Tuesday, July 8, 2014

Stock market bubbles - A brief history

“Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.”
- Charles Mackay, Extraordinary Popular Delusions And The Madness Of Crowds, 1841.

Economic bubbles are great examples of societies failing to learn from previous mistakes. Time and time again something comes along that seems too good to be true and it inevitably turns out that it is. People invest in their masses and the more who invest, the higher the price rises, drawing more people in until eventually the bottom falls out and people lose a lot, sometimes everything.
Bubbles in nature are simple, perfect and beautiful. Investment bubbles can seem the same way at the beginning – perfect and so beautifully simple. You put money in and it grows, what could be easier or more rewarding than that? Nature’s bubbles are incredibly delicate though and are all destined to eventually pop, gone forever. Economic bubbles are the same, but it takes a while for people to see how fragile they are, often not before it is too late.
Outlined below are 4 major bubbles from the past 400 years, taking in bubbles surrounding individual companies, whole industries and entire national economies.

Tulip Mania

One of the earliest examples of a bubble occurred in the Dutch Republic in the 1630s. It concerned the trade of tulip bulbs, or more specifically the trade of agreements to buy tulip bulbs, essentially what we would refer to as futures contracts today.
Tulips flower in mid-Spring, with their bulbs becoming dormant and ready for harvesting around June. The bulbs stay dormant until September, after which they must be planted. This meant that the sale of bulbs could only occur between June and September, with agreements to buy bulbs (rather than the bulbs themselves) changing hands the rest of the year.
New varieties of stripy petalled tulips started to appear in the early 1630s and as they popularity grew speculators started to move in. By 1636 contracts for single bulbs were changing hands for many multiples of average yearly salaries, with some contracts changing hands dozens of times a day. Many people made huge fortunes having never even laid eyes on the tulip bulbs their agreements were backed by.
Trade was not confined to financiers and bankers, many regular people were drawn into the whirlwind of sky-rocketing prices, believing that the rich from all over the world would soon be coming to Holland to pay huge sums for tulips and that demand would never cease.
Bulb prices peaked in February 1637 with reports of a single bulb being purchased for 100,000 (florins the equivalent of around £1million in today’s money) then dipped suddenly, after which trading quickly ground to a halt, financially ruining huge numbers of people.
It’s worth noting that short selling was a practice banned in the Dutch Republic at the time, making it very hard for investors to re-coup any losses as the tulip prices started their inexorable decline.

The South Sea Bubble

Around 75 years later, in 1711, the South Sea Company was founded in Britain, ostensibly as a monopolistic trading company for commerce with South America. The company never did much trade in that regard though due to the Spain’s grip on the continent and the ongoing War of Spanish Succession. Instead, the company was used as a vehicle for consolidating Britain’s national debt. Those whom the nation owed a monetary debt were given shares of equal value in the newly formed company with a dividend (paid by the government, rather than the company).
This resulted in potentially lower returns for the holders of the relatively risk free national debt, but turned an illiquid market liquid, allowing the debt to be freely traded as shares.
In 1719 a scheme was hatched for the South Sea Company to take on moregovernment debt in return for shares, around £2.5million worth. Such was the success of this refinancing that the government decided to repeat the process, hoping to pass over most of the national debt, approximately £31million.
After this, in early 1720, the already bloated company set about putting rumours about of the potential riches to be gathered in South America using their monopoly. The speculators dove straight in, boosting the share price from £120 to £550 by May. The company itself started lending money to speculators to buy shares in order to artificially inflate the price. By early August the share price had nearly hit £1,000 and it came time for the company to reclaim the money it had lent.
Many speculators were only able to pay back their debts by selling their South Sea shares, causing a sudden drop in the share price. Many investors who had bought near the top on credit were now sorely out of pocket, forcing them to sell their holdings for a loss and forcing the price down even further. By the end of the year the share price had fallen to £100 with many investors bankrupt or nursing serious dents to their fortunes.

