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: Why staying long-term in your investments makes a lot of sense.

Why staying long-term makes a lot of sense?    


Quoting Phillip Fisher:

1.  It is just appalling the nerve strain people put themselves under trying to buy something today and sell it tomorrow.  2.  It's a small-win proposition. 3.  If you are a truly long-range investor, of which I am practically a vanishing breed, the profits are so tremendously greater. 

1.  Someone made a remark that, while it is factually correct, is completely unrealistic when he said, "Nobody ever went broke taking a profit."   2.  Well, it is true that you don't go broke taking a profit, but that ASSUMES you will make a profit on EVERYTHING you do.  3.  It doesn't allow for the mistakes you're bound to make in the investment business.

1.  Funny thing is, I know plenty of guys who consider themselves to be long-term investors but who are still perfectly happy to trade in and out and back into their favourite stocks.  2.  Then when their stock got up to a higher price, the pressure to sell got so strong.  3.  "Well, why don't we sell half of it, so as to get our bait back?"  4.  That is a totally ridiculous argument.  5.  Either this is a better investment than another one or a worse one.  6.  Getting your bait back is just a question of psychological comfort.  7.  It doesn't have anything to do with whether it is the right move or not. 

Warren Buffett on Phil Fisher

http://investinginknowledge.com/info/2010/10/warren-buffett-on-phil-fisher/

5 Investing Styles dominate today. Value Investing is fashionable again.

FIVE investing styles dominate today:

1.  Value Investors
They rely on fundamental analysis of companies' financial performance to identify stocks priced below intrinsic value (the present value of a company's future cash flows.)
Benjamin Graham and David Dodd in the 1930s.
Warren Buffett in the 1970s and 1980s.

2.  Growth Investors
They seek companies whose earnings gains promise to boost intrinsic value rapidly.
Philip Fisher late 1950s.
Peter Lynch in the 1980s.

3.  Index Investors
They buy shares that replicate a large market segment such as the S&P 500.
Endorsed by Graham for defensive investors.
John Bogle in the 1980s.

4.  Technical Investors
They use charts to glean market behaviour indiccating whether expectations are rising or falling, market trends, and other "momentum" indicators.
William O'Neill in the late 1990s.

5.  Portfolio Investors
Tney ascertain their appetite for investment risk and assemble a diversified securities protfolio bearing the risk level.
Burton G. Malkiel in early 1970s.

Philip Fisher 15 Points for Growth Stocks

Philip Fisher’s Investment Philosophy

•Philip Fisher’s Investment Philosophy

•Introduction

•The late Phil Fisher was one of the great investors of all time and the author of the classic book Common Stocks and Uncommon Profits.

•Introduction

•Fisher started his money management firm, Fisher & Co., in 1931 and over the next seven decades made tremendous amounts of money for his clients.

•Introduction

•For example, he was an early investor in semiconductor giant Texas Instruments TXN.

•Fisher also purchased Motorola MOT in 1955, and in a testament to long-term investing, held the stock until his death in 2004.

•Introduction

•"Common Stocks and Uncommon Profits" - is a MUST READ!

•Fisher's Investment Philosophy

•Fisher's investment philosophy can be summarized in a single sentence: Purchase and hold for the long term a concentrated portfolio of outstanding companies with compelling growth prospects that you understand very well.

•Fisher's Investment Philosophy

•This sentence is clear on its face, but let us parse it carefully to understand the advantages of Fisher's approach.

•Fisher's Investment Philosophy

•The question that every investor faces is, of course, WHAT to buy? - and - WHEN to buy it?

•Fisher's answer is to purchase the shares of superbly managed growth companies, and he devoted an entire chapter in Common Stocks and Uncommon Profits to this topic.

•Fisher's Investment Philosophy

•The chapter begins with a comparison of "statistical bargains," or stocks that appear cheap based solely on accounting figures, and growth stocks, or stocks with excellent growth prospects based on an intelligent appraisal of the underlying business's characteristics.

•Fisher’s Investment Philosophy –
The Problem with Statistical Bargains

•The problem with statistical bargains, Fisher noted, is that while there may be some genuine bargains to be found, in many cases the businesses face daunting headwinds that cannot be discerned from accounting figures, such that in a few years the current "bargain" prices will have proved to be very high.

•Fisher’s Investment Philosophy –
The Problem with Statistical Bargains

•Furthermore, Fisher stated that over a period of many years, a well-selected growth stock will substantially outperform a statistical bargain.

•Fisher’s Investment Philosophy –
The Problem with Statistical Bargains

•The reason for this disparity, Fisher wrote, is that a growth stock, whose intrinsic value grows steadily over time, will tend to appreciate "hundreds of per cent each decade," while it is unusual for a statistical bargain to be "as much as 50 per cent undervalued.”

•Fisher’s Investment Philosophy – The Universe of Growth Stocks

•Fisher divided the universe of growth stocks into large and small companies.

