- 1 Book Summary - Common Stocks and Uncommon Profits and Other Writings by Philip A. Fisher
- 1.1 Key Insights
- 1.2 Key Points
- 1.2.1 It’s not as simple as buying low and selling high.
- 1.2.2 A good investor can identify promising stocks by asking the right questions.
- 1.2.3 “The 15 Points to Look for in a Common Stock”
- 1.2.4 Knowing when to buy and sell is just as important as knowing where to put your money.
- 1.2.5 When it comes to making decisions, don’t follow the crowd.
- 1.2.6 A conservative investor should look at a stock’s “true value.”
- 1.2.7 Fisher’s 8 Principles for Creating and Maintaining an Investment Portfolio
- 1.3 The Main Take-away
- 1.4 About the Author
Book Summary - Common Stocks and Uncommon Profits and Other Writings by Philip A. Fisher
Though Philip A. Fisher’s book was published in 1958, it remains an invaluable text on personal finance and investment, influencing prominent businessmen like Warren Buffet. Fisher’s principles for investment revolve around extensive research and long-term, conservative investing practices. Fisher provides fifteen principles for choosing the best stock options, and basic guidelines on buying and selling to ensure maximum profit. He also shares a list of common investing practices that investors should not follow, despite popular opinion. He concludes his book with eight concise best practices to develop an investment portfolio that will lead to long-term financial gains. Common Stocks and Uncommon Profits was the first investment book in history to make it on the New York Times best-seller list, and despite some dated references to color TV, Fisher’s advice withstands the test of time.
It’s not as simple as buying low and selling high.
Despite the mantra of investors and advisors, Fisher makes it clear at the beginning of this book that a solid investment plan is about much more than just buying low and selling high. Most investors purchase common stock to make money, but they often make the mistake of selling too soon or choosing the wrong places to invest. Fisher’s principles of investment focus on conducting extensive research using a fifteen-point questionnaire and holding on to common stocks for at least ten years to guarantee maximum returns on your investment. The basis of Fisher’s investment strategy is to find good firms, ask good questions, and as the saying goes in poker, “know when to hold ‘em.”
A good investor can identify promising stocks by asking the right questions.
While relying on ratios and investment reports is an important part of financial research, the best research comes from the business grapevine -- Fisher calls this word-of-mouth research “scuttlebutt.” With scuttlebutt, investors can discover promising rising talent, a company’s mission or ideals, potential management downfalls, and what sets them apart from the competition. Fisher suggests a handful of sources to determine what a company is like on the inside; researchers should chat with customers, suppliers, competitors, ex-employees, trade association leaders, and company management. Asking questions from a wide variety of sources - and guaranteeing confidentiality - will allow you to get a clearer picture of what a company is like day-to-day and their long-term outlook.
What kinds of questions should you ask? Fisher provides a sample questionnaire of the kinds of probing questions he uses to gather information on promising companies.
“The 15 Points to Look for in a Common Stock”
- What is the potential for long-term sales growth?
It’s best to buy stocks when a company’s growth is on the rise and to focus on its long-term potential for growth. Avoid flash-burn companies that quickly rise and fall in value and lack longevity.
- Do the company’s executives have an innovative and forward-thinking approach?
Employees are the heart of a companies success, and understanding their leadership is vital. Ideally, you want to invest in companies with innovative and forward-thinking leadership who will adapt to changes in the market.
- What is the company’s policy on research and development?
Successful companies will bring new products to market and innovate current offerings. How is the company investing in its future products?
- How are the company’s sales?
At the end of the day, the bottom line is based on sales. Examining a company’s sales portfolio is important.
- How is the company’s profit margin?
Making money is great, but the profit margin tells the real story of a growing company. Are they barely staying afloat or rapidly gaining value?
- What is the company doing to maintain or grow their profit margin?
Companies shouldn’t just maintain their profit margin - it should grow. What steps is the company taking to ensure long-term growth and stability?
- Does the company value its workers?
Leadership matters, but so do the front-line workers. A company that treats its employees well will have fewer issues with labor relations and less turnover.
- Does the company have competent and well-supported leadership?
The best companies promote from within and support employees on their path to leadership positions.
- Is the company’s success dependant on the work of one person?