Wall Street Crash

As the 1920s drew to a close in the USA the Great Depression was kicked off by the largest stock market crash in US history. The Dow Jones Industrial Average peaked at just over 381 points on 3 September 1929, but by 13 November had hit 198, a fall of 42%. By 8 July 1932 the Dow had slipped down to just above 41 points, a slide of over 91% from its high. What happened?
As with the two examples outlined above, the bursting of the bubble was preceded by rife speculation, first by financial professionals, but soon by an increasing proportion of the general populace.
Technological advances created new products, companies and industries in the 1920s and generated a mood of optimism. Many Americans became stockholders who had previously never dabbled in the markets. As prices started to rise and paper profits rose accordingly many borrowed money to invest in shares or took on large margins to maximise profit. At one point more money has been loaned for purchasing shares than there was hard currency in the country, over $8billion.
Panic selling started on Black Thursday, 24 October 1929, with the ow dropping 11% in one day. This was followed by two further major falls, 13% on 28 October and 12% on 29 October. Margin calls came in and speculators, both financiers and private individuals lost huge sums of money.

The Dot Com Bubble

An entirely new industry sprang up in the late 1990s consisting of companies focussed on the internet, collectively known as dot coms. In a strange twist to the standard bubble arc, investors were seemingly unfazed by the lack of profit these companies showed, in fact some companies would go to initial public offering having only ever made large losses.
A large number of these companies were focussed on rapid growth in the new industry, putting profits as a secondary requirement to be fulfilled further down the line. The mantra of the day was “get large or get lost”. investors bought into this in a way that would unlikely ever have done in other, more established industries. As with the examples above, the speculators moved in and share prices began to rise and rise.
The US Federal Reserve increased interest rates significantly between mid 1999 and early 2000 causing the US economy to slow down. In turn, dot com share prices began to falter. Many companies were listed on the NASDAQ Composite which peaked at 5,048.62 on 10 March 2000 falling to only 1,114.11 on 9 October 2002.

Future bubbles

History has shown us the same pattern repeated in each of the bubbles above. New ideas creating initial optimism and wealth but turning to depression and severe hardship as things get out of control. Doubtless this pattern will be repeated again in the future, probably many times.
It is often hard to see the signs of a bubble until it is too late, but if you take a step back and look at recent developments in new ideas like Bitcoin, or the seemingly endless rise in London house prices you might see certain correlations. Keep an eye out and invest wisely.
“In the present state of civilization, society has often shown itself very prone to run a career of folly from the last-mentioned cases. This infatuation has seized upon whole nations in a most extraordinary manner.” - Charles Mackay, 1841

Saturday, June 28, 2014

How Britain’s greatest physicist lost a fortune

How (not) to invest like Sir Isaac Newton

“When I see a bubble forming I rush in to buy,” he said. In January 2010 he declared gold to be the “ultimate asset bubble” shortly after he built up a £400m stake in the metal.
He had sold most of it by March 2011, at a handsome profit – and comfortably before the bubble popped in September of that year.
Not everyone can pull off the same trick; some clever people have lost a lot of money by failing to get out before everyone else. Some very clever people indeed, actually: one investor who lost a fortune this way was Britain’s greatest physicist, Sir Isaac Newton.

Newton was a victim of the South Sea Bubble, one of the most famous boom-and-busts in history – in fact, it was the one that gave rise to the very term “bubble”.
As the graph above shows, he initially did just what Mr Soros would do centuries later – invest early and then sell after making excellent returns very quickly. But Newton made the mistake of re-entering the market much closer to the peak, and then hanging on even after the bubble had burst, selling only once the price had collapsed to well below his buying price.
Newton reportedly lost £20,000, equivalent to about £3m in today’s terms.
The South Sea Company was an unusual business. Founded in 1711, it was promised a monopoly on trade with Spanish South American colonies by the British government in exchange for taking over the national debt raised by the War of Spanish Succession. However, the trade concessions turned out to be less valuable than hoped.
In January 1720, when the company’s shares stood at £128, the directors circulated false claims of success and fanciful tales of South Sea riches and in February the shares rose to £175.
The following month the company convinced the government to allow it to assume more of the national debt in exchange for its shares, beating a rival proposal from the Bank of England. With investor confidence mounting, the share price had climbed to about £330 by the end of March.
The South Sea Company was part of a wider flurry of speculation on the stock market, however.
Newly floated firms were seen as appearing like bubbles; 1720 was sometimes known as the “bubble year”. In June, Parliament, at the behest of the South Sea Company, passed the Bubble Act, which required all shareholder-owned companies to receive a royal charter.
The South Sea Company received its charter, perceived as a vote of confidence in the company, and at the end of June its share price reached £1,050.
But investors started to lose confidence in early July and by September the shares had plummeted to £175, devastating investors.
How to avoid losing a fortune in bubbles
The simplest way to avoid losing money in a bubble is not to invest in any asset in which you suspect a bubble is forming. But as the example of Newton illustrates, this can be easier said than done. The temptation to join in, especially if you tell yourself that you will “sell before the bubble bursts”, can be irresistible.
If you do buy into the latest hot investment, one homespun piece of advice is to sell when even the taxi drivers are talking about it. 