•Fisher’s Investment Philosophy – The Universe of Growth Stocks

•On one end of the spectrum are large financially strong companies with solid growth prospects.

•At the time, these included IBM (IBM), Dow Chemical (DOW), and DuPont (DD), all of which increased fivefold in the 10-year period from 1946 to 1956.

•Fisher’s Investment Philosophy – The Universe of Growth Stocks

•Although such returns are quite satisfactory, the real home runs are to be found in "small and frequently young companies... [with] products that might bring a sensational future.”

•Fisher’s Investment Philosophy – The Universe of Growth Stocks

•Of these companies, Fisher wrote, "the young growth stock offers by far the greatest possibility of gain.

•Sometimes this can mount up to several thousand per cent in a decade.”

•Fisher’s Investment Philosophy – The Universe of Growth Stocks

•Fisher's answer to the question of what to buy is clear:

•All else equal, investors with the time and inclination should concentrate their efforts on uncovering young companies with outstanding growth prospects.

•Fisher’s Investment Philosophy – The Universe of Growth Stocks

•Remember - much has changed - therefore YOU must integrate "today's" Economics and Financial Markets in with Mr. Fisher's Philosophy!

•Fisher's 15 Points

•All good principles are timeless, and Fisher's famous "Fifteen Points to Look for in a Common Stock" from Common Stocks and Uncommon Profits remain as relevant today as when they were first published.

•Fisher's 15 Points

•The 15 points are a qualitative guide to finding superbly managed companies with excellent growth prospects.

•According to Fisher, a company must qualify on most of these 15 points to be considered a worthwhile investment:

•Fisher's 15 Points

•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?

•A company seeking a sustained period of spectacular growth must have products that address large and expanding markets.

•Fisher's 15 Points

•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?

•All markets eventually mature, and to maintain above-average growth over a period of decades, a company must continually develop new products to either expand existing markets or enter new ones.

•Fisher's 15 Points

•3. How effective are the company's research-and-development efforts in relation to its size?

•To develop new products, a company's research-and-development (R&D) effort must be both efficient and effective.

•Fisher's 15 Points

•4. Does the company have an above-average sales organization?

•Fisher wrote that in a competitive environment, few products or services are so compelling that they will sell to their maximum potential without expert merchandising.

•Fisher's 15 Points

•5. Does the company have a worthwhile profit margin?

•Berkshire Hathaway's (BRK.B) vice-chairman Charlie Munger is fond of saying that if something is not worth doing, it is not worth doing well. Similarly, a company can show tremendous growth, but the growth must bring worthwhile profits to reward investors.

•Fisher's 15 Points

•6. What is the company doing to maintain or improve profit margins?

•Fisher stated, "It is not the profit margin of the past but those of the future that are basically important to the investor." Because inflation increases a company's expenses and competitors will pressure profit margins, you should pay attention to a company's strategy for reducing costs and improving profit margins over the long haul. This is where the moat framework can be a big help.

•Fisher's 15 Points

•7. Does the company have outstanding labor and personnel relations?

•According to Fisher, a company with good labor relations tends to be more profitable than one with mediocre relations because happy employees are likely to be more productive. There is no single yardstick to measure the state of a company's labor relations, but there are a few items investors should investigate. First, companies with good labor relations usually make every effort to settle employee grievances quickly. In addition, a company that makes above-average profits, even while paying above-average wages to its employees is likely to have good labor relations. Finally, investors should pay attention to the attitude of top management toward employees.

•Fisher's 15 Points

•8. Does the company have outstanding executive relations?

•Just as having good employee relations is important, a company must also cultivate the right atmosphere in its executive suite. Fisher noted that in companies where the founding family retains control, family members should not be promoted ahead of more able executives. In addition, executive salaries should be at least in line with industry norms. Salaries should also be reviewed regularly so that merited pay increases are given without having to be demanded.

•Fisher's 15 Points

•9. Does the company have depth to its management?

•As a company continues to grow over a span of decades, it is vital that a deep pool of management talent be properly developed. Fisher warned investors to avoid companies where top management is reluctant to delegate significant authority to lower-level managers.

•Fisher's 15 Points

•10. How good are the company's cost analysis and accounting controls?

•A company cannot deliver outstanding results over the long term if it is unable to closely track costs in each step of its operations. Fisher stated that getting a precise handle on a company's cost analysis is difficult, but an investor can discern which companies are exceptionally deficient--these are the companies to avoid.

•Fisher's 15 Points

•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?

•Fisher described this point as a catch-all because the "important clues" will vary widely among industries. The skill with which a retailer, like Wal-Mart (WMT) or Costco (COST), handles its merchandising and inventory is of paramount importance. However, in an industry such as insurance, a completely different set of business factors is important. It is critical for an investor to understand which industry factors determine the success of a company and how that company stacks up in relation to its rivals.

•Fisher's 15 Points

•12. Does the company have a short-range or long-range outlook in regard to profits?

