Investors can learn some valuable lessons from "two early masters of the game", say Pablo Galarza and Stephen Gandel in Money. The first is value investor Benjamin Graham, who developed a "sceptical, by-the-numbers approach" that should help stockpickers avoid nasty surprises. Second is Philip Fisher, the "prototype for growth investors". He managed to identify some of the fastest-growing corporations of his age, including Texas Instruments and Motorola, shares in which he held from 1955 until his death in March at the age of 96. He made "millions". Here are the key principles of the two legends and what they might be buying now.
Benjamin Graham
Benjamin Graham developed his ideas - which helped him to an annual average gain for his fund of 14.7% from 1936 to 1956 versus 12.2% for the overall market - after losing 70% of his money in the three-year slump of 1929-32. The wipeout convinced him to concentrate on stocks that were so cheap that he could make a profit even if the growth prospects implied by research proved illusory. He sought out firms trading for significantly less than the value of their net assets (assets minus debt), or book value.
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Calculations of book value often include intangible assets, such as goodwill (brand value). But Graham just concentrated on net tangible assets: cash, accounts receivable (outstanding payments) and inventories. (Investors can look up a firm's net tangible assets on its balance sheet at www.CNNMoney.com. Type in a ticker, then on the next page select Financials, then Balance Sheet.) So what might he be buying now?
Unum Provident (UNM), America's biggest disability insurer, is a likely candidate. It has been buffeted by lawsuits accusing it of unfairly denying claims, and several states are investigating its business practices. However, "changes are in the works". A recently appointed chief executive has revamped the Unum's claims process, and the company has boosted the reserves needed to cover claims. If Unum had to pay out all these reserves, as well as its other liabilities, it would be left with $6.2bn in assets. But its current market capitalisation is just $4.5bn. It is therefore trading at a 27% discount to its real book value.
Philip Fisher
While Graham's approach was to focus on a firm's value, Philip Fisher bought shares based on the expectation that the business behind it would grow profits "for years and years". He homed in on growth industries where firms were making new products that were hard to imitate - hence his initial interest in DuPont, which was developing cutting-edge products such as nylon.
But although Fisher, like today's growth investors, was prepared to buy stocks with relatively high p/es, he shunned "hot stocks" and IPOs. He researched potential buys through his industry contacts and company visits - canvassing employees as well as managers - to get a detailed idea of the firm's potential market and edge over its rivals. (Today's investors in growth industries such as healthcare or technology can look up a firm's assessment of its growth prospects and appraisal of its rivals in its recent annual reports; see www.secinfo.com). Fisher also ensured the firm was run by people of "unquestionable integrity": be wary of managers who award themselves loads of stock options. Once convinced of a stock's merits, Fisher "held and held and held".
Were he alive today, Fisher might be buying Xilinx (XLNX). The firm has 50% of the market for semiconductors known as programmable logic devices (PLDs), which are used in everything from laptops to mobile phones. PLDs, a $3.5bn market, are gradually replacing fixed logic devices, which have global sales of $12bn. Fisher would also have approved of the management's decision to ride out the tech downturn by trimming salaries - the CEO took a 27% pay cut.
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