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.

Summary

• 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"

http://www.physics.ohio-state.edu/~prewett/writings/BookReviews/CommonStocksAndUncommonProfits.html

Common Stocks and Uncommon Profits by Philip Fisher

Published on 6 Jun 2013

Widely respected and admired, Philip Fisher is among the most influential investors of all time. His investment philosophies, introduced almost forty years ago, are not only studied and applied by today's financiers and investors, but are also regarded by many as gospel. This book is invaluable reading and has been since it was first published in 1958. The updated paperback retains the investment wisdom of the original edition and includes the perspectives of the author's son Ken Fisher, an investment guru in his own right in an expanded preface and introduction
"I sought out Phil Fisher after reading his Common Stocks and Uncommon Profits...A thorough understanding of the business, obtained by using Phil's techniques...enables one to make intelligent investment commitments."
Warren Buffet

Philip Fisher: Quality first, Price second

•Philip Fisher:
Quality first, Price second

•

•Fisher formulated a clear and sensible investing strategy (which I'll get to in a second), wrote one of the best investment books of all time, Common Stocks and Uncommon Profits, and made a good deal of money for himself and his clients.

•

•His son wrote that Phil's best advice was 

•to "always think long term," 

•to "buy what you understand," and 

•to own "not too many stocks." 

•

•Charles Munger, who is Buffett's partner, praised Fisher at the 1993 annual meeting of their company, Berkshire Hathaway Inc. (BRK/A): "Phil Fisher believed in concentrating in about 10 good investments and was happy with a limited number.

•

•That is very much in our playbook.

•And he believed in knowing a lot about the things he did invest in.  And that's in our playbook, too.

•And the reason why it's in our playbook is that to some extent, we learned it from him."

•

•In addition to the warning against over-diversification — or what Peter Lynch, the great Fidelity Magellan fund manager, calls "de-worse-ification" — the book makes three important points:

•

•(1)  First, don't worry too much about price.  (Quality first, Price second)

•(2)  Second, Fisher says that investors must ask, "Does the company have a management of unquestionable integrity?" 

•(3)  Finally, Fisher offered the best advice ever on selling stocks. "It is only occasionally," he wrote, "that there is any reason for selling at all."

•

•

•

•(1)  First, don't worry too much about price.  (Quality first, Price second)

•

•(1)  First, don't worry too much about price.  (Quality first, Price second)

•"Even in these earlier times [he's talking here about 1913], finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear.”

•(1)  First, don't worry too much about price.  (Quality first, Price second)

•In fretting about whether a stock is cheap or expensive, many investors miss out on owning great companies. 

•My own rule is: quality first, price second.

•

•

•(2)  Second, Fisher says that investors must ask, "Does the company have a management of unquestionable integrity?" 

•

•(3)  Finally, Fisher offered the best advice ever on selling stocks. "It is only occasionally," he wrote, "that there is any reason for selling at all."

•

•Yes, but what are those occasions?

•They come down to this: Sell if a company has deteriorated in some important way.  

•And I don't mean price! 

•

•Fisher's view, instead, is to look to the business — the company itself, not the stock. 

•

•"When companies deteriorate, they usually do so for one of two reasons: 

•Either there has been a deterioration of management, or 

•the company no longer has the prospect of increasing the markets for its product in the way it formerly did."

•

•A stock-price decline can be a key signal:  "Pay attention!  Something may be wrong!" 

•But the decline alone would not prompt me to sell.  

•Nor would a rise in price. 

•

•Time to sell? 

•If you did, you missed another doubling.

•

•"How long should you hold a stock? 

•As long as the good things that attracted you to the company are still there."

•  

Why Stocks?

Past performance is no guarantee for future performance.  There are no guarantees that any asset will thrive in the future because it has in the past.

This leaves two choices:

1.  Keep hard cash and save enough during your working years to last your retirement years; or
2.  Take some risks and invest the money in assets that have a reasonable chance of increasing in value over time.

Keeping cash:  Most people cannot save enough to support them in retirement especially when inflation continuously erodes the purchasing power of money.  Therefore, most would not choose this option.

Investing the money in different asset classes:  Here is where the problem of choosing investment options comes in.  It is definitely wise to spread your wealth across various asset classes like stocks, bonds, real estate, art or gold.

