- The original purchase turns out to have been a mistake
- A full year has passed since the purchase
Show the answer
Answer: B.
His first reason is a mistake in the original case. Neither a price rise nor the passage of time is on his list.Sources
- Fisher, Common Stocks and Uncommon Profits, 1958, chapter 2: what scuttlebutt can do.
- Fisher, Common Stocks and Uncommon Profits, 1958, chapter 3: the fifteen points.
- Fisher, Common Stocks and Uncommon Profits, 1958, chapter 6: when to sell, the three reasons.
What this leaves out
- The three points and the company in the worked example are illustrative, not any filed company's figures.
- Scuttlebutt describes what to ask and of whom. It is not a substitute for reading the filed statements, and this page does not run it for you.
- Fisher wrote for a market decades before current disclosure rules. Some of what scuttlebutt once had to supply is filed today; some still is not.
- Nothing here is advice about any security.