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Common Stocks and Uncommon Profits and Other Writings
by Philip Fisher
November 30, 2007
Written in the late 1950’s, like “Intelligent Investors” this book has become one of the classics on investments. Its principles and ideologies have withstood the test of time and should already be realized by seasoned value investors. Philip Fisher is said to be the first person to link the models of sustainable growth with the concept of competitive advantage.
Philip Fisher was a man with full of oddities. He was called “flash” for his habit of power walks to everywhere he went. He followed strict schedule daily and hated changes. Given to his success, strangely enough, he was a solitary and sociably shy, preferred to work alone and to not be bothered. One of his eccentric talents was his ability to memorize the names of all 435 members of House and 100 Senators. His three enjoyments were walking, worrying and work.
”Scuttlebutt” method: examine the subdivisions of a company’s organization: executive personnel, its production, its sales organization, and its research. You can acquire information from trade association executives and its former employee.
15 points to which company to buy. 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 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 analyses and accounting controls?” 11. “Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues 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 are disappointment occur?” 15. “Does the company have a management of unquestionable integrity?”
When to buy: 1. When the first full-scale commercial plant or large improvement are made and is about to begin in production. The results will take longer to be shown on earnings. 2. When after commercial plants started, unexpected expenses occurred, eager buyers became discouraged sellers, then after some good news came and ensured the company’s operation, but the following quarter, expenses caused sag in net income and cause stocks to fall to lowest of the year. 3. Buy in portions and plan on several years before fully invested.
5 Influences of business cycles: 1. Mass psychology or direct economic operation have extreme powerful influence on the general level of stock prices. 2. Trend of interest rate. 3. Government attitude toward investment and private enterprise. 4. Inflation. 5. New inventions and technologies.
3 Reasons to sell: 1. when mistake were made and not realized. In this, ego makes the handling of investment mistakes more difficult. 2. “Sale should always be made of the stock of a company which, because of changes resulting from the passage of time, no longer qualifies in regard to the fifteen points outlined in Chapter Three to about the same degree it qualified at the time of purchase.” 3. when the times change and the business has exhausted the growth prospects of its market. In such case, selling might take place at a more leisurely pace than if management deterioration had set in. ”in regard to too readily selling a common stock in the hope of switching these funds into a still better one…an alert investor who has held a god stock for some time usually gets to know its less desirable as well as its more desirable characteristics. Therefore, before selling a rather satisfactory holding in order to get a still better one, there is need of the greatest care in trying to appraise accurately all elements of the situation.”
P/E is over-rated. Don’t sell just because of high P/E, because no one can precisely price a company, much less than stating what is overprice for an outstanding company with rapid growth.
“if the job has been correctly done when a common stock is purchased, the time to sell it is – almost never.”
Dividends: Retained earnings can have two ways of not increasing values. 1. when spend on so-called assets which in no sense increase the volume of business, but which would cause a loss of business in the expenditure had not been made, like replacing a A/C in department store this impact the flow of customers say in a hot summer. 2. when used in depreciation allowance.
Dividend policy should be set and not easily changed, the policy should be based on a percentage of earnings. ”As long as dividend policy is consistent, so that investors can plan ahead with some assurance, this whole matter of dividend is a far less important part of the investment picture than might be judged from the endless arguments frequently heard about the relative desirability of this dividend policy or that.”
5 don’ts for investors 1. “Don’t buy into promotional companies.” 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 had largely been already discounted in the price.” 5. “Don’t quibble over eighths and quarters.”
5 More don’ts 1. “Don’t overstress diversification.” 2. “Don’t be afraid of buying on a war scare.” 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.”
How to find stocks. 1. Get ideas from a few numbers of respectable friends with outstanding work of their own. 2. Original leads. 3. Major consulting research laboratories, such as Arthur D. Little, Standford Research Institute, or Battelle (remember these names are from 1950’s) Typical public printed brokerage bulletin is not a fertile source.
4 Dimensions of a conservative Investment (the other Fisher writing included in the book, same repeated) 1. Superiority in production, marketing, research, and financial skills. 2. The people Factor: Top management ability to identify qualified juniors to succeed senior management. Company with real investment merit is the ones promotes within. When executive are brought from outside, it is a sure sign of internal problem with existing management. And whether a management is predominately one man or a working team, this can be shown through the salaries of its top executive team. 3. Investment characteristics of some business. Two ways of express profitability: return on invested assets and compare profit margin per dollar of sales, the latter might be more helpful. Two ways of block competition: monopoly and operate with high efficiency and reduce incentive for market entries. Profit margin with 2 or 3 percentage above the next best competitor is sufficient to ensure outstanding investment. To this extent, larger company has maximum advantage at reducing cost, but bigger the company, the harder it is to manage. And when a company clearly becomes the leader in the field, it seldom gets displaced as long as the management remains competent. Choose leaders. 4. Price of a conservative Investment. Don’t use solely price-earning for valuation. “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.” (I am adding acquisitions also.) “On the lowest end of the risk scale and most suitable for wise investment is the company that measures quite high in regard to the first three dimensions but currently is appraised by the financial community as less worthy, and therefore has a lower price-earning ratio, than these fundamental facts warrant.” BABTAT, “The conservative investor must be aware of the nature of the current financial-community appraisal of any industry in which he is interested.” The real-world factor mainly is with interest rate. When rate goes up, the investment capital flow toward those markets, thus demand for stock is less and vice versa.
”Modern war always causes governments to spend far more than they can possibly collect from their taxpayers while the war is being waged … this cause a vase increase in the amount of money … so each unit of money worth less … thus take more money to buy same number of stocks … this is the classic form of inflation … this is the time when having surplus cash for investment becomes least, not most, desirable.”
contrary to few, like Jim Cramer, “the size of the profit had nothing whatsoever to do with the decision to sell.”
”…those who get really rich take bigger calculated risks…”
Kenneth, Philip’s son, urges people to stop making investment decision at old ages.
Philip had principle that allows any young investor to meet with him and talk about investments at least once. If proved with unusually capable, Philip would see him repeatedly and exchange ideas.
A key to his success is knowing which idea to follow and which to discard.
Patient is needed if big profits are to be made from investments. “If is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens.”
80% of federal revenue comes from corporate and personal income taxes.
Depressions in the future will occur and apt to be shorter than some of the depressions in the past.
It may takes as much as 5 years for investment to demonstrate their real merit. By compare to record of security prices for period of time, one can learn the real ability of the advisor.
One of Fisher strong point: growth stock > dividend stock. “The growth stocks had not only shown a marked superiority in the field of capital appreciation, but given a reasonable time, they had grown to a point where they showed superiority in the matter of dividend return as well.”
“economics which deal with forecasting business … had not reached a point where such principles could be safely used as a basis for choosing a course of action.” Economic forecasting is comparable to chemistry in the days of alchemy.
contrary to few, like Jim Cramer, “the size of the profit had nothing whatsoever to do with the decision to sell.” Two reasons to sell:
1. when the long-range outlook for another company appeared to be better. 2. when the business not making as much progress in broadening profit margins and establishing profitable news lines as had been hoped.