Common Stocks and Uncommon Profits By philip fisher

Take-Aways 

· People investing in common stocks must focus on long-range returns. They must not attempt selling high and buying low. 

· Use “scuttlebutt” to get knowledge of a firm. This is the information you get by speaking with consumers, competitors, and suppliers. 

· Purchase shares of companies that have well-planned strategies for long-term growth and profits. Then keep them till you are sure that the company’s future is not bright anymore. 

· For a more focused search, use 15 points which judge a company’s finances and management. 

· You can seek companies with robust profit margins, great marketing, and healthy employee relations. 

· Pick an investment advisor with at least 5-years’ experience in both bad-and-good markets. 

· Assign the majority of your money to huge “institutional stocks.” Besides, invest a small part to smaller and upcoming companies. 

· Capitalize on downturns to purchase stocks in a small number of extraordinary firms. 

· Stay away from typical mistakes — for example, overdiversification or following others. However, if you do commit an error, learn from it. 

· Make conservative investments to get a good night’s sleep. 

Know When to Hold ’Em 

People purchase common stocks hoping to make money. However, they must be cautious about the typical process of selling high and buying low. The best way to get strong returns is to identify winning firms. Or finding ones set to become successful. Then, hold their stocks for the long-run. It should at least be a decade or even more. However, finding such companies is not easy. But it is surely possible if you are ready to work hard. So, ask valid questions and use all your resources.

“Scuttlebutt” 

Invest smartly for the long-run. Hence, find firms that are likely to grow quicker than their rivals. Or faster than the whole market. Find firms that have capable and visionary managers who will guide such growth. You will not discover them by looking at statistics. Instead, use scuttlebutt. This is the information you get by speaking with a company’s consumers, rivals, and suppliers. Mostly, you will get a consistent view in such discussions. 

Also, exploit the business “grapevine” by questioning experts in the company’s field. Besides this, speak with the firm’s trade association leaders. You may even interview previous employees. However, take their answers with a pinch of salt. Why? Because former staff might have a biased view. Prepare analytical questions. More importantly, ensure complete confidentiality to all those you are questioning. Approach the company’s management only after finishing your due diligence. 

“TO BUILD WEALTH, MINIMIZE YOUR REALIZED (TAXABLE) INCOME AND MAXIMIZE YOUR UNREALIZED INCOME (WEALTH/CAPITAL APPRECIATION WITHOUT A CASH FLOW).”

“The 15 Points to Look for in a Common Stock” 

For findings companies worth investing, identify how they perform against the below 15 questions: 

1. Does the company show “sufficient market potential” for long-term sales growth? – Seek companies having an upward “long-run sales curve.” For instance, 90% of American houses had TVs by 1960s. So, it looked that the future for TV makers had hit a plateau. However, alert companies started to redirect their vision to color TVs. And, some even began envisioning flat screens. 

2. Can the company’s management guide innovation for tomorrow’s products? – The firm’s senior management should have a positive visionary attitude. This is key to helping the business achieve its promise. It is especially true when expanding R&D efforts indicate new technologies and opportunities. 

3. Does the company use research and development to advance its agenda? – Hiring staff has great research talent. Coordinating their work to launch new products will ensure a firm’s success in the future. 

4. “Does the company have an above-average sales organization?” – Investors do not generally analyze companies’ marketing potential. However, survival is unlikely without sales. 

5. “Does the company have a worthwhile profit margin?” – Sound research and marketing are zero in the absence of bottom-line profitability. Companies have a wide profit margin to see repeat investors. 

6. “What is the company doing to maintain or improve profit margins?” – Keep a future-centric outlook. Look for companies which are increasing their scale and productivity. Focus on the brilliance of the work being done. Plus, pay attention to novel ideas for curbing costs and growing profits. 

7. “Does the company have outstanding labor and personnel relations?” – Influential firms show that they value their employees by fair payment. Plus, they resolve labor issues faster. 

8. “Does the company have outstanding executive relations?” – Seek a company which promotes from inside and has strong leadership. 

9. “Does the company have the depth to its management?” – Be cautious of “key man” situations. These are the case where the company is over-reliant on one man. Evolving firms must build their executive positions for the future. 

10. “How good are the company’s cost analysis and accounting controls?” – When a firm does not have tight control over finances, its growth may slow down. Scuttlebutt can often disclose apparent lapses in a firm’s control. 

11. Does the company show strengths specific to its industry? – For instance, an engineering company with excellent technical talent may beat its competition. 