Wednesday, June 25, 2014

A new approach to investment by John Slater

How to invest like Jim Slater – and beat the market by a factor of 20

The veteran investor's stock-picking formula outperformed spectacularly when he invented it 50 years ago. Here are four stocks that pass his tests today

Jim Slater
Jim Slater: 'I was convinced that the stock market winners of the past would have some common characteristics' Photo: PA

"It is only necessary to be 6 inches taller than the other people in a room to see above everyone’s heads.”
This is Jim Slater’s recipe for investing success – that if you concentrate on learning about a particular aspect of investment, you can quickly become more knowledgable about it than “the other people in the room”.
You will then make better choices – and bigger profits.
Mr Slater, who chose undervalued growth stocks as his specialism, called this approach “the Zulu principle” (the name of his most famous book) because he noticed how quickly his wife became, relative to most people, an expert on Zulus after reading a magazine article on the subject.
“It occurred to me that if she had then borrowed all the available books on Zulus from the local library, she would have become the leading expert in the county,” he said.
So when he decided to learn about the stock market after an illness that he feared might end his career as a company executive and force him to find another source of income, he researched the subject exhaustively before he bought his first share.
“At the time there were two weekly investment magazines, The Stock Exchange Gazette and the Investors Chronicle,” Mr Slater said. “I bought two years’ back copies of both and read through them page by page.
“I was convinced that the stock market winners of the past would have some common characteristics. If, with the benefit of hindsight, I could develop a formula based on these characteristics, I was sure that I would be able to make my fortune.”
Once he had come up with his system, he put it to the test in a stock-tipping column in The Sunday Telegraph, titled “The Capitalist” (pictured), which began in 1963. In two years his tips rose by 68.9pc, against just 3.6pc for the wider market.
The first of Jim Slater's Sunday Telegraph columns under the pseudonym of 'The Capitalist', March 3 1963
So what was his system?
First, he preferred small companies to large ones. “Mammoth companies rarely double their market capitalisation in a year. “In contrast, small companies often do this and more,” he said, summarising this analysis neatly in the phrase “elephants don’t gallop”.
Then he came up with a means to determine which small companies with good growth prospects were undervalued. Most investors are familiar with the “price to earnings” or p/e ratio, which shows how much you have to pay for each £1 of profit made by a company (so a smaller figure signifies that you are buying profits cheaply). Mr Slater took it a stage further to work out when investors were buying growth cheaply.
Do you believe in "investment formulas" such as Jim Slater's?
He devised the “Peg” ratio, which is the p/e figure divided by the annual growth rate of the company. For example, a share with a P/E ratio of 20 but growing at 25pc a year would have a Peg of 0.8.
Investors should seek shares with a Peg of less than 1 but ideally below 0.75, Mr Slater said, combined with a p/e (on the basis of forecast profits for the current year) of less than 20. The company should also be able to show consistent growth in profits in at least four out of five years.
In the first “Capitalist” article, he outlined a few other requirements. These included a dividend yield of at least 4pc; that the most recent chairman’s statement must be optimistic; that the company must not be vulnerable to exceptional factors; that it shouldn’t be family controlled; and that the shares should have votes.
Mr Slater also suggested watching out for directors selling shares or large debts, while cash flow should exceed profits.