Why Stocks
Stocks increase in value faster than inflation decreases the buying power of money.  The best way to have money in the future is to make money in the future.  So, forget about which asset class will appreciate in the future but rather focus on owning a business that profitably sells products or services.  Of course, most do not have the inclination, the money or the skills to start their own business, so the next best way to share in the profits is through the stock markets.

Stocks represent ownership interest in businesses.  When you invest in stocks, you become a partial owner of the concern that will hopefully make money in the future.  Stock ownership will reward the owners either because the stock prices go up or because the firm/s profits will be distributed as dividends.  In the short period stocks may rise for reasons having nothing to do with profitability or dividends.  But over the long periods of time it has been proved that stock prices rise in relation to a company's earnings and distribution of profits to shareholders in the form of dividends, bonus share and rights.  Learn and acquire the knowledge to consistently identify specific companies that will thrive.  In the absence of this ability, employ the services of a professional.

If you don't plan to tap into your long-term savings for a period of at least five years, stocks should probably constitute the bulk of your portfolio depending upon your emotional strength to deal with the ups and downs of the market.  Even retirees who draw their current income from their investments should have a portion of their savings invested in stocks so that their money will grow faster than inflation.

To be a savvy investor, know the difference between investing and speculating.

Common Stocks and Uncommon Profits by Philip Fisher (Summary)

