Book Summary
Who is Philip Fisher?
Philip Fisher (September 8, 1907 – March 11, 2004) was an American stock investor best known as the author of Common Stocks (Common Shares) and Uncommon Profits, a guide to investing that has remained in print ever since it was first published in 1958. He was not well-known to the public until he published his first book in 1958. At this point, Fisher's popularity rose dramatically and propelled him to his now legendary status as a pioneer in the field of growth investing. Source: Wikipedia
My Thoughts
Warren Buffett once said: “I’m 15% Fisher and 85% Benjamin Graham.” This statement alone testifies the importance of this outstanding book and why an investor must read it. This book is a complete guide for conducting a qualitative analysis of companies and their businesses and is, therefore, a must-read book for those who wish to have a qualitative framework for finding great companies to invest in.
PART 1: COMMON STOCKS AND UNCOMMON PROFITS
Chapter One: Clues from the Past
There are two important lessons we can learn from the past. In the 19th century and early 20th century, in a period of unstable banking causing boom and bust, buying stock in bad times and selling in good times, made a number of big and many small fortunes. But, buying the stock of outstanding companies and staying with them through all the fluctuation was far more profitable. Hence, time in the market is more important than timing the market.
Today more investment opportunities are available because of:
transparency and accountability in corporate management and more investment in research and development to stay current and maintain the highest standard of efficiency
introducing and strengthening of policies and regulations that has occurred since 1932, both company and the government receive credit for any prosperity and similarly, they are blamed by both opposition and the general public if a bad slump occurred.
Chapter Two: What “Scuttlebutt” Can Do
Phil introduces a “scuttlebutt” method to carry out an initial investigation of companies to gather some useful insights:
Go to five companies in an industry, ask each of them intelligent questions about the strength and weaknesses of the other four.
Talk to customers, vendors, trade association and former employees to learn about their experiences and any other insights they know.
Information collected through the above sources will help even a moderately experienced investor to make an initial judgment as to which companies are worth investigating further.
Chapter Three: What to Buy: The Fifteen Points to Look for in a Common Stock
This chapter talks about fifteen attributes that are important for companies’ long-term durability. Investors finding companies with as many attributes as possible will gain a significant return on investment over a longer period of time. Here is the gist of fifteen points in my own simple words:
Able management with a strong track record of sales, research, and development, and potential to make possible a sizable increase in sales for at least several years to come
Continue to develop new products and new markets, and not being complacent with its existing products, demand, and revenue
Effectiveness of research and development, the amount spent in relation to sales, net profits, etc. and what % has been contributed by the results of its research organization during a particular span, such as the prior ten years.
Production, research, and sales go hand in hand; all are needed for survival. Outstanding companies do more through training and development to increase the efficiency and effectiveness of their sales arm
Investment gains come from profit margins, so the higher the profit margins the better. Higher profit margin also indicates the company’s ability to control over its costs compared to its competitors
What company is doing to maintain and improve its profit margin is important for an investor in order to gain returns in the long run
Constant and prolong union strikes make significant damage to its economics; companies with good labor relations are the ones making every effort to settle grievances quickly.
The right atmosphere among executive personnel is vital; stakes are high if executives are not happy and not working to their full potential
One man show can’t continue for long; companies must have a depth to its management
Confine investment to companies with unquestionable management’s integrity.
Chapter Four: What to Buy: Applying this to your own needs
There are many methods an investor can use to make money but the best way must lead to the greatest total profit for the least risk. The statistical-accounting bargains tell the half-truth because they are based on mechanical judgment and may not point towards business problems lying ahead. If an investor doesn't have time to do thorough research, even knowing enough of principles will help to pick an outstanding investment advisor. Other factors for choosing an advisor include a track record of results obtained for others, complete and unquestioned honesty, and concepts of financial management.