12. “Does the company have a short-range or long-range outlook [on] profits?” – Firms which forgo their current profits for future growth are likely to survive longer. Public firms need to perform outstandingly for their external shareholders. 

13. Will the firm need to raise equity shortly? – If yes, potential investors must concern about their stock’s dilution. Purchase stocks in a company which can fund its growth in the long-run. 

14. Do executives share bad news as well as good with shareholders? – A growing company is likely to face problems. However, stay away from firms which are not accessible during rough times. 

15. “Does the company have a management of unquestionable integrity?” –Management must showcase a robust sense of trusteeship to their shareholders. Utilize your scuttlebutt resources to get details about inside information. For example, nepotism, insider deals, or questionable behavior remove offenders from your list. 

Investment research is specialized. You may not always perform a detailed study to find the best stocks. It is possible that you do not have the time. Or merely the interest to do it yourself. So, choose a reputed advisor who pursues the above checklist. Plus, he/she should have at least 5-years of experience in both good-and-bad markets. 

Buying and Selling 

Only use your extra money to invest in common shares. Do not risk your emergency money. Or the funds you require for your kids’ education. Build your investment criteria around a long-run increase of a growth share. Invest the majority of your funds in institutional stocks which are still growing. For example, IBM, DuPont, Dow Chemical Company, etc. Invest a smaller portion in a small and upcoming firm. Choose companies that offer the greatest potential for gains in the long-run. 

Let go of immediate dividends for capital gain. Why? Because dividends should be your lowest priority to purchase a stock. A company which reinvests its profits for future growth will deliver better in long-run. However, a company which rewards its existing shareholders generously is unlikely to do so. What to do if you depend on dividends for a major share of your income? Then look for reliability or regularity of a steady payout schedule. 

“HIS VIEW OF MILLIONAIRES IS SHARED BY MOST PEOPLE WHO ARE NOT WEALTHY. THEY THINK MILLIONAIRES OWN EXPENSIVE CLOTHES, WATCHES, AND OTHER STATUS ARTIFACTS. WE HAVE FOUND THIS IS NOT THE CASE.” 

The Five Forces Affecting the Stock Market 

Deciding when to purchase is as tough as finding which one to buy. Trying to predict the market is the same as the pseudoscience in the Middle Ages. So, pay attention to buying signals. For instance, buy shares in a firm just before it launches a new product. Examine possible industry situations for buying prospects. Reel your purchases over time to benefit from interim price falls. Also, be cautious of the five powerful forces that affect the stock market. These are: 

Business cycle 

Movements of interest rate 

Government’s take on business and investment 

Inflation predictions, and 

Potentially enormous shifts in existing products and industries 

When Is It Wise to Sell? 

However, it would be smart to sell the stocks in 3 specific instances. These are: 

When you have made a mistake – admit it. Gulp down your pride and sell. 

When a company does not match the 15-pointer checklist any longer, this is especially when all its growth opportunities are exhaust. 

If something better comes your way, for instance, a new firm which better fits the 15-pointer criteria. However, this will not often happen if your research is thorough. 

Avoid selling in a bear market. Why? Because you cannot estimate the correct time to purchase again. Plus, avoid selling after a rise in your share price. A temporary price rise does not imply a stock’s time is over. Especially when you have established, it is an excellent stock with long-run potential. 

Ten Don’ts 

Now you know how to make a sound investment. Below is what you should do next: 

“Don’t buy into promotional companies” – Stay away from the urge to “get in on the ground floor” of unproven firms. 

“Don’t ignore a good stock just because it is traded ‘over the counter’” – Nonexchange-listed stocks also have good liquidity now. 

Don’t buy based on the annual report – PR staff usually writes them for promotional purposes. 

Don’t think a stock’s high P/E means there’s no upside left – A share with a high P/E ratio, given the company keeps reinvesting, can provide appreciation prospects. 

“Don’t quibble over eighths and quarters” – Buy your ideal stock at the market. Avoid waiting for the share to attain some magical price. This may never happen. 

“Don’t overstress diversification” – An over-diversified portfolio is as problematic as a non-diversified one. You cannot closely monitor 25 investments and review their prospects. 

“Don’t be afraid of buying on a war scare” – Today, shares fall at the possibility of war. However, they bounce back once hostility stops. Government’s spending on defense is inflationary. Hence, stocks tend to become worth investing than keeping the cash. 

“Don’t be influenced by what doesn’t matter” – Do not focus much on information on old stock price performance. This has no bearing on future potential. 

“Don’t fail to consider time as well as price in buying a true growth stock” –Be alert of firm actions which may momentarily reduce the stock price. Purchase once such factors are well discounted. 

