Tuesday, 6 May 2014

Common Stocks and Uncommon Profits by Philip Fisher

Fisher has a fairly simple investment plan:  buy only outstanding companies and sell only when they are no longer outstanding.  Although many people try to time the market, this is the method that he has found will consistently return good results.  However, finding outstanding companies is a bit of a challenge and the book mostly concentrates on suggestions on how to find the good ones and avoid the bad.

Fisher discovered that his main method of discovering quality companies was through "scuttlebutt".  Detailed analysis of company financials simply cannot provide the necessary information;  one must talk to people who know the company.  These, of course, are quite varied individuals, from competitors to vendors and customers, and when used with caution, former employees.

After scuttlebutt clearly points to a promising company, then an evaluation can be made with a list of requirements.  The requirements did not seem much different that Graham and Dodd propounded in The Intelligent Investor, and certainly not nearly as elegantly as inGood to Great.  They are designed to answer the questions "is management good" and "is the company doing what it needs to in order to maintain and expand its market position".  The latter focuses largely on technology research, an area that Fischer feels is required for continued success.

The book concludes some advice to investors on what not to do, which can be fairly effectively summarized by saying "ignore what Wall Street thinks is important".

While no means a thorough treatment of investment, Fisher provides very practial guidelines to how the investor can realize consistently good profits.  Unfortunately, as a fund manager Fisher is able to talk to management of a company, a luxury not necessarily afforded to the individual investor and some of his points require this ability.  However, there is no way to be sure one's judgement is correct;  his guidelines merely significantly increase the probabilities, and if the individual investor must settle for slightly worse probabilities, following Fisher's methods should still produce significantly better than average results.


  • Buy only high quality companies
  • Find these companies by talking to competitors, customers, vendors, and if one factors in the inevitably strong bias, from former employees.  After scuttlebutt consistently suggests that the company is good, continue investigations.
  • Fifteen points to look for.  Require fourteen, perhaps thirteen if the others are strong.
  1. "Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?"
  2. "Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?"
  3. "How effective are the company's research and development efforts in relation to its size?"
  4. "Does the company have an above-average sales organization?"
  5. "Does the company have a worthwhile profit margin?"
  6. "What is the company doing to maintain or improve profit margins?"
  7. "Does the company have outstanding [superb] labor and personnel relations?"
  8. "Does the company have outstanding [superb] executive relations?"
  9. "Does the company have depth to its management?"  (i.e. more than just one or two people)
  10. "How good are the company's cost analysis and accounting controls?"  (i.e. ability for detailed cost analysis)
  11. "Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?"
  12. "Does the company have a short-range or long-range outlook in regard to profits?"  (the latter is desirable)
  13. "In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this accelerated growth?"  (An answer in the negative is desirable)
  14. "Does management talk freely to investors about its affairs when things are going well but 'clam up' when troubles and disappointments occur?"
  15. "Does the company have a management of unquestionable integrity?"
  • We do not know enough to guess market trends.
  • The best time to buy is when a superb company has just spent lots of money developing a new product and (inevitably) delays occur, causing investors to push down the prices.  This always happens with new products and if you can have confidents in the outcome, the stock is now selling at a discount.
  • "If the job [selecting a company] has been correctly done when a common stock is purchased, the time to sell it is--almost never" (p. 91).
  • "Perhaps the most peculiar aspect of this much-discussed subject of dividends is that those giving them the least consideration usually end up getting the best dividend return"  (The better stocks typically have a lower dividend, but the company grows faster than the stocks with the bigger dividend, so the end result is a larger total dividend, although it is a smaller percentage)
    • Ed:  This is not quite the view of Graham and Dodd (The Intelligent Investor);  they claim that stocks with dividends generally increase faster than those without and virutally mandate consistent and increasing dividends.  However, Graham and Dodd lack a theory of how to pick great companies.  I think their view is that consistent and increasing dividends is a trait of companies likely to do well.
  • Ten don'ts for investors:
  1. "Don't buy into promotional companies"  (ie. IPOs)
  2. "Don't ignore a good stock just because it is traded 'over the counter'"
  3. "Don't buy a stock just because you like the 'tone' of its annual report"
  4. "Don't assume that the high price at which a stock may be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price"  (i.e.  the high P/E might be an indication that the company will continue to grow at those rates)
  5. "Don't quibble over eighths and quarters"  (i.e. don't try to get get a stock for 50 cents cheaper;  it may never get there and you never buy an excellent stock)
  6. "Don't overstress diversification"
  7. "Don't be afraid of buying on a war scare"
  8. "Don't forget your Gilbert and Sullivan"  (i.e. don't give too much weight to things that don't matter, like the price of the company four years ago, or the historical earnings.  What matters is the state of the company now.)
  9. "Don't fail to consider time as well as price in buying a true growth stock"
  10. "Don't follow the crowd"


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