Sunday, 17 April 2016

Summary of Common Stocks and Uncommon Profits by Philip A. Fisher

Philip A. Fisher’s Stocks Selection Criteria - What to buy?

In his book, Common Stocks and Uncommon Profits, Philip A. Fisher listed down his 15 points on the criteria of selecting good stocks. These 15 points cover 4 areas on sales & growth, financial, management and leadership.

Area 1: Sales & growth
Products and services that have market potential to increase and give sizable sales for few years (Point 1)
Management determination in develop new products and services for growth and sales potential (Point 2)
Effectiveness of research & development in relation to size (Point 3)
An above average sales organization (Point 4)

Area 2: Financial
A worthwhile profit margin (Point 5)
Effort in maintaining or increasing profit margin (Point 6)
Good cost analyses and accounting control (Point 10)
Will new equity funding require from growth subsequently cancel the existing stockholders’ benefit from this anticipated growth? (Point 13)

Area 3: Management
Outstanding labor and personnel relations (Point 7)
Outstanding executive relations (good executive climate for team work) (Point 8)
Development of proper management in depth. Delegation of authority to develop pool of talents (Point 9)

Area 4: Leadership: visions and characters
Peculiarity of the company in winning the competition (Point 11)
Management perspectives in regard to profits (short-range or long range) (Point 12)
Management attitude in conveying troubles and disappointments. “Clam up”? (Point 14)
Unquestionable integrity (Point 15)

Philip A. Fisher’s Stocks Strategies - When to buy? When to sell or not to sell?

In Common Stocks and Uncommon Profits, Philip Fisher provided guidelines on timing of buying and selling stocks. Once a company fits into the 15 points criteria of a good and growth stock, when should we start buying the stocks? When should we sell it?

When to buy a good stock?

The best time to buy a company’s shares is right before the improvement of its earning power and before its shares price reflects the anticipated earnings improvement.
When the company’s commercial plant for a new processes is about to begin production. Initially, growth drains profit and other resources of the business. The point in the development of a new process that worth considering as buying time is that at which the first full-scale commercial plant is about to begin production. (Extra cost will incur, benefit of the new production has not crept into EPS. But eventually profit will come.) This criteria can only apply to the companies that fit the 15 points
When the company Introduces new products
When the company faces problems of starting complex plants. Such troubles are temporary rather than permanent
Alternatively, we can just buy into outstanding companies, though our patient will be tested.

Another important strategy is that we should buy the shares in staggered way. Spread the timing of buying to avoid losses caused by major economic storm.

When to sell?

There are only 3 reasons to sell
When a mistake has been made in the original purchase
The company has no longer qualified in regard to the fifteen points, either through deterioration or exhaustion of growth prospects
Switch to a more attractive investment as our investment resources (money) are limited

When not to sell?
General stock market movement, as the good companies that fit the 15 points may defy business cycle
Overpriced, as you cannot know whether it is really overpriced. The companies that fit the 15 points have good growth prospects
The price of the stock has a huge advance

Ultimately, "If the job has been correctly done when a common stock is purchased, the time to sell it is – almost never." – Philip A Fisher

Philip A. Fisher’s "Ten Don'ts" For Investors

In his book, Common Stocks and Uncommon Profits, Philip Fisher also stated "Ten Don'ts" for investors.

Don’t buy into promotional companies
Don’t ignore a good stock just because it is traded “over the counter”
Don’t buy a stock just because you like the “tone” of its annual report
Don’t assume that the high price at which a stock may be selling in relation to earnings (PER) is necessarily an indication that further growth in those earnings has largely been already discounted in the price.
Don’t quibble over eights and quarters, i.e. few sens.
Don’t overstress diversification
Don’t be afraid of buying on a war scare
Don’t be influenced by what doesn’t matter, that statistic of former years’ earnings and particularly of per-share price ranges of these former years quite frequently “have nothing to do with the case”.
Don’t fail to consider time as well as price in buying a true growth stock. Based on time, rather than price, eg. a month before the commission of new plant, etc.
Don’t follow the crowd, ie. collective perception on the broad picture or particular industry, trend, outlook, favor of the months, etc. These investment fads and misinterpretation of facts may run for several months or several years. Given the same facts, change of such perceptions would lead to different conclusion.

Philip A. Fisher’s View on Dividend

According to Philip Fisher, in his book Common Stocks and Uncommon Profits, a company that fits the 15 points should retain its profits for better growth instead of distributing the profits to investors. There are more opportunities available to the management to get high yield investments than that available to the investors.

Argument on tax effects of dividend is not entirely relevant to Malaysian investors due to different tax system.

“Actually dividend considerations should be given the least, not the most, weight by those desiring to select outstanding stock.” – Philip A Fisher

“Worthy of repetition here is that over a span of five to ten years, the best dividend results will come not from the high-yield stocks but from those with the relatively low yield.” – Philip A Fisher

In a way I cannot entirely agree with Philip Fisher in his view on dividend. I always like to invest in company with opportunities of growth, financially strong with net cash and that distributes dividend consistently. By receiving dividends periodically, I can be patient even when the market falls for a long period of time.

Without dividend, I am not sure if I can maintain the discipline to hold on to good stocks in an economy downturn. It is such "discipline" (plus knowledge in the company) that ultimately decides our investment outcome of gain or loss.

Philip A. Fisher’s Method on Finding Growth Stocks

In Common Stocks and Uncommon Profits, Philip Fisher illustrated his method of finding growth stocks.

Step 1
Listen to investment men with great ability as a source of original leads on what to investigate. Typical public printed brokerage bulletin available to everyone is not a fertile source. Few hours conversation, with and outstanding investment man, occasionally with a business executives or scientist, would lead to a decision that a particular company might be exciting.

Step 2
He didn’t approach anyone in the management in this stage. He didn’t spend hours and hours going over old annual reports and making minutes studies of minor year-by-year balance sheet changes. He didn’t ask every stockbroker he knew what he thinks of the stock.

He would glance over
a. The balance sheets to determine general nature of the capitalization and financial positions.
b. Breakdown of total sales by product line
c. Competitions
d. Shareholdings
e. All earnings statement figures throwing light on depreciation, profit margins, extent of research activity and abnormal or non-recurring costs in prior years’ operations

Step 3
Using “scuttlebutt” method, he would try to see every key customer, supplier, competitor, ex-employee or scientist in a related field that he knew or whom he could approach through mutual friends.

If he did not know enough of people that could lead to such background information, he would stop and do something else.

He would go through commercial bankers to those businessmen who have the information.

“Scuttlebutt” method
This method provides the clues that are needed to find really outstanding investments.
Ask the
a. Competitors
b. Researchers of the competitors, government, universities, etc.
c. Vendors
d. Customers
e. Executives of trade association
f. Former employees

Step 4
He would gather at least 50% of all the knowledge he would need to make the investment before approaching the management.

He would choose to see the man who make the decisions, not the financial public relations officer. It is wise and important to go to considerable trouble to be introduced to a management by the right people, ie. key customers, major shareholders, investment banking connections, etc.

He bought one out of two or two-and- a-half companies he visited. He had done his scuttlebutt work well enough to be very certain even before he visited the company. Meeting management was merely to confirm hopes or to ease fears by answers that make sense.

“One of the ablest investment men I have ever known told me many years ago that in the stock market a good nervous system is even more important than a good head. Perhaps Shakespeare unintentionally summarized the process of successful common stock investment: There is a tide in the affairs of men which, taken at the flood, leads on to fortune.” – Philip A Fisher

1 comment:

Anonymous said...

Fantastic notes. Thanks for sharing.