When to Buy? FIVE powerful forces having extremely powerful influence on the general level of stock prices either by influencing mass psychology or by direct economic operation..

All types of common stock investors might well keep one basic thought in mind; otherwise, the financial community's constant worry about and preoccupation with the danger of downswings in the business cycle will paralyze much worthwhile investment action.

This thought is the current phase of the business cycle is but one of at least five powerful forces.  

All of these forces, either by influencing mass psychology or by a direct economic operation, can have an extremely powerful influence on the general level of stock prices.

The other four influences are:

1. the trend of interest rates,
2. the overall governmental attitude toward investment and private enterprise,
3. the long-range trend to more and more inflation, and 
4. possibly most powerful of all - new inventions and techniques as they affect old industries.

These forces are seldom all pulling stock prices in the same direction at the same time.

Nor is any one of them necessarily going to be of vastly greater importance than any other for long periods of time.

#  So complex and diverse are these influences that the safest course to follow will be the one that at first glance appears to be the most risky or riskiest.

#  This is to take investment action when matters you know about a specific company appear to warrant such action.

#  Be undeterred by fears or hopes based on conjectures, or conclusions based on surmises.

When to buy? You have some money to invest. Should you completely ignore the future trend of the business cycle?

Questions:

# Does this mean that if a person has some money to invest he should completely ignore what the future trend of the business cycle may be and invest 100% of this fund the moment he has found the right stocks and located a good buying point, as indicated above?

A depression might strike right after he has made his investment.

Since a decline of 40 to 50% from its peak is not at all uncommon for even the best stock in a normal business depression, is not completely ignoring the business cycle rather a risky policy?



1.   For those in the happy position of having a backlog of well-chosen investments bought comfortably below present prices.

Answers:  

This risk may be taken in stride by the investor who, for a considerable period of time, has already had the bulk of his stocks placed in well-chosen situations.

If properly chosen, these should by now have already shown him some fairly substantial capital gains.

But now, either because he believes one of his securities should be sold or because some new funds have come his way, such an investor has funds to purchase something new.

UNLESS it is one of those rare years when speculative buying is running riot in the stock market and major economic storm signals are virtually screaming their warnings (as happened in 1928 and 1929), this class of investor should ignore any guesses on the coming trend of general business or the stock market.

# Instead, he should invest the appropriate funds as soon as the suitable buying opportunity arises.



2.  For those NOT in the happy position of having a backlog of well-chosen investments bought comfortably below present prices.

Answers:

Perhaps this maybe the first time they have funds to invest.

Perhaps they may have a portfolio of bonds or relatively static non-growth stocks which at long last they desire to convert into shares that in the future will show them more worthwhile gains.

If such investors get possession of new funds or develop a desire to convert to growth stocks after a prolonged period of prosperity and many years of rising stock prices, should they, too, ignore the hazards of a possible business depression?

Such an investor would not be in a very happy position if, later on, he realized he had committed all or most of his assets near the top of a long rise or just prior to a major decline.

This does create a problem.  However, the solution to this problem is not especially difficult - as in so many other things connected with the stock market, it just requires an extra bit of patience.

# This group should start buying the appropriate type of common stocks just as they feel sure they have located one or more of them.

# However, having made a start in this type of purchasing, they should stagger the timing of further buying.

# They should plan to allow several years before the final part of their available funds will have become invested.

By so doing, if the market has a severe decline somewhere in this period, they will still have purchasing power available to take advantage of such a decline.  

If no decline occurs and they have properly selected their earlier purchases, they should have at least a few substantial gains on such holdings.

This would provide a cushion so that if a severe decline happened to occur at the worst possible time for them - which would be just after the final part of their funds had become fully invested - the gains on the earlier purchases should largely, if not entirely, offset the declines on the more recent ones.

No severe loss of original capital would, therefore, be involved.


Additional notes:

There is an equally important reason why investors who have not already obtained a record of satisfactory investments, and who have enough funds to be able to stagger their purchases should do so.

#  This is that such investors will have had a practical demonstration, prior to using up all their funds, that they or their advisors are sufficient masters of investment technique to operate with reasonable efficiency.