•Fisher argued that investors should take a long-range view, and thus should favor companies that take a long-range view on profits. In addition, companies focused on meeting Wall Street's quarterly earnings estimates may forgo beneficial long-term actions if they cause a short-term hit to earnings. Even worse, management may be tempted to make aggressive accounting assumptions in order to report an acceptable quarterly profit number.

•Fisher's 15 Points

•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?

•As an investor, you should seek companies with sufficient cash or borrowing capacity to fund growth without diluting the interests of its current owners with follow-on equity offerings.

•Fisher's 15 Points

•14. Does management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?

•Every business, no matter how wonderful, will occasionally face disappointments. Investors should seek out management that reports candidly to shareholders all aspects of the business, good or bad.

•Fisher's 15 Points

•15. Does the company have a management of unquestionable integrity?

•The accounting scandals that led to the bankruptcies of Enron and WorldCom should highlight the importance of investing only with management teams of unquestionable integrity. Investors will be well-served by following Fisher's warning that regardless of how highly a company rates on the other 14 points, "If there is a serious question of the lack of a strong management sense of trusteeship for shareholders, the investor should never seriously consider participating in such an enterprise.”

•Important Don'ts for Investors

•In investing, the actions you don't take are as important as the actions you do take.

•Here is some of Fisher's advice on what you should not do.

•Important Don'ts for Investors

•1. Don't overstress diversification.

•2. Don't follow the crowd.

•3. Don't quibble over eighths and quarters.

•

•

•

•1. Don't overstress diversification.

•Investment advisors and the financial media constantly expound the virtues of diversification with the help of a catchy cliché: "Don't put all your eggs in one basket."

•However, as Fisher noted, once you start putting your eggs in a multitude of baskets, not all of them end up in attractive places, and it becomes difficult to keep track of all your eggs.

•1. Don't overstress diversification.

•Fisher, who owned at most only 30 stocks at any point in his career, had a better solution.

•Spend time thoroughly researching and understanding a company, and if it clearly meets the 15 points he set forth, you should make a meaningful investment.

•1. Don't overstress diversification.

•Fisher would agree with Mark Twain when he said, "Put all your eggs in one basket, and watch that basket!”

•2. Don't follow the crowd.

•Following the crowds into investment fads, such as the "Nifty Fifty" in the early 1970s or tech stocks in the late 1990s, can be dangerous to your financial health.

•2. Don't follow the crowd.

•On the flip side, searching in areas the crowd has left behind can be extremely profitable.

•2. Don't follow the crowd.

•Sir Isaac Newton once lamented that he could calculate the motion of heavenly bodies, but not the madness of crowds. Fisher would heartily agree.

•3. Don't quibble over eighths and quarters.

•After extensive research, you've found a company that you think will prosper in the decades ahead, and the stock is currently selling at a reasonable price.

•Should you delay or forgo your investment to wait for a price a few pennies below the current price?

•3. Don't quibble over eighths and quarters.

•Fisher told the story of a skilled investor who wanted to purchase shares in a particular company whose stock closed that day at $35.50 per share.

•However, the investor refused to pay more than $35.

•The stock never again sold at $35 and over the next 25 years, increased in value to more than $500 per share.

•The investor missed out on a tremendous gain in a vain attempt to save 50 cents per share.

•3. Don't quibble over eighths and quarters.

•Even Warren Buffett is prone to this type of mental error.

•Buffett began purchasing Wal-Mart many years ago, but stopped buying when the price moved up a little.

•Buffett admits that this mistake cost Berkshire Hathaway shareholders about $10 billion.

•Even the Oracle of Omaha could have benefited from Fisher's advice not to quibble over eighths and quarters.

•The Bottom Line

•Philip Fisher compiled a sterling record during his seven-decade career by investing in young companies with bright growth prospects.

•By applying Fisher's methods, you, too, can uncover tomorrow's dominant companies.

•Q&A

•There is only one correct answer to each question.

•Q&A

•Fisher was the author of which classic investment book?

–Security Analysis.

–One Up on Wall Street.

–Common Stocks and Uncommon Profits.

•Q&A

•What sorts of companies did Fisher favor?

–Young growth companies.

–Companies with large dividends.

–Companies in mature industries.

•Q&A

•Fisher's time horizon for holding a well-selected stock can best be described as what?

–Very long-term.

–Short-term.

–Three to five years.

•Q&A

•Which statement would Fisher most agree with?

–"I don't want a lot of good investments; I want a few outstanding ones."

–"It is important to own a well-diversified portfolio of over 50 stocks to reduce risk."

–"Large capitalization companies in mature and steady industries are the best investments.”

•Q&A

•According to Fisher, management quality:

–Is irrelevent so long as the company is growing.

–Should cause you to avoid a stock if there are serious stewardship issues.

–Should not delegate to lower-level employees.

•

•http://www.safehaven.com/article/20772/investment-basics-course-505-wise-analysts-philip-fisher

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