Some startups depend on the ideas of a single person, or “key man.” This is dangerous for investors. If the key man leaves, your returns are history.
- Does the company have a solid grasp of their expenses?
A company should have solid accounting practices and a good grasp of their financial situation.
- What sets the company apart from the competition?
This is a key point for Fisher - what makes a company different? Companies with something new or different to offer will surpass their competition.
- Does the company take a long-term view of their success?
Small startups are sometimes focused more on quick gains than longevity. This is dangerous for investors. Choose companies with a long-term plan.
- Does the company need to raise equity?
The need to raise equity in the near future isn’t necessarily a bad sign for a company, but it can be problematic for investors, whose shares will lose value during the process.
- Is the company transparent with their investors?
As an investor, you want transparency in leadership - it’s important to be kept up to date on failures as well as success.
- Is the company run with integrity?
Conservative investing means avoiding leadership who participate in shady deals that might damage a company’s reputation or longevity. Choose companies whose leadership values transparency and integrity.
Whether you are doing your own research or hiring a trusted advisor, using Fisher’s questions to guide your research will help you understand a company’s long-term chances for success.
Knowing when to buy and sell is just as important as knowing where to put your money.
Research is important, but it can only get you so far. Fisher offers some basic principles on buying and selling to guarantee success as you maintain your investment portfolio.
The most important rule in investing is to only invest surplus money. Don’t invest an emergency or education fund that you don’t want to lose. The best stock portfolios but majority shares in stable, rising companies and a smaller percentage in higher-risk start-up stocks.
Fisher recommends forgoing dividends for capital appreciation. Dividends are a nice source of income, but your investment goes further if the company reinvests in itself, versus paying out to investors.
Finally, knowing when to sell is an important part of investing. Fisher reminds readers that the market fluctuates, and selling anxiously will only result in a loss. That being said, you shouldn’t hold on to stocks that are no longer good investments. For example, if you made a mistake, swallowing your pride and selling is the best choice. If a business was once a good investment based on the 15 criteria but is no longer a good investment, that’s a good reason to sell. And if you find a company that is a better fit for your 15 criteria, you might choose to sell and reinvest in the new company - but if you’ve done all your research, that should be a rare occurrence.
When it comes to making decisions, don’t follow the crowd.
It can be easy to get swept up in stock market trends and new hot stocks. The stock market is all about psychology and is full of trends that may or may not be the right choice for your investment portfolio. Do your own research, and don’t make decisions to buy or sell based on popular opinion. Making the decision to save a small amount of money in the short term can mean long-term losses. Buying what everyone else is buying means the stock won’t have the same value, and may not be as good an investment as comparable companies that aren’t as trendy. Don’t follow the herd mentality of investing - do your own research.
A conservative investor should look at a stock’s “true value.”
Finally, Fisher explains the idea of the “true value” of a stock - for a conservative investor, this number is more important than it might be for an investor who takes more risk.
Trends in the stock market can overvalue some stocks, and undervalue others. While a risky investor buys with the expectation that a stock will rapidly grow, a conservative investor makes a decision based on a stock’s true value, and hopes for consistent long-term growth. As a conservative investor, it makes more sense to buy a stock based on its true value, which can be determined by dividing the stock price by the earnings per share. The lower the ratio of price to earnings, the better.
Sometimes, stocks go up in price because the earnings go up, and investors see that a business is on the rise. But don’t fall for that trap until you compare the price to earnings ratio. The rise in the stock price might outpace the rise in earnings, meaning that you actually end up losing out in the end on an overvalued stock.
Fisher’s 8 Principles for Creating and Maintaining an Investment Portfolio
- Buy stocks from companies with a mission for growth and a plan to achieve it.
- Purchase shares when they are unpopular.
- Don’t sell until you are positive a company is failing.
- Focus on returns, not dividends.
- Accept and learn from your own mistakes - don’t let your ego get in the way of making a good financial choice.
- Take the opportunity during dips in the market to buy a few stocks from remarkable companies.
- Trust yourself, and don’t follow the crowd.
- With “hard work, intelligence, and honesty” you can succeed in investing, and most other things in life.
The Main Take-away
Common Stocks and Uncommon Profits is a classic investment guide with a focus on conservative investments and