In the event that such a record had not been attained, at least, all of an investor's assets would not be committed before he had had a warning signal to revive his investment technique or to get someone else to handle such matters for him.

When to Buy? When to Sell? Learning from Philip Fisher describing a fund's investment into American Cyanamid share.

When to Buy?

Philip Fisher wrote:

"Immediately prior to the 1954 congressional elections, certain investment funds took advantage of this type of situation.  For several years before this time, American Cyanamid shares had sold in the market at a considerably lower price-earnings ratio than most of the other major chemical companies.  I believe this was because the general feeling in the financial community was that, while the Lederle division represented one of the world's most outstanding pharmaceutical organizations, the relatively larger industrial and agricultural chemical activities constituted a hodge-podge of expensive and inefficient plants flung together in the typical "stock market" merger period of the  booming 1920's.  These properties were generally considered anything but a desirable investment."

"Largely unnoticed was the fact that a new management was steadily but without fanfare cutting production costs, eliminating dead wood, and streamlining the organization.  What was noticed was that this company was'making a huge bet' - making a major capital expenditure, for a company its size, in a giant new organic chemical plant at Fortier, Louisiana.  So much complex engineering was designed into this plant that it should have surprised no one when the plant lagged many months behind schedule in reaching the break-even point.  As the problems at Fortier continued, however, the situation added to the generally unfavourable light in which American Cyanamid shares were then being regarded.  At this stage, in the believe a buying point was at hand, the funds to which I have already referred acquired their holdings at an average price of 45 3/4.  This would be 22 7/8 on the present shares as a result of a 2 for 1 stock split which occurred in 1957."

"What has happened since?  Sufficient time has elapsed for the company to begin getting the benefits of some of the management activities that were creating abnormal costs in 1954.  Fortier is now profitable.  Earnings have increased from $1.48 per (present) common share in 1954 to $2.10 per share in 1956 and promise to be slightly higher in 1957, a year in which most chemical (though not pharmaceutical) profits have run behind those of the year before.  At least as important, 'Wall Street; has come to realize that American Cyanamid's industrial and agricultural chemical activities are worthy of institutional investment.  As a result, the price-earnings ratio of these shares has changed noticeably.  A 37 percent increase in earnings that has taken place in somewhat under 3 years has produced a gain in market value of approximately 85 percent."



Since writing these words, the financial community's steady upgrading of the status of American Cyanamid appears to have continued.  With earnings for 1959 promising to top the previous all-time peak of $2.42 in 1957, the market price of these shares has steadily advance.  It now is about 60, representing a gain of about 70 percent in earning power and 163 percent in market value in the five years since the shares referred to were acquired.


In 1954 Cyanamid stock was purchased by "certain funds" referred to by Philip Fisher in his original edition.  These funds are no longer retaining the shares, which were sold in the spring of 1959 at an average price of about 49.  This was of course significantly below the current market (60) but still represented a profit of about 110 percent.



When to Sell?

The size of the profit had nothing whatsoever to do with the decision to sell.

There were two motives behind the decision.

1.  One was that the long-range outlook for another company appeared even better.  While not enough time has yet passed to give conclusive proof one way or the other, so far comparative market quotations for both stocks appear to have warranted this move.

2.  There was a second motive behind this switch of investments which hindsight may prove to be less credible.  This was concern that in relation to the most outstanding of competitive companies, American Cyanamid's chemical (in contrast to its pharmaceutical) business was not making as much progress in broadening profit margins and establishing profitable new lines as had been hoped.  Concern over these factors was accentuated by uncertainty over the possible costs of the company's attempt to establish itself in the acrylic fiber business in the highly competitive textile industry.  This reasoning may prove to be correct and still could turn out to have been the wrong investment decision, because of bright prospects in the Lederle, or pharmaceutical division.  These prospects have become more apparent since the shares were sold.  The possibilities for a further sharp jump in Lederle earning power in the medium-term future center around (1) a new and quite promising antibiotic, and (2) in time a sizable market for an oral "live" polio vaccine, a field in which this company has been a leader.  These developments make it problematic and a matter that only the future will decide as to whether this decision to dispose of Cyanamid shares may not have been an investment mistake.  