Mr Slater’s system works on measurable data, so it is possible to replicate and apply it to the stock market today. This is what the boffins at stockopedia.com have done – in fact, the website’s “Jim Slater” stock screen is its most popular.
It is also successful, returning 47.7pc in capital gains over the past 12 months and more than 90pc over the past two years, compared with 7pc and 23pc, respectively, for the FTSE 100.
Twenty shares currently make it through the Slater screen, but we have decided to focus on four. These stocks are also held in the fund run by Mr Slater’s son, Mark – the MFM Slater Growth fund.
p/e ratio 17.4
Peg ratio 0.6pc
Market value £141m
Trifast makes and distributes industrial fastenings (such as nuts and bolts). It recently completed the acquisition of an Italian rival.
p/e ratio 17.8
Peg ratio 0.4
Market value £212m
A utility cost management consultancy. High energy prices are expected to stimulate demand for its services.
Pressure Technologies
p/e ratio 16.5
Peg ratio 0.4
Market value £105m
Pressure Technologies is an engineering company that specialises in high-pressure devices. A boom in the deep-water oil and gas market could boost sales; the Slater Growth fund is a buyer.
Galliford Try
p/e ratio 11
Peg ratio 0.55
Market value £897m
The house-builder and construction business could benefit from momentum in the property market, supported by the Government’s Help to Buy scheme and the wider economic recovery.
Jim Slater
More 'How to invest like ...'

Wednesday, June 11, 2014

How to get started in investing

Before you dive into the world of stocks and shares, it pays to do your homework. 

Research, goal setting and self-evaluation will help break in a new investor

Stock market
Understand the risks of the stock market before jumping in  

Getting started in investing can be daunting. Novices tempted by a rapidly rising market should not invest money they cannot afford to lose. Always remember that share prices go down as well as up.
Also consider your financial objectives, your time frame and your appetite for risk.
Do you need income or are you hoping to grow your funds for the future?
Are you targeting rapid returns or is this a long-term investment towards a more comfortable retirement?
Do you have the nerve for the rollercoaster ride of risky investment, or are you aiming for steady, dependable results with less chance of loss?
The combination of personal goals, timing and attitude to risk should drive your choice of investments.
Rather than putting all your eggs in one basket, you might diversify your investments across different companies and countries. Pooled funds, such as unit trusts, investment trusts, open-ended investment companies (Oeics) or exchange-traded funds (ETFs), seek to diminish risks by spreading individuals’ money over many different shares or bonds.
However, since all funds have a different focus – some are geographical, while some only invest in small companies, or in bonds, or equities, it is important that you have a mix of funds as well.
This will help to minimise your risk, and can allow you access to a qualified fund manager who can pick stocks for you. Alternatively you can choose a tracker fund, which aims to replicate the performance of an index, such as the FTSE 100 or 250, and which may have lower charges than a managed fund.
Aim to invest for a minimum of five years and ideally 10, allowing time to ride out any short-term stock market volatility.
Choosing the right funds for you is a matter of research and personal preference. You can use the Key Investor Information documents (KIIDs) and fund factsheets, which will show you the top shareholdings in any fund, as well as its past performance – though be wary of this as it is not a reliable indicator of future performance – to help inform your decisions.
Financial planners can make recommendations tailored to your circumstances – at a cost. Check out unbiased.co.uk for a directory of qualified advisers.
However, changes to the way people pay for financial advice, known as the Retail Distribution Review, have encouraged more people to make their own investment decisions.
If you prefer and are able to do your own research, many websites offer information about company performance, recommend shares and funds, and even provide model portfolios.
Free performance statistics are available on websites such as Morningstarand FE Trustnet, as well as on the websites of leading brokers.
Annabel Brodie-Smith, communications director at the Association of Investment Companies, says: “At the end of the day, there is no substitute for doing your research if you’re going it alone, and are comfortable taking the risks without seeking advice.” But no matter how much you research, you have to keep in mind those risks: you can lose money as well as gain it.
This article is from the Investment Library's 'How To' section
Visit www.telegraph.co.uk/investmentlibraryto rummage through the digital shelves
About the Investment Library
If investors are to take advantage of the new rules set in the 2014 Budget, they need information. That is where the new Investment Library series, in association with Barclays Stockbrokers, will come in.
Whether you want answers to your questions or ideas, you will find articles grouped under easy-to-understand headings. The Investment Library will cover everything from tax efficient investing to how to invest at home and abroad. There will also be sections on subjects such as commodities and emerging markets.