Common Stocks and Uncommon Profits by Philip Fisher
INTRODUCTION By Kenneth L. Fisher (Philip Fisher’s Son) Ken Fisher credits his father for teaching him the "craft" of investing. He writes that, "It’s the difference between learning to play the piano (craft) and then composing (art)." Indeed Ken’s own investment practice—his art— deviates from his father’s preference for growth stocks; Ken prefers value-oriented investments. But the process Ken uses to arrive upon investment decisions is largely based on his father’s tenets of "scuttlebutt" and "the fifteen points." As the son now runs a large investment management company he uses these principles en mass. He also believes his father’s ideas about undue diversification, in particular, influenced Buffett. Phil Fisher went to Stanford and started work as a security analyst in San Francisco in 1928. He formed his own firm, Fisher & Co., in 1931. After some years in the game he decided to write this book, "In studying the investment record of both myself and others, two matters were significant influences in causing this book to be written. One, which I mention several times elsewhere, is the need for patience if big profits are to be made from investment. Put another way, it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens. The other is the inherently deceptive nature of the stock market. Doing what everybody else is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all."
1:  CLUES FROM THE PAST Fisher summarizes his conclusions from the past in the following paragraph, "Such a study indicates that the greatest investment reward comes to those who by good luck or good sense find the occasional company that over the years can grow in sales and profits far more than industry as a whole. It further shows that when we believe we have found such a company we had better stick with it for a long period of time. It gives us a strong hint that such companies need not necessarily be young and small. Instead, regardless of size, what really counts is a management having both a determination to attain further important growth and an ability to bring its plans to completion…It makes clear to us that a general characteristic of such companies is a management that does not let its preoccupation with long-range planning prevent it from exerting constant vigilance in performing the day-to-day tasks of ordinary business outstandingly well."
2:  WHAT SCUTTLEBUTT CAN DO Merriam-Webster defines "scuttlebutt" as: 1, a : a cask on shipboard to contain freshwater for a day's use, b : a drinking fountain on a ship or at a naval or marine installation 2 : RUMOR, GOSSIP Fisher makes use of definition 2 here in the second chapter. "It is amazing what an accurate picture of the relative points of strength and weakness of each company in an industry can be obtained from a representative cross-section of the opinions of those who in one way or another are concerned with any particular company." Though he writes only three pages about scuttlebutt here, Fisher assures us the concept will be discussed in great detail all throughout the book.
3:  WHAT TO BUY, THE FIFTEEN POINTS… Below you will find "The Fifteen points to look for in a common stock," Fisher’s famous checklist for the inquiring investor. 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 labor and personnel relations? 8. Does the company have outstanding executive relations? 9. Does the company have depth to its management? 10. How good are the company’s cost analysis and accounting methods? 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 regards to profits? 13. In the foreseeable future will the growth of the company require sufficient equity financing so that the large number of shares then outstanding will largely cancel the existing benefit from this anticipated growth? 14. Does the 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?
4:  APPLYING THIS TO YOUR OWN NEEDS "The typical investor has usually gathered a good deal of the half-truths, misconceptions, and just plain bunk that the general public has gradually accumulated about successful investing." Fisher posits that the average investor believes only a bookish genius is capable of superior returns. He doesn’t agree with this mean mentality. "The most skilled statistical bargain hunter ends up with a profit which is but a small part of the profit attained by those using reasonable intelligence in appraising the business characteristics of superbly managed growth companies," he further expounds upon his view of apparent expertise, "Even among some of the so-called authorities on investment, there is still enough lack of agreement on the basic principles involved that it is as yet impossible to have schools for training investment experts…"
5:  WHEN TO BUY Contrary to Buffett, Fisher is looking for companies that "will have spectacular growth in their per-share earnings." (Buffett is primarily concerned with consistent and handsome returns on equity.) Buffett and Fisher do agree on the worthlessness of macroeconomic forecasting. Fisher writes, "The conventional method of timing when to buy stocks is, I believe, just as silly as it appears on the surface to be sensible. This method is to marshal a vast mass of economic data…I believe that the economics which deal with the forecasting business trends may be considered to be about as far along as was the science of chemistry during the days of alchemy in the Middle Ages." Fisher prefers to buy into outstanding companies when their earnings are temporarily depressed, and so consequently is the share price, because of a new product or process launch. "In contrast to guessing which way general business or the stock market may go, he should be able to judge with only a small probability of error what the company into which he wants to buy is going to do in relation to business in general."
6:  WHEN TO SELL Fisher is very precise about when to sell. "I believe there are three reasons, and three reasons only, for the sale of any common stock which has been originally selected according to the investment principles already discussed." They are:  1.) Upon realizing a mistake,  2.) When a stock no longer meets the 15 points, and 3.) If a substantially attractive investment arises and stock needs to be sold to finance that investment. Interestingly, Buffett’s commonly told parable about investing in your classmates seems to have originated out of this chapter. Both describe a hypothetical scenario of buying a percentage of the future earnings of a classmate. The point being that we should rationally select people on the basis of their character rather than purely on their intellect. Fisher notes how foolish it would be to sell your lucrative future contract on classmate’s earnings for the sake of buying another, less proven, classmate’s earnings, simply because somebody offered to buy your original classmate investment at a high price.