-------------------------------------------------------





Additional Notes:

http://myinvestingnotes.blogspot.my/2010/09/common-stocks-and-uncommon-profits-by.html

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."

Stock monitoring and when to sell
• Use a three-year rule for judging results if a stock is
underperforming but no fundamental changes have
occurred.
• Hold stock until there is a fundamental change in its
nature or it has grown to a point where it will no longer
be growing faster than the overall economy.
• Don’t sell for short-term reasons.
• Sell mistakes quickly, once they are recognized.
• Don’t overdiversify—10 or 12 larger companies is
sufficient, investing in a variety of industries with different
characteristics.

When to Buy? Economic forecasting business trends cannot be safely used as a basis for your investing action. Stay with superbly selected growth stocks.

The heart of successful investing is knowing how to find the minority of stocks that in the years ahead will have spectacular growth in their per-share earnings.

Is there any reason to divert time or mental effort from this main issue?

Does not the matter of when to buy become of relatively minor importance?

Once the investor is sure he has definitely found an outstanding stock, isn't any time at all a good time to buy it?

The answer to this depends somewhat on the investor's objective.

It also depends on his temperament.



The consequence of buying just before a big stock market crash.

An example of this would be the purchase of several superbly selected enterprises in the summer of 1929 or just before the greatest stock market crash of American history.

In time, such a purchase would have turned out well.

But 25 years later, it would provide a much smaller percentage gain than would have been the case if, having done the hardest part of the job in selecting his companies properly, an investor had made the small extra effort needed to understand a few simple principles about the timing of growth stocks.

In other words:

• if the right stocks are bought and held long enough they will always produce some profit.
• usually, they will produce a handsome profit.
•  however, to produce close to the maximum profit, the kind of spectacular profit one hoped for, some consideration must be given to timing.

The conventional method of timing when to buy stocks.

This is just as silly as it appears on the surface to be sensible.

This method is to marshal a vast mass of economic data.  From these data conclusions are reached as to the near- and medium-term course of general business.

More sophisticated investors will usually form opinions about the future course of money rates as well as business activity.

Then, if their forecasts for all these matters indicate no major worsening of background conditions, the conclusion is that the desired stock may be bought.   

It sometimes appears that dark clouds are forming on the horizon.  Then those who use this generally accepted method will postpone or cancel purchases they otherwise would make.


The objection to this conventional approach.

The conventional approach is not unreasonable in theory.  

The objection is that in the current state of human knowledge about the economics which deal with forecasting future business trends, it is impossible to apply this method in practice.

The chances of being right are not good enough to warrant such methods being used as a basis for risking the investment of savings.

This may not always be the case.


Economic forecasting business trends cannot be safely used as a basis for your investing action.

It might not even be the case five or ten years from now.  At present, able men are attempting to harness electronic computers to establish "input-output" series of sufficient intricacy that perhaps at some future date it may be possible to know with a fair degree of precision what the coming business trend will be.

When, if ever, such developments occur, the art of common stock investment may have to be radically revised.  Until they occur, however, the economics which deal with 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.

In chemistry then, as in business forecasting now, basic principles were just beginning to emerge from a mysterious mass of mumbo-jumbo.  However, chemistry had not reached a point where such principles could be safely used as a basis for choosing a course of action.


Rarely, economic forecasting is useful or safe.

Occasionally, as in 1929, the economy gets so out of line that speculative enthusiasm for the future runs to unprecedented proportions.

Even in our present state of economic ignorance, it is possible to make a pretty accurate guess as to what will occur.

However, it is doubtful if the years when it is safe to do this have averaged much more than one out of ten.

They may be even rarer in the future.

(Read:  Year 2008 - Buffett Calls The Market Again...And He's Never Been Wrong
http://myinvestingnotes.blogspot.my/2016/01/year-2008-buffett-calls-market-againand.html0



If, then, conventional studies of the near-term economic prospect do not provide the right method of approach to the proper timing of buying, what does provide it?

The answer lies in the very nature of growth stocks themselves.