Friday, June 6, 2014

Nurse reveals the top 5 regrets people make on their deathbed

Nurse reveals the top 5 regrets people make on their deathbed

This article presents a series of regrets that many people experience of their deathbed. It’s an interesting source of perspective for many of us who are moving into new phases of our adult lives.
Ware writes of the phenomenal clarity of vision that people gain at the end of their lives, and how we might learn from their wisdom. “When questioned about any regrets they had or anything they would do differently,” she says, “common themes surfaced again and again.”
Here are the top five regrets of the dying, as witnessed by Ware:
For many years I worked in palliative care. My patients were those who had gone home to die. Some incredibly special times were shared. I was with them for the last three to twelve weeks of their lives.
People grow a lot when they are faced with their own mortality. I learnt never to underestimate someone’s capacity for growth. Some changes were phenomenal. Each experienced a variety of emotions, as expected, denial, fear, anger, remorse, more denial and eventually acceptance. Every single patient found their peace before they departed though, every one of them.
When questioned about any regrets they had or anything they would do differently, common themes surfaced again and again. Here are the most common five:
1. I wish I’d had the courage to live a life true to myself, not the life others expected of me.
This was the most common regret of all. When people realise that their life is almost over and look back clearly on it, it is easy to see how many dreams have gone unfulfilled. Most people had not honoured even a half of their dreams and had to die knowing that it was due to choices they had made, or not made.
It is very important to try and honour at least some of your dreams along the way. From the moment that you lose your health, it is too late. Health brings a freedom very few realise, until they no longer have it.
2. I wish I didn’t work so hard.
This came from every male patient that I nursed. They missed their children’s youth and their partner’s companionship. Women also spoke of this regret. But as most were from an older generation, many of the female patients had not been breadwinners. All of the men I nursed deeply regretted spending so much of their lives on the treadmill of a work existence.
By simplifying your lifestyle and making conscious choices along the way, it is possible to not need the income that you think you do. And by creating more space in your life, you become happier and more open to new opportunities, ones more suited to your new lifestyle.
3. I wish I’d had the courage to express my feelings.
Many people suppressed their feelings in order to keep peace with others. As a result, they settled for a mediocre existence and never became who they were truly capable of becoming. Many developed illnesses relating to the bitterness and resentment they carried as a result.
We cannot control the reactions of others. However, although people may initially react when you change the way you are by speaking honestly, in the end it raises the relationship to a whole new and healthier level. Either that or it releases the unhealthy relationship from your life. Either way, you win.
4. I wish I had stayed in touch with my friends.
Often they would not truly realise the full benefits of old friends until their dying weeks and it was not always possible to track them down. Many had become so caught up in their own lives that they had let golden friendships slip by over the years. There were many deep regrets about not giving friendships the time and effort that they deserved. Everyone misses their friends when they are dying.
It is common for anyone in a busy lifestyle to let friendships slip. But when you are faced with your approaching death, the physical details of life fall away. People do want to get their financial affairs in order if possible. But it is not money or status that holds the true importance for them. They want to get things in order more for the benefit of those they love. Usually though, they are too ill and weary to ever manage this task. It is all comes down to love and relationships in the end. That is all that remains in the final weeks, love and relationships.
5. I wish that I had let myself be happier.
This is a surprisingly common one. Many did not realise until the end that happiness is a choice. They had stayed stuck in old patterns and habits. The so-called ‘comfort’ of familiarity overflowed into their emotions, as well as their physical lives. Fear of change had them pretending to others, and to their selves, that they were content. When deep within, they longed to laugh properly and have silliness in their life again.
When you are on your deathbed, what others think of you is a long way from your mind. How wonderful to be able to let go and smile again, long before you are dying.

Life is a choice. It is YOUR life. Choose consciously, choose wisely, choose honestly. Choose happiness.

- See more at: http://www.seenox.com/2014/02/14/nurse-reveals-top-5-regrets-people-make-deathbed/#sthash.I1XFepP3.dpuf

Saturday, May 17, 2014

It doesn't make sense to invest scared. Despite the occasional bubble or risky valuations, stocks still go up over the long term.

Recently, the American Association of Individual Investors (AAII) sentiment survey revealed bullish and bearish sentiment fell, but neutral sentiment spiked.

Over the long term, the majority of investors surveyed were dead wrong.

Since 1987, the weekly AAII sentiment survey had the following average reading:

Bullish: 38.8%
Neutral: 30.7%
Bearish: 30.5%.

In that period, the S&P 500 has gone up 498%—a compound average growth rate of 7%, not including dividends—pretty much in line with historical averages.

Think about that for a minute.

Over a quarter of a century, despite some big moves up and down, stocks performed as they historically always have, averaging about 7% gains per year. And while stocks went along their usual course higher, at any given time, the majority of investors were, on average, not bullish.

Nearly two-thirds of investors, in fact, expected the market to go down or remain flat.

