Buy Book Of the Month 2019 – Mentor Review
October 25 - November 23
The book ‘Common Stocks and Uncommon Profits’ by Philip Fisher, originally published in 1958; is unquestionably a classic that persistently holds relevance even in the contemporary model of the stock market. Philip Arthur Fisher was a savant in the investments domain and had pronounced influence over Warren Buffett who since his beginning as an investor has established himself as one of the wealthiest people on the globe.
Prior to delving deeper into the contents of the book, it is imperative that we familiarize ourselves with Philip Fisher and his contribution to the financial market.
It was the year 1928, when Fisher had just dropped out of the newly established Stanford Graduate School of Business to subsequently work as a securities analyst with Anglo-London Bank in San Francisco; only to return as a professor of investments, numerous years hence. He founded Fisher & Co., which commenced operations in full swing in 1931; and stayed at the helm of affairs for 68 years till the year 1999. Albeit his beginning, which was approximately 50 years prior to the existence of the name ‘Silicon Valley,’ he already held expertise in companies whose operations were innovation and technology driven. Fisher worked with the philosophy of investing in immaculately managed high-quality growth stocks for an extended term.
With the launch of the book, ‘Common Stocks and Uncommon Profits,’ Philip Fisher’s ingenious method of growth stock investing became widely accepted. He referred to the high-quality stocks as ‘Scuttlebutt,’ that simply meant the common stocks that go under scrutiny, for instance close study of the company stakeholders, customers suppliers, etc. to guage the propects that the company under scrutiny holds. To my mind one chapter in particular is intrinsic and that is, ‘What to Buy,’ which goes on to focus on the renowned ’15 points to look for a stock.’
‘What to Buy’ astutely describes the different determinants that are helpful in checking for a common stock, such as, validity of products/services for prolonged durations, proficiency of the management required for sustained growth; in turn multiplying the sales and amplifying the research and development wing of the organisation with respect to its sales organisation, profit margins, improving profit margins, size, accounting controls and cost analysis, and preeminently integrity and transparency of the management. The following was a checklist as per Fisher every aspiring investor needs to be in possession of so as to ensure profitable outcomes.
- Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
- Does the management have a determination to continue to develop products or processes that will still further increase total ssales potentials when the growth potentials currently attractive product lines have largely been exploited?
- How effective are the company’s research and development efforts in relation to its size?
- Does the company have an above-average sales organization?
- Does the company have a worthwhile profit margin?
- What is the company doing to maintain or improve profit margins?
- Does the company have outstanding labor and personnel relations?
- Does the company have outstanding executive relations?
- Does the company have depth to its management?
- How good are the company’s cost analysis and accounting controls?
- 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?
- Does the company have a short-range or long-range outlook in regard to profits?
- 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?
- Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?
- Does the company have a management of unquestionable integrity?
In furtherance to the above it was also mentioned that it’s significantly improbable for any company to fulfill all the 15 requisites listed above, however, alarms shall have to be raised for the investors if the company falls short on multiple of these desired components.
Subsequently, another chapter of utmost prominence is ‘when to buy.’ The chapter commences with a couple of questions that are answered in no specific cadence during the chapter. The question being as follows:
- Is there any reason to divert time or mental effort from the main issue?
- Does not the matter of when to buy become of relatively minor importance?
- Once the investor is sure he has definitely found an outstanding stock, isn’t any time at all a good time to buy it?
The answer to the above questions, as mentioned by Fisher in the book are the objective that the investor comes in with as well as his temperament.
‘When to sell’ is another key chapter that contends that ‘NEVER’ is an ideal time to sell a good stock so long as the company that parents the stock continue to exhibit characters of a successful conglomerate.
‘Hullabaloo about dividends’ is another key chapter that accentuates an unsettling trend among the investment community that persists, which is, a disproportionate emphasis on near-term cash generation to the exclusion of value creation. ‘Five don’ts for investors’, and ‘How I go about finding a growth stock’ are the two other chapters that are sure to engage a reader’s attention.
Common Stocks and Uncommon Profits quite unambiguously aids the reader in getting a better understanding of growth investing.