7:  THE HULLABALOO ABOUT DIVIDENDS Fisher warns us to be wary of two scenarios when earnings are retained and no dividends are paid.  The first is when executives pile up liquid assets for a sense of security.  The second occurs when "substandard managements can get only a subnormal return on the capital already in the business, yet use the retained earnings merely to enlarge the inefficient operation rather than to make it better." Fisher posits that "regularity or dependability" is the most important characteristic of dividends. He illustrates his claim using the restaurant parable that Buffett so often cites. "There is perhaps a close parallel between setting policy in regard to dividends and setting policy on opening a restaurant. A good restaurant man might build up a splendid business with a high priced venture. He might also build up a splendid business with an attractive place selling the best possible meals at the lowest possible prices. Or he could make a success of Hungarian, Chinese, or Italian cuisine. Each would attract a following. People would come there expecting a certain kind of meal. However, with all his skill, he could not possibly build up a clientele if one day he served the costliest meals, the next day low-priced ones, and then without warning served nothing but exotic dishes. The corporation that keeps shifting its dividend policies becomes as unsuccessful in attracting a permanent shareholder following. Its shares do not make the best long-range investments."
8:  FIVE DON’TS FOR INVESTORS "1. Don’t buy into promotional companies." "When a company is in a promotional stage…all an investor or anyone else can do is look at a blueprint and guess what the problems and strong points may be." "There are enough spectacular opportunities among established companies that ordinary individual investors should make it a rule never to buy into a promotional enterprise." Fisher wants to see a firm with at least one year of operational profit and two to the three years of business before investing. "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." "The annual report may…reflect little more than the skill of the company’s public relations department in creating an impression about the company in the public mind." "4. Don’t assume that the high price at which a stock my be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been discounted already in the price." "…why shouldn’t this stock sell five years from now for twice the price-earnings ratio of these more ordinary stocks just as it is doing now and has done for many years past?" "5. Don’t quibble over eights and quarters." "If the stock seems the right one and the price seems reasonably attractive at current levels, buy ‘at the market.’"
9:  FIVE MORE DON’TS FOR INVESTORS Given the recent terror and talk of war, we will focus on point two in this chapter. "2. Don’t be afraid of buying on a war scare." "At the conclusion of all actual fighting—regardless of whether it was World War I, World War II, or Korea—most stocks were selling at levels vastly higher than prevailed before there was any thought of war at all. Furthermore, at least ten times in the last twenty-two years, news has come of other international crises which gave threat of major war. In every instance, stocks dipped sharply on the fear of war and rebounded sharply as the war scare subsided." "War is always bearish on money. To sell a stock at the threatened or actual outbreak of hostilities so as to get into cash is extreme financial lunacy. Actually just the opposite should be done. If an investor has about decided to buy a particular common stock and the arrival of a full-blown war scare starts knocking down the price, he should ignore the scare psychology of the moment and definitely begin buying." The other four points… 1. Don’t overstress diversification. 3. Don’t forget your Gilbert and Sullivan. 4. Don’t fail to consider time as well as price in buying a true growth stock. 5. Don’t follow the crowd.
10:  HOW I GO ABOUT FINDING A GROWTH STOCK "Possibly one-fifth of my first investigations start from ideas gleaned from friends in industry and four-fifths from culling what I believe are the more attractive selections of a small number of able investment men. These decisions are frankly a fast snap judgment on which companies I should spend my time investigating and which I should ignore. Then after a brief scrutiny of a few key points in an SEC prospectus, I will seek ‘scuttlebutt’ aggressively, constantly working toward how close to our fifteen-point standard the company comes. I will discard one respective investment after another along the way. Some because the evidence piles up that they are just run of the mill. Others because I cannot get enough evidence to be reasonably sure one way or the other. Only in the occasional case when I have a great amount of favorable data do I then go to the final step of contacting the management. Then if after meeting with management I find my prior hopes pretty well confirmed and some of my previous fears eased by answers that to me make sense, at last I am ready to feel I may be rewarded for all my efforts." Fisher also notes that he’ll invest in one stock out of two hundred fifty that he initially considers. For every two to two and a half visits he’ll buy into the company—this points to the fact that most of his work is done beforehand.
11:  SUMMARY AND CONCLUSION Chapter eleven concludes the first part of Fisher’s book; it and the chapters leading to it comprise a book within a book. "This book has attempted to show what these basic principles are, what type of stock to buy, when to buy it, and most particularly, never to sell it—as long as the company behind the common stock maintains the characteristics of an unusually successful enterprise."