How is that possible? Have we become a world of glass-half-empty pessimists?

The news media certainly doesn't help. 

And, of course, the financial media needs to scare you in order to keep you hooked so you know what and when to buy and sell.

It doesn't make sense to invest scared. Despite the occasional bubble or risky valuations, stocks still go up over the long term.

If you're a long-term investor, I hope you won't be part of the majority that is constantly afraid. That's no way to live. And it's no way to make money.

- See more at: http://www.hcplive.com/physicians-money-digest/investing/IU-Why-Are-So-Many-People-Wrong?utm_source=Informz&utm_medium=PMD&utm_campaign=PMD+5%2D14%2D14#sthash.tuiDlsW7.dpuf

Tuesday, May 13, 2014

Growth Investing versus Value Investing

Fisher stood out as one of the first money managers to focus on qualitative factors instead of quantitative ones.  He examined factors that were difficult to measure through ratios and other mathematical formulations:  the quality of management, the potential for future long term sales growth, and the firm's competitive edge.

Although Fisher focused on the qualitative characteristics of a company, he was first and foremost a growth stock investor.  He felt the greatest investment returns did not come from the purchase of stocks that were undervalued, since a stock that is undervalued by as much as 50% would only double in price to reach fair market value.

Instead, he sought much higher returns from those companies that could achieve growth in sales and profits greater than the overall market over a long period of time.

Furthermore, Fisher did not seek companies showing promise of short-term growth due to cyclical events or one-time factors.  He felt that the timing was too risky and the promised returns too small.  

Fisher penned his investment philosophy in his book: "Common Stocks and Uncommon Profits and Other Writings" by Philip A. Fisher.

Wednesday, May 7, 2014

Common Stocks and Uncommon Profits - "Scuttlebutt" method might be of value in seeking to make investments in smaller, local companies.

Common Stocks and Uncommon Profits

by Philip Fisher

Common Stocks and Uncommon Profits is one of the classic investment texts written for the lay person. The legendary investor, Warren Buffett, has credited Philip Fisher's investment strategy as strongly influencing him.

Rather than just seeking value, as the Ben Graham school of investment taught, Fisher realized that even a greatly "undervalued" company could prove a horrible investment. Sure, you might occasionally buy a stock for less than the company's cash-in-the-bank (back then, at least!). But what if the business is horribly run? It might not take long for the company to lose all that cash!

Even if the company returns to "fair" value, that ends the potential profit from investing in such a business. Holding an average company, because it was once undervalued, but is no more, makes little sense.
Fisher points out that the largest wealth via investing has been made in one of two ways. First, buying stocks when the markets crash and holding them until the markets recover. Secondly, with less risk and more potential return, you can also just invest in a small portfolio of companies which continue to strongly grow sales and earnings over the years. Then, if the company was correctly selected, you might never have to sell, while accruing a huge return on your initial investment.

Fisher pioneered the school of growth stock investing. In Common Stocks and Uncommon Profits, Fisher explains how he selects a growth company. He lists fifteen points which a company must have to be considered a superior investment.

Fisher's first point seems obvious: "Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?"

Fisher shows that some companies might have potential substantial sales increases for only a few years, but after that have limited potential due to some factor, such as market saturation. For example, Fisher mentions the growth in sales of TV's until the U.S. market was saturated.

He also wisely suggests looking behind the products to seek other superior investments. While many TV manufacturers were competitive and it was difficult to tell which was best, Fisher points out that Corning Glass Works was, by far, the company most capable of producing the glass bulbs used in TVs.

Fisher tries to clearly distinguish between companies which are "fortunate and able" and those which are "fortunate because they are able." The second kind, the superior investments, are highly innovative and create new products which have growth potential. Fisher uses Dow Chemical as one example of a "fortunate because they are able" company.

The second point wants to know if management has the drive to innovate new products. A man ahead of his time, Fisher wonders about how much of a company's future sales might come from products not yet invented.

A constant theme of Common Stocks and Uncommon Profits is examining what the company is doing to prepare for the future. Is the company spending wisely on Research and Development? Or, is the company just trying to maximize its current profit and reinvesting nothing for future growth?

Fisher explains why answering that question is difficult in practice. What different companies account for under R&D is one problem. Another is that some companies are more successful than others at turning money spent on R&D into future marketable products. Today, we must assume this question is far more difficult to answer!