Common Stocks and Uncommon Profits
Philip Fisher

Philip Fisher’s Approach in Brief

It’s Quality That Counts: The Fisher Approach to Stock Investing

Philosophy and style


Investment in “outstanding” companies that over the
years can grow in sales and profits more than industry
as a whole. The key features of “outstanding” companies
are: strong management that has a disciplined approach
designed to achieve dramatic long-term growth in profits,
with products or services that have the potential for
sizable sales long term, and with other inherent qualities
that would make it difficult for competitors and newcomers
to share in that potential growth.


Universe of stocks

No restrictions on universe of stocks from which to
select. Over-the-counter stocks should not be overlooked,
but “outstanding” companies are not necessarily
young and small.


Criteria for initial consideration

Prospective companies should pass most of the following
15 points, which can be divided into three main
dimensions:

Functional factors:
• Products or services with sufficient market potential for
sizable increase in sales for several years. Major sales
growth, judged over series of years.
• Superiority in production—lowest-cost production (for
manufacturing firms) or lowest-cost operation (for
service firms or retailers).
• Strong marketing organization—efficiency of sales, advertising,
and distributive organizations.
• Outstanding research and development efforts—amount
expended relative to its size, effectiveness of effort as
indicated by ability to bring research ideas to production
and to market and by how much research contributed
to net profits.
• Effectiveness of company’s cost analysis and accounting
controls, and choice of capital investments that will
bring the highest return.
• Financial strength or cash position—sufficient capital
to take care of needs to exploit prospects for next
several years without the need to raise equity capital.


Excellence in Management
• Attitude of management to continue to develop products
or services that will further increase sales.
• Development of good in-house management and teamwork.
• Management depth.
• Good labor and personnel relations: Affiliation with an
international union may be an indication of bad relations;
labor turnover relative to competitors.
• Long-range outlook by management even at the expense
of short-term profits.
• Good investor relations, and willingness to talk freely
about problems.
• Management of unquestionable integrity—salaries and
perks in line with those of other managers.


Business characteristics
• Above-average profitability: Compare profit margins
per dollar of sales—compare within industry and examine
for several years, not just single years. Older and
larger firms are usually the best in their industry.
Younger firms may elect to speed up growth by spending
all or a large part of profits on research or sales; for
these, make sure a narrow profit margin is due to
spending in these areas alone.
• Ability to maintain good profit margins: Good position
relative to competition—for instance, skill in a particular
line of business, or patent protection for a small
business.


Secondary factors
Once an “outstanding” company is found, purchase
stock when it is out-of-favor either because the market
has temporarily misjudged the true value of the company,
or because of general market conditions. “Outstanding”
companies can also be purchased at fair value, but
investor should expect a lower (but respectable) return.


Stock monitoring and when to sell
• Use a three-year rule for judging results if a stock is
underperforming but no fundamental changes have
occurred.
• Hold stock until there is a fundamental change in its
nature or it has grown to a point where it will no longer
be growing faster than the overall economy.
• Don’t sell for short-term reasons.
• Sell mistakes quickly, once they are recognized.
• Don’t overdiversify—10 or 12 larger companies is
sufficient, investing in a variety of industries with different
characteristics.


https://www.aaii.com/journal/article/it-s-quality-that-counts-the-fisher-approach-to-stock-investing

Common Stocks and Uncommon Profits by Philip Fisher

Philip Fisher, Legendary Growth Investor

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 may 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."



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.

The 15 points of Philip Fisher in picking Common Stocks

The Fifteen Points to Look for in a Common Stock

1. Does the company have products or services with sufficient market potential to make possible a sizeable 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 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 controls?
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?
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 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?
    
    
    
    
    
    
    Ref:  Common Stocks and Uncommon Profits by Philip Fisher
    
    
    
    
    http://www.valueinvestingstock.com/#!A-Legendary-Investor-To-Learn-From/cour/569909000cf2e94e3fb94388

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.

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.

http://www.bainvestor.com/Common-Stocks-Uncommon-Profits.html

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.

http://prasadcapital.com/2013/02/11/book-summary-common-stocks-and-uncommon-profits/