The objective of investing in the common stock should be a huge, long-range gain. The young growth stocks offer by far the greatest possibility of gain, whereas large companies are less risky and offer steady returns. Even though 15 points should govern when buying either a young or large company, how risk-averse you are must determine your allocation in each type. But, in any case, the only funds small investors consider using that is truly surplus.
Chapter Five: When to Buy
Phil argues that it is impossible to time the market with the current state of knowledge, therefore, one must focus on finding companies that meet enough of the fifteen points described in chapter 3.
A few hurdles (strikes, unexpected capital expenditures) is inevitable in almost every company and often presents buying opportunities. The investor needs to be sure that these troubles are temporary and is able to see how management is dealing with the problems and is foresighted that significant earnings are set to come in the near future. Above all, the company must be in the hands of exceptionally able management.
Chapter Six: When to Sell
Phil believes there are three reasons, and three reasons only, for the sale of stocks:
When you realize you have made a mistake in assessing the quality of stocks, future prospects, management’s ability, etc. by a significant margin and the company is less favorable than originally believed.
With the passage of time, the company no longer qualifies in regard to some of the important fifteen points outlined in chapter three.
This situation will seldom arise if the right principles are followed in the original purchase: the company you own stocks for appears less attractive in some important features compare to opportunities available.
Chapter Seven: The Hullabaloo about Dividends
Retained earning in business is good as long as it is reinvested for building new plants, launching new products, etc. which will benefit the stockholders in the long term. However, the investor will not benefit when management is piling up cash and liquid assets, and/or invested in enlarging the inefficient operation rather making it better. In this case, passing earnings on to investors as the dividend would be a better choice. There are important considerations for dividends for investors:
It increases income, therefore more tax
Good companies are hard to find for reinvesting dividends
There will be a commission for buying new companies
Chapter Eight: Five Don’ts for Investors
Don't buy into promotional companies: No matter how appealing a new promotional company may seem at first glance, their financing should always be left to a specialized group. An investor should look for established companies where things are easy to gauge.
Don't ignore a good stock just because it is traded over the counter: The rules for investors for picking the over-the-counter securities are not too different from those for listed securities. Just be sure to pick the right security and then able conscientious broker.
Don't buy a stock just because you like the “tone” of its annual report: Annual report often fails to provide a complete and adequate picture of the company’s problems and efforts; finding underlying facts are important.
Don't assume that the high price at which a stock may be selling in relation to its earnings is necessarily an indication that future growth in those earnings has largely been discounted in the price: It's highly likely that a wonderful company selling at a high price in relation to it earning for the last several years, and with its ability to continue its sales and profit growth, will be selling at a high price in future as well.
Don’t quibble over eighths and quarters: If you have found a company that is great enough to invest in, don't focus on saving half a dollar or a dollar per share. Buy it at the market price. The future value of the company will be far greater than saving $100 or $200 today.
Chapter Nine: Five More Don’ts for Investors
Don’t overstress diversification: Buying a company without having sufficient knowledge maybe even more dangerous than having inadequate diversification. As a general different industry and 10 stocks in growth companies ($15 to $100 million revenue)the guideline, a minimum of five stocks of large companies ($1 billion and above revenue) in with a good management team will suffice.
Don’t be afraid of buying on a war scare: Wars or even fear of wars plunges stocks down. In almost entire history stocks eventually become far more profitable than ever before after the war. Therefore, the thing to do is buy buy buy slowly and at a scale-down on just a threat of war. If the war occurs, then increase the tempo of buying significantly
Don't forget your Gilbert and Sullivan: Past statistics about earnings, price ranges, etc. have nothing to do with what lies ahead in the future. It is the future that governs, not the past. Changes in management, research, products can dramatically turn things around. Background knowledge of what is happening is more important.
Don't fail to consider time as well as price in buying a growth stock: Once a company meets all the fifteen points outlined in chapter 3, investors must also decide on when to buy and at what price. The ideal time to buy growth stock will be one month before the plant goes on stream.
