The Education of Warren Buffett 17observed about the companies and managers they visited. “That hour
each week,” Fisher said, “was the most useful training I ever received.”^5
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.^6 That
growth, in turn, usually was a combination of two factors: a signif icant
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.^7 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 benefit that stockholders might realize from the company’s growth.