In addition to questioning a company's R&D, Fisher wants to see a company with a strong sales organization and distribution efficiency. "It is the making of a sale that is the most basic single activity of any business," he writes.

Yet, why don't investors focus upon such key factors instrumental to a company's future growth? Fisher points out that certain issues are not quantifiable. That is why many investors tend to focus upon financial issues which can be expressed in a simple ratio.

How does the investor go about answering the "unquantifiable"? How does the investor know how well-managed the company is? Or, how does one evaluate the people factors, which Fisher says are the real strength of a superior growth company?

Fisher suggests the "scuttlebutt" method. This involves talking to suppliers, customers, company employees, and people knowledgeable in the industry, and, eventually, company management. From this information, an investor can get a good feel for the quality of the company as a growth investment. Fisher teaches us how to learn to ask the correct, company-specific questions.

Fisher acknowledges the "scuttlebutt" method is a lot of work. But, he asks, should it be easy to find such great companies, when finding only a few can easily lay the foundation for building huge future wealth?

I tend to think the average individual investor will not use the "scuttlebutt" method. And, for most investors and most companies, even if the investor had the desire to use this method, it would not be practical.
The average investor will not have access to all the people with whom Fisher suggests talking. Imagine trying to use this method on a larger company with tens of thousands of employees worldwide. What is said about the company in one area may differ greatly from what is believed about the company in another region. Applying such a method to evaluate a large, innovative company, such as 3M, for example, seems utterly impossible.

Yet, for investors seeking to make investments in smaller, local companies, the "scuttlebutt" method might be of value. For angel investors or mini-venture capitalists, reading Common Stocks and Uncommon Profits is probably also worthwhile. However, Fisher is quick to point out that such company evaluation is far more tenuous when the company hasn't any history behind it.

Entrepreneurs seeking to build companies should also give the book a quick read. The fifteen points are very important to company growth and success. And, encouraging these strengths from the perspective of a company's CEO trying to build the company is far easier than seeking to answer these questions from the perspective of an investor who is a company outsider!

Common Stocks and Uncommon Profits also has an excellent chapter titled, "Hullabaloo About Dividends" which tells us investing in growth stocks with smaller dividend payout ratios often leads to greater total future dividends because the dividends are growing, while high-yielding stock tends to grow far less, and hence, the dividends grow far less.

The book also has some excellent thoughts about buying-and-holding a stock and when to sell a stock. Fisher's thoughts on diversification are also well worth reading, although I would recommend more diversification than Fisher claims is adequate.

Overall, this is a great book for the individual investor. You will not be able to follow the "scuttlebutt" method in practice, for most investments, and, maybe, the complexity of today's companies and scientific research in many growth companies make Fisher's method less practical today than in the past, but there is much to learn about business and investing from this book.


Common Stocks and Uncommon Profits - One should buy stocks to hold them for the very long run.