Part two is of the book is entitled, "Conservative Investors Sleep Well." Fisher begins by defining two terms: "1. A conservative *investment* is one most likely to conserve (i.e. maintain) purchasing power at a minimum risk. 2. Conservative *investing* is understanding of what a conservative investment consists and then, in regard to specific investments, following a procedural course of action needed properly to determine whether specific investment vehicles are, in fact, conservative investments." At the time of writing, in mid-1974, Fisher noted that the morale of the investor was the lowest it had been in history since the Depression. Consequently there existed, "a magnificent opportunity for those with the ability and the self-discipline to think for themselves and to act independently of the popular emotions of the moment."
II. 1:  THE FIRST DIMENSION OF A CONSERVATIVE INVESTMENT "The company that qualifies well in this first dimension of a conservative investment is a very low cost producer or operator in its field, has outstanding marketing and financial ability and a demonstrated above-average skill on the complex managerial problem of attaining worthwhile results for its research or technological organization. In a world where change is occurring at an ever increasing pace, it is  (1) a company capable of developing a flow of new and profitable products or product lines that will more than balance older lines that maybe become obsolete by the technological innovations of the others;  (2) a company able now and in the future to make these lines at costs sufficiently low so as to generate a profit stream that will grow at least as fast as sales and that even in the worst years of general business will not diminish to a point that threatens the safety of an investment in the business; and  (3) a company able to sell its newer products and those which it may develop in the future at least as profitably as those with which it is involved today." - Fisher.
II. 2:  THE SECOND DIMENSION The second dimension is the most important of the qualitative aspects of sound investing: the people factor. "Here is an indication of the heart of the second dimension of a truly conservative investment: a corporate chief executive dedicated to long-range growth who has surrounded himself with and delegated considerable authority to an extremely competent team in charge of the various divisions and functions of the company." Fisher warns us of one-man shows and provides an insight into determining the managerial balance of an investment, "If the salary of the number-one man is very much larger than that of the next two or three, a warning flag is flying." Fisher concludes with three points about the second dimension: "1. The company must recognize that the world in which it is operating is changing at an ever increasing rate." Dow Chemical is looked at as an example. "2. There must always be a conscious and continuous effort, based on fact, not propaganda, to have employees at every level, from the most newly hired blue-collar or white-collar worker to the highest levels of management, feel that their company is a good place to work." Texas Instruments is looked at as an example. "3. Management must be willing to submit itself to the disciplines required for sound growth."
II. 3:  THE THIRD DIMENSION Investment Characteristics of Some Businesses Fisher’s third degree deals with "the degree to which there does or does not exist within the nature of the business itself certain inherent characteristics that make possible can above-average profitability for as log as can be foreseen into the future." Fisher’s views on profitability jibe with Buffett’s concerns about inflation, indeed Fisher may have influenced Buffett in this regard. "A company that has annual sales three times its assets can have a lower profit margin but make a lot more money than one that needs to employ a dollar of assets in order to obtain each dollar of annual sales." Fisher sides with industry leaders rather than number two and three players. "It has been our observation, that in many years of trying, Westinghouse has not surpassed General Electric, Montgomery Ward has not overtaken Sears, and---once IBM established early dominance in its areas of the computer market—even the extreme efforts of some of the largest companies in the country, including General Electric, did not succeed in displacing IBM from it’s overwhelming share of that market." In short, along with good leadership, a company needs great economics for it to be truly a conservative investment.
II. 4 :  THE FOURTH DIMENSION Price of a Conservative Investment Fisher posits that many fortunes have been made when investors have refused to sell their position in a rapidly appreciating equity. If the company is of a high quality then selling it is rather foolish, at almost any price, because of the scarcity of high-quality investments. What will you do with the money? "Every significant price move of any individual common stock in relation to stocks as a whole occurs because of a changed appraisal of that stock by the financial community," writes Fisher. He warns us about the vagaries of these "appraisals", emphasizing that they are not snapshots of true company performance but only opinions of fallible human minds—minds prone to herd behavior at that.
II. 5 :  MORE ABOUT THE FOURTH DIMENSION To illustrate the willy-nilly stances common to analysts Fisher looks their views chemical industry from the 1950s to the 1970s. In the 50s chemical concerns were golden synthesizing wonder products like DDT and nylon. In the 60s they appeared to be commodity producers with seemingly the same business characteristics of steel mills. Then in the 70s, for whatever reason, chemical stocks became expensive again.
II. 6 :  STILL MORE ABOUT THE FOURTH DIMENSION "The fourth dimension to stock investing might be summarized in this way: The price of any particular stock at any particular moment is determined by the current-financial community appraisal of the particular company, of the industry it is in, and to some degree of the general level of stock prices. Determining whether at that moment the price of a stock is attractive, unattractive or somewhere in between depends for the most part on the degree these appraisals vary from reality. However, to the extent that the general level of stock prices affects the total picture, it also depends somewhat on correctly estimating coming changes in certain purely financial factors, of which interest rates are by far the most important."
