Wednesday, December 25, 2013

Ken Fisher and the Price to Research Ratio

Any investor that has followed the techniques of Kenneth Fisher, writer at Forbes magazine for over 25 years and investing guru, has discovered that Fisher's methodology is ever being refined. Aside from his P/S ratio introduced in his book, "Super Stocks," Fisher also introduced investors to a "price to research ratio." You will still discover Fisher occasionally talking about the P/S ratio, but the price to research ratio appears to have disappeared from the radar screen.

It is this ratio that I would like to revisit.

One finds his book "Super Stocks" still rewarding because Fisher lays out an investing methodology that still leads to satisfactory returns, even if he has personally strayed away and/or altered it to suit himself. In one of his latest books, "The Only Three Questions That Count," Fisher introduces investors to a little statistical lesson on casual correlations and the correlation coefficient. While the concepts sound complicated, they are actually easy and he teaches investors how to "credibly" disprove that any two events are related to one another. This lesson alone makes the book worthwhile once you grasp the concept. Perhaps it was the use of this concept that silenced Fisher on the price to research ratio. Whatever the case, it does not appear to raise its head again in his writings.

Fisher's Price to Research Ratio was simply calculated by dividing the company's market capitalization by the amount of research and development shown on the income statement over the last full 12 months. He determined that if the:

Price to Research Ratio:

>15 = Fail

>10 or ≤ 15 = Pass (barely)

≥5 or ≤10 = Pass

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