Book: Common Stocks and Uncommon Profits
Author: Philip Fisher
This is easily one of the best books I have read on investing (big surprise, given that this is one of the classics). Here we go.
The biggest takeaway from the book is that one should buy stocks to hold them for the very long run (reminds you of Buffett’s philosophy?). Fisher’s take on it is that the one should continue to hold the stocks even if the stock appears overvalued at the moment as long as you can ascertain that its peak earning power hasn’t past, among other things. In the very first chapter, he talks about the era before 1913, when federal Reserve was established–the era when the business cycle was even more pronounced, and stock market gyrated even more. Fisher says that even in these time, people who bought and held stocks made more money than those who bet on the cycles. He says that the only times you should sell are (a) when a mistake has been made, or (b) when the next peak earning power adjusted for the business cycle activity will be less than what it is now/has been. He thinks its is not worth disturbing a position that could likely be a great deal worth more even if it is 35% overpriced because you risk losing the future returns and incur a capital gains tax liability.
He says that companies with truly unusual prospects for growth are hard to find because they’re so rare AND they can be differentiated from a run of the mill company 90% of the times. On the other hand, it is vastly more difficult to understand what the market or the business cycle will do in the next few months. Thus, it is much likely for one to be wrong when guessing the short-term changes for a stock than assessing long-term prospects of a company. This is why one should not be selling a position in anticipation of market downturns. He says that the EMH is true in the narrow sense that it is very hard to make money in and out of stocks by trading them, but as owners and investors, one can beat the theory.
The second biggest takeaway is the idea of ‘scuttlebut’–someone who gets information from industry contacts that one develops and speaks with a bunch of them to get a more colorful picture of the company so one can understand the competitive position of the industry and company better. I guess this is what we could call “channel checks” in today’s parlance.
Fisher provides fifteen points to look for in a common stock
This is a very well-curated list, but I don’t think that this is where the book pays for itself. Most investors already look for most of the items listed below, and the list is not as useful as it must have bee back in 1958. Nonetheless, it is a phenomenal checklist.
  1. Can the firm have potential for sizable increase in sales for years to come?
  2. Does the management strive to develop products that will compensate for stabilization decline of the sales of the existing products? (some large companies tend to interrupt regular R&D for pet projects, which is often not successful).
  3. How effective are firm’s R&D efforts? Also, need to better understand what companies mean by R&D. Sometimes market research, or simple sales engineering is bucketed under R&D, and doesn’t represent true developmental research.
  4. Does the company have an above-average sales organization? (Fisher says that this is the trait that is most difficult to evaluate)
  5. Does company have a decent profit margin or is it a marginal company?
  6. What is the company doing to improve margins? (this is something the management will freely talk about)
  7. Does the company have outstanding labor and personnel relations?
  8. … outstanding executive relations?
  9. … has depth in its management?
  10. How good is company’s cost analysis and accounting controls? (in most of the cases, if the company is good at most of the other things, it can be assumed that the company is good at this too).
  11. Are there any other aspects of the business (perhaps peculiar to the business) that will give a hint about the company’s standing vs. the competition?
  12. Does the company have a short-range or long-range outlook when it comes to profits?
  13. Will the foreseeable growth require equity financing?… if it is years ahead, it is not that important as it can be assumed that the prices will be at a much higher levels. (quite an assumption here)
  14. Does the management talk even when things are not going well?
  15. Does the company have management of unquestionable integrity?
Stocks vs bonds
Fisher makes a strong case for stocks over bonds using the following logic. He says that the way our laws are written, and our accepted beliefs about what to expect in a recession, makes one of the two things likely. One, either the business will remain good and stocks will outperform bonds, or a significant recession will happen, when for a while bonds will out-perform stocks, but the recessions will cause the Fed to intervene (causing inflation) and the Federal government to produce deficits that will together lower the value of fixed-income instruments. This, of course, does not apply in the 2008 recession, as that was brought by collapse of the financial system after an obscene amount of debt was built in the system, and the Fed very quickly hit the zero-bound line of interest rates, and banks made hardly many loans post-recovery, causing very little inflation.
When to buy?
Fisher says that people often rely too much on the business cycle to make this decision, but this is but one of forces; the others are (a) interest rates, (b) government attitude toward investment and private enterprise, (c) inflation trends, and (d) new inventions that affect existing industries–the most powerful force. He says that instead of relying on the business cycle and general stock market trend, people should buy when funds are available. He says that buying points do no necessarily come out of corporate troubles, but could be a case where significant capex has been spent to get a plant running and some incremental capex can improve the productivity by a lot, which would a very high ROIC when thought of as a project on its own.
What about dividends?
Fisher thinks that dividends are overhyped. The company should allocate assets to pursue maximum future cash flow growth. He says that the company in the end attracts the investor-base it wants to, as long it doesn’t change its dividend policy–more important than high dividends is a consistent dividend policy. He compares a company to restaurant. He says that a restaurant can’t succeed if it catered to different clientele every day; it must be somewhat consistent.
Some interesting tidbits from the book-
  • Industrial organizations used to have small R&D departments. Research activity increased for military purposes at first due to fear of Adolph Hitler.
  • Capex and D&A is an interesting area where accounting, which doesn’t account for time value of money, can confuse people. Capex is always spent in current $s but D&A is spent in old $s which have a higher value than the simple accounting rules shows them for. This needs to be kept in mind as one analyzes companies with long depreciation schedules. This is beneficial for growth companies as they’re spending capex so fast that the D&A is recent $s and hence they’re obfuscating less than what older slower-growth companies would have.
  • Don’t over-stress diversification
  • Fisher talks about one of the ways in which the leader always remains the leader. He talks about situations where the buyer comes back to leader because no one will criticize the purchasing manager for making a safe decision, unless there is a significant economic difference.