Don't follow the crowd: Investors should be extra careful when buying the companies that are darling to the financial community. It's important that they do a careful quantitative and qualitative analysis of the companies before buying stocks.
Chapter Ten: How I go about finding growth stocks
Phil found one-fifth of companies through ideas gleaned from friends in the industry and four-fifths culling from what he believed are the more attractive selections of a small number of able investment men. After taking a quick glance over financial statements, he used his scuttlebutt method (fifteen points) to further investigate. He discarded one prospective investment after another along the way if he found a run of the mill companies and/or he could not get enough evidence. His last step is contacting the management to make a final decision.
PART 2: CONSERVATIVE INVESTORS SLEEP WELL
Chapter One: The First Dimension of a Conservative Investment: Superiority in Production, Marketing, Research, and Financial Skills
The biggest competitive advantage any company can have is to be the lowest-cost producer in the industry. Other than improving the profit margin, it discourages potential competitors and avoids the additional burden of debt and/or issuance of more shares.
Companies with strong marketing respond to changing customer desires promptly as well as make customers aware of the advantage of a product and service.
In this ever-changing world, developing new products and providing better services at a low cost is vital for growth and this will not be possible without outstanding research and technical ability.
A company with the ability to know accurately how much they make on each product after including all costs (manufacturing, selling, research, etc.) has an edge over its competitors. Skillful people and a good accounting system create early-warning signs to detect unfavorable influences that threaten profit.
Chapter Two: The Second Dimension of a Conservative Investment: The People Factor
The world we are living in is changing at an ever-increasing rate, therefore, companies must examine and reexamine every accepted way of doing things to ensure that is the best way of doing if not, they should be nimble enough to improve on the go.
Companies must make a conscious and continuous effort to make employees at every level feel that their company is a good place to work. To do that, companies must treat their employee with dignity and decency, making them part of decision-making, giving them space to be innovative, and providing pension and profit-sharing plan.
The farsighted company invests its profits wisely in developing new products, services or starting new product lines. The dollar must be spent today wisely to make dollar tomorrow.
Chapter Three: The Third Dimension: Investment Characteristics of Some Businesses
The best safety of investment and competitive advantage for any conservative investor is to find companies with the above-average profit margin on sales. In order to earn above the average margin, the company must operate so much more efficiently than others that it makes it difficult for present and potential competition to compete.
The “economies of scale” is the most common characteristic for companies to earn high profit. A simple example of an economy of scale: A well-run company making one million units a month will often have a lower production cost for each unit than a company producing only 100,000 units in the same period. Other characteristics are usually getting there first with a new product or service, and greater ability to attract new customers and keep existing ones happy so they keep coming back.
Chapter Four: The Fourth Dimension: Price of a Conservative Investment
Appraisal of any particular stock by the financial community makes a significant price change. Investors should not be worried about the high price to earning ratio if the fundamentals are genuinely strong. The company will eventually justify its high price. Always remember undervalued companies are not easy to find. On the other hand, companies trading at a very high price because of the appraisal by the financial community without strong fundamentals can make a significant hole in your investment.
Chapter Five: More about the Fourth Dimension
Appraisal of the industry by the financial community changes from time to time even though when fundamentals don't. An investor needs to constantly probe whether the appraisal is significantly more or less favorable than the fundamentals warrant.
Chapter Six: Still more about the Fourth Dimension
Price to earning ratio must be looked at with prospects of earning in the future. A company with a twenty times earnings along with strong future prospects would be better than the company with ten times earnings with little or no future earnings growth prospects. Also, the seemingly cheaper company may have such a leverage capitalization (interest charges and preferred dividends that must be earned before anything accrues to common stockholders)
PART 3: DEVELOPING AN INVESTMENT PHILOSOPHY
Chapter One: Origins of Philosophy
His investment philosophy developed over a considerable period of time, partly as a result of logical reasoning, and partly from observing the successes and failures of others, but much of through learning from his own mistakes.