III. 1:  ORIGINS OF A PHILOSOPHY --Part III is entitled "Developing an Investment Philosophy"-- This chapter reviews Fisher’s early hard-luck experiences and how they forged his philosophy. His interest in investing bubbled up as grammar school kid when he overheard his uncle explaining stocks to Fisher’s grandmother. Fifteen years or so later he had completed his first year at Stanford and went to work for a bank "writing" reports on companies which the bank was issuing high-yield debt for. (He noted that he wasn’t really originating the reports, as the standard practice was to paraphrase whatever was in Moody’s.) Encouraged by a supporting boss, Fisher began seeking out the management of the debt issuing companies and incorporating his inquiries into his reports. In performing his due diligence Fisher came to a first principle, "Reading the printed financial records about a company is never enough to justify an investment." Fisher went on to loose money during this period of time. He wasn’t alone: it was 1929. Another principle learned – "what really counts in determining whether a stock is cheap or overpriced is not the ratio to the current year’s earnings, but its ratio to the earnings a few years ahead"--, and one more job completed at an investment firm, Fisher struck out on his own. In 1933 he managed a monthly profit of $29 (rent was $25), but soon (1935) his practice was "extremely profitable."
III. 2 :  LEARNING FROM EXPERIENCE Fisher begins by recounting his intrigue with Food Machinery Corporation; he started pay attention to the operations of this firm in 1928. Food Machinery Corporation was the product of a merger between three agricultural machinery companies. The company appealed to Fisher for three business reasons: it was a "world leader in size," it had cornered some pockets of the market, and it enjoyed the fruits of a "superbly creative research or engineering department." In addition to these favorable business economics Fisher trusted and admired the company’s management. There was a shotgun burst of IPOs in 1928, including that of Food Machinery Corporation. "Food Machinery was thought to be just another of the many ‘flaky’ which were sold to the public at the height of a speculative orgy…it was possible to buy these shares in quantity at the ridiculous price to which they had sunk." And that was what Fisher did for his clients. Unfortunately, Fisher doesn’t disclose the success of this investment in this chapter. He does gives us another principle, namely, "I established what I called my three-year rule. I have repeated again and again to my clients that when I purchase something for them, not to judge the results in a matter of a month or a year, but allow me a three year period." Fisher broke this rule one time, when he sold Rogers Corporation in the mid 1970s.
III. 3 :  THE PHILOSOPHY MATURES Fisher’s entrepreneurial efforts stalled when he served in the Air Force for three years starting in 1942. His assignments occasionally gave him time to plot his return to investing. Upon returning he decided to earnestly investigate the chemical industry, as Fisher was convinced of its post-war growth potential. His research culminated when, in 1947, he invested in Dow Chemical. Dow appealed to Fisher because of its efforts to become the lowest cost producer in each of its markets and because of its emphasis on the "people factor." When Fisher asked the president of Dow what he foresaw as Dow’s biggest problem in the future the president confessed that he worried about Dow becoming a more "military-like organization" – such concern for people sold Fisher. One of Fisher’s key principles is repeated in this chapter: "Even if the stock of a particular company seems at or near a temporary peak and that a sizable decline may strike in the near future, I will not sell the firm’s shares provided I believe that its longer term future is sufficiently attractive."
III. 4:  IS THE MARKET EFFICIENT? According to Fisher, the market is not efficient. "Efficient market theory grew out of the academic School of Random Walkers. These people found that it was difficult to identify technical trading strategies that worked well enough after transactions [sic] costs to provide an attractive profit an attractive profit relative to the risks taken. I don’t disagree with this. As you have seen, I believe it is very, very tough to make money with in and out trading based on short-term market forecasts. Perhaps the market is efficient in this narrow sense of the word…I do not believe that prices are efficient for the diligent, knowledgeable, long-term investor." Fisher points out that the prevailing view, that is the fully informed professional perspective, has often been incorrect or inefficient. "With the possible exception of the 1960’s, there has not been a single decade in which there was not some period of time when the prevailing view was that external influences were so great and so much beyond the control of individual corporate managements that even the wisest common stock investments were foolhardy and not perhaps for the prudent…Yet everyone of these periods created investment opportunities that seemed almost incredible with all the advantages of hindsight."
Here are the points, abbreviated, Fisher gives as his conclusion: 1. Buy into companies that have disciplined plans for achieving dramatic long-range growth in profits and that have inherent qualities making it difficult for newcomers to share in that growth. 2. Focus on buying these companies when they are out of favor. 3. Hold the stock until either (a) there has been a fundamental change in its nature (such as a weakening of management through changed personal), or (b) it has grown to a point where it no longer will be growing faster than the economy as a whole. 4. For those primarily seeking major appreciation of their capital, de-emphasize the importance of dividends. 5. Taking small profits in good investments and letting losses grow in bad ones is a sign of abominable investment judgment. A profit should never be taken just for the satisfaction of taking it. 6. There are a relatively small number of truly outstanding companies. Their shares frequently can’t be bought at attractive prices. Therefore, when favorable prices exist, full advantage should be taken of the situation. 7. A basic ingredient of outstanding common stock management is the ability to neither accept blindly whatever may be the dominant opinion in the financial community at the moment nor to reject the prevailing view just to be contrary for the sake of being contrary. 8. In handling common stocks, as in most other fields of human activity, success depends greatly on a combination of hard work, intelligence, and honesty.

Source:steadygains

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"Investing is simple, but not easy." - Warren Buffet