“Don’t follow the crowd” – As markets comprise of humans, mass psychology abounds. Stay away from the herd mentality. Instead, decide on your terms and research. 

“Conservative Investors Sleep Well” 

Wise investors aim to preserve buying power at the least level of risk. For this, a conservative investor must consider four factors when studying a company. These are: 

Its low production cost. This includes a robust sales process, excellent financial knowledge, and remarkable technology. 

Its investment in its people and their recognition. 

Some natural attributes which keep the company at the top. For example, massive economies of scale or technical expertise. 

An honest evaluation of its P/E ratio compared to the market. 

Want a good night’s sleep? Follow these eight precepts refined during a distinguished 50-year career in stock picking: 

Purchase shares of companies having definite plans to attain long-term profit growth. 

Buy the stocks when they are out of favor. 

Hold your investments until you are sure that the firm’s prospects are not rosy anymore. 

Avoid depending on dividends. 

Learn from the mistakes you make. 

Use market downturns to purchase a smaller number of extraordinary firms. 

Trust your gut, not the herds. 

In investing, success depends mainly on a blend of honesty, hard work, and intelligence. 

“WEALTH IS NOT THE SAME AS INCOME. IF YOU MAKE A GOOD INCOME EACH YEAR AND SPEND IT ALL, YOU ARE NOT GETTING WEALTHIER. YOU ARE JUST LIVING HIGH. WEALTH IS WHAT YOU ACCUMULATE, NOT WHAT YOU SPEND.” 

Common Stocks and Uncommon Profits Review 

If you are seeking a simple to read and understand, quick-paced, useful formulas, plus a fast way to earn a fortune, this book is not for you. If you are a rookie or even an experienced investor who thinks that you do not have an understanding of the investing game, and if you are ready to endure a lot of reading to get some fundamental precepts of investing analysis, then reading Fisher’s seminal classic would be worth your time and money. In his classic manner, Fisher lays out the notions and answers to queries which you might not have thought to be pertinent. 

In this book, Fisher brings his 50 years of investing experience into play besides highlighting factors which the mainstream financial media fails to cover. Being a reader, you will not be overloaded with too much financial trivia. Instead, you will get to know about general trends and techniques of investment assessment, which usually are not considered by the statistic-focused investors. Nonetheless, to be able to garner the gems of necessary stock information, you will need to let go of financial data, tables, charts, and figures usually demonstrated in stock analysis. 

In one of the main chapters, Fisher outlines the 15 questions investors must ask when deciding about a stock. A small lie which the readers might have is that the majority of the issues are for manufacturing firms. Nonetheless, with some thought, they could be modified to suit the companies in the service sector too. The benefit of such a comprehensive analysis is that readers will quickly remove the duds. 

Common Stocks and Uncommon Profits Quotes 

“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.” 

“Even in those earlier times, 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.” 

“But his very best questions always popped out of his mind, unprepared, never having been written down in advance because they were the angle he picked up on the fly, as he heard an answer to a lesser question. Those creative questions were the art. It is what, in my mind, made his querying great.” 

“Most frequently given of such reasons is the conviction that a general stock market decline of some proportion is somewhere in the offing. In the preceding chapter I tried to show that postponing an attractive purchase because of fear of what the general market might do will, over the years, prove very costly. This is because the investor is ignoring a powerful influence about which he has positive knowledge through fear of a less powerful force about which, in the present state of human knowledge, he and everyone else is largely guessing.” 

“In a new plant for even established processes or products, there will probably be a shake-down period of six to eight weeks that will prove rather expensive. It takes this long to get the equipment adjusted to the required operating efficiency and to weed out the inevitable “bugs” that seem to occur in breaking in modern intricate machinery.” 

“Never promote someone who hasn’t made some bad mistakes, because if you do, you are promoting someone who has never done anything.” 

“I have already made up my mind, don’t confuse me with facts.” 

“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.” 

“Conversely, as such a stock rises to, say, 50 or 60 or 70, the urge to sell and take a profit now that the stock is “high” becomes irresistible to many people. Giving in to this urge can be very costly. This is because the genuinely worthwhile profits in stock investing have come from holding the surprisingly large number of stocks that have gone up many times from their original cost. The only true test of whether a stock is “cheap” or “high” is not its current price in relation to some former price, no matter how accustomed we may have become to that former price, but whether the company’s fundamentals are significantly more or less favorable than the current financial-community appraisal of that stock.”

AUTHOR

ANKIT VERMA

ASSISTANT PROFESSOR