He invested in companies with management who are able to grow sales and profits significantly greater than the industry as a whole. They should have a viable policy to subordinate immediate profits for long term goals. Because Phil understood the characteristics of the manufacturing industry better, he confined his activities to manufacturing enterprising. Other considerations included:
No matter how good a company or product is, the company must have people capable of convincing people how good their product is and appraise the changing needs and desires of its customers
Financial records of a company are never enough, an investor must find out about the company affairs from those who have some direct familiarity with them
The current low price to earning ratio does not help to determine whether the stock is cheap or overpriced, but its ratio to the earning a few years ahead.
Chapter Two: Learning from Experience
In this chapter, Phil talks about his learning through his experiences:
The quality of the people involved in the business is extremely important. Their ability to manage the day to day tasks of business with above-average efficiency and constantly seek to find better ways to produce more efficiently to watching receivables with sufficient closeness. Also, honestly and personal decency of management is extremely important.
Don’t follow the crowd and buy when others are fearful as long as you are absolutely sure about the future prospects of the business you want to invest in.
Phil applied the three-year rule with his purchases. He will allow at least three years after buying the shares to perform and the business doesn’t live up to expectations he would sell. However, there were exceptions. For example, if he came across any aspect of the business after buying it which made the company unattractive, he would sell. Or if the company didn’t perform but there are some strong indications for profits to come in the near future, he would stick beyond three years.
The risk of frequent buying and selling is significantly high in comparison to the profits he made through buying and waiting.
Don’t focus on saving a few cents or dollars when you find a good company to invest in. The stock of great companies would rise in a few years several times its current price, and it would make a little different whether you bought for $10 or $10.50.
Chapter Three: The Philosophy Matures
In this chapter, Phil reflects on how his investment philosophy matured through his experiences during and after world war 2. After the war, he limited his clientele to a small group of large investors with the objective of concentrating solely on the single class of growth investment.
Another conclusion was that the chemical company would enjoy a period of major growth in the postwar years. His research about dow chemical had a great impact on his philosophy about effective management, business culture, leading people within the organization, the importance of talent, strategy and process management, etc. Through his mistakes: he learned:
Invest in companies you're able to understand
Don't try to time the market. During a downturn, don't sell and believe in your reasoning
In and out leads you to a great risk
Try to find companies which are good in reinvesting their profit and increase the future value
Chapter Four: Is the Market Efficient?
The efficient market hypothesis (EMH) is an investment theory that states it is impossible to"beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. Source Investopedia
In the 1930s, 1940s, 1950s, and 1970s, the prevailing view was that it is not prudent to invest in the stock market due to the fear of war, depression, inflation, hostile government actions, etc. Yet each of the periods presented opportunities that ten years later yielded hundreds of percent profits for those who bought and stayed with the shares. And the stock market performance as a whole has always been insignificant compared to the differences between the change in the price of some of the stocks.
An efficient market does account for information readily available but often market misread the info. For example, some new developments are bound to fail but that doesn't mean the company as a whole won't do well in the future. Restructuring eats up a lot of profit for the first one or two years but results in a lot of profit down the road. Efficient markets don't always consider these things.
Conclusion
Phil’s investment philosophy can be summarized in the following eight points:
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.
Focus on buying these companies when they are out of favor
Hold until there is a fundamental change in its nature (weakening management) or it has grown to a point where further growth won’t be faster than the economy as a whole
For a major appreciation of capital, buy companies which reinvest its profits to grow future value rather than giving away dividends
Some mistakes in evaluating companies are inevitable. The important thing is to recognize, understand the cause and don’t repeat
Outstanding companies are hard to find. When an opportunity arises, try to allocate a good percentage of your investment.
Knowledge, better judgment, and evaluation of the specific situation is more important than the financial community’s views
Success in stock management, like any other fields, greatly depends on hard work, honesty, and intelligence
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