Common Stocks and Uncommon Profits is considered to be Phil Fisher’s signature book on investing. This investment classic was originally published in 1958 but the content is timeless.
In this book Fisher describes his unique investment criteria which is more growth oriented than the value approach that I have been more interested in as of late. However, despite the difference in investment objective Fisher has plenty of valuable insights to share about his research approach which is much more qualitative in nature than Graham’s & Dreman’s.
I was initially introduced to Phil Fisher by reading The Warren Buffet Way by Robert Hagstrom, Jr. In Hagstrom’s book he describes Warren Buffet’s investment philosophy as a synthesis between the Benjamin Graham & Phil Fisher.
In my quest to learn everything I can about Warren Buffet and his investment approach I naturally had to read this investment classic.
Lesson’s/ Note’s from Common Stock and Uncommon Profits:
* You can get an idea of how Fisher views “stockbrokers” in his humorous description- “men who know the price of everything and the value of nothing.”
* On patience- “…it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens.”
* On buying companies and sticking with them- “ ….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.”
* On stocks vs. bonds- “Bonds have become undesirable investments for the strictly long-term holdings of the average individual investor.”
* On causes of inflation- “It seems to me that if this whole inflation mechanism is studied carefully it becomes clear that major inflationary spurts arise out of wholesale expansions of credit, which in turn result from large government deficits greatly enlarging the monetary base of the credit system.”
* “Scuttlebutt”- This is the word Phil Fisher uses to describe his method of interviewing various people with ties to a specific company to learn more about the firm’s prospects. These individuals may include competitors, suppliers, customers, “scientists” (research and development), industry analysts, etc.
* Fisher’s 15 points- These 15 points represent the criteria that a company must meet in order to be an attractive investment. Fisher admits that a company may not need to meet ALL 15 of these criteria but certainly should meet most of them.
* Point 1- Does a company have products or services with growth potential?
→ Measuring growth- “….growth should not be judged on an annual basis but, say, by taking units of several years each.”
→ “These companies which decade by decade have consistently shown spectacular growth might be divided into two groups….I will call one group…fortunate and able and the other group….fortunate because they are able.” Good investments are those that are fortunate because they are able.
→ On management- “…the investor must be alert to whether the management is and continues to be of the highest order of ability; without this, the sales growth will not continue.”
* Point 2- Does management have a determination to continue to develop products or processes that will further increase sales after existing products and processes have been exploited?
→ Google?- “The investor usually obtains the best results in companies whose engineering or research is to a considerable extent devoted to products having some business relationship to those already within the scope of company activities.”
* Point 3- How effective are the company’s R & D efforts in relation to its size?
* Point 4- Does the company have an above-average sales organization?
* Point 5- Does the company have a worthwhile profit margin?
→ a comparison of profit margins should be made “for a series of years.”
→ boom years vs. slow years- During boom years in an industry the marginal companies will grow profits at a quicker pace than more favorable companies. This is because in less prosperous times the marginal companies are not as profitable. Be aware of this when comparing profit margins.
* Point 6- What is the company doing to maintain or improve profit margins?
* Point 7- Does the company have outstanding labor relations?
* Point 8- Does the company have outstanding executive relations?
* Point 9- Does the company have depth in its management?
* Point 10- How good are the company’s cost/ accounting controls?
* Point 11- Are there aspects of the business which make the company outstanding to its competition?
→ I think of this as the concept of a “moat” which Buffet often looks for in a company.
* Point 12- Does the company have a short-range or long-range outlook in regard to profits?
* Point 13- In the foreseeable future will the growth of the company require sufficient equity financing that will cause dilution which will ultimately cancel out current stockholders benefit?
* Point 14- Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles occur?
→ This is another are where I think Fisher had great influence on Buffet.
* Point 15- Does the company have management of unquestionable integrity?
* On growth vs. value- “The reason why the growth stocks do so much better is that they seem to show gains in value in the hundreds of per cent each decade. In contrast, it is an unusual bargain that is as much as 50 per cent undervalued.”
* A stock should be purchased when, “a worthwhile improvement in earnings is coming in the right sort of company, but that this particular increase in earning has yet produced upward move in the price of that company’s shares. I believe that whenever this situation occurs the right sort of investment may be considered to be in a buying range.”
* On when to sell- “This is when a mistake has been made in the original purchase and it becomes increasingly clear that the factual background of the particular company is… less favorable than originally believed.”
* On emotion- do not let ego enter into investing decisions. When an investment goes bad admit you were wrong and take your medicine (sell).
* On learning from mistakes- Fisher encourages investors to learn from their mistakes.
* Never sell a stock simply because it has significant outstanding gains. Fisher provides an analogy about a class of students. As an investor you are able to “buy” the future income stream of one of the students. As an investor you buy the student who had the brightest prospects. If this student goes onto law and school and becomes a highly paid lawyer you wouldn’t necessarily sell the stock in this student after they had made a lot of money in their career because it is likely that this person still has the highest income potential.
* On dividends- Fisher, like Buffet, concerns himself more with return on capital than on dividends paid.
* On diversification- Like Buffet, Graham, and many other value investors Fisher believes that investors should concern themselves with investing in good companies more than in many companies.
* On diversification- “Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself.”
* Buying best firms in un-favor industries- Although Fisher is not considered to be your classic value investor he does recognize that trends and fads do appear in the financial markets. Because of that he advocates for buying best firms in out-of-favor industries.
* On finding investment ideas- For Fisher, the most valuable source of investment ideas was in talking with other investment professionals whose opinions and knowledge he respected.
* In order to be a successful investor one must have “great effort combined with ability and enriched by both judgment and vision.”
arket from having a clear direction up or down. One of the viewpoints is from Robert Shiller who is a bear and argues that stocks are currently overvalued. The opposite view is from his close friend Jeremy Siegel who I got to see speak in Portland a few months ago. He argues that on a historical scale stocks look cheap right now. What I find interesting is that effectively each uses historical data dating back to the 19th century to support their views. In effect they are looking at the same data and drawing two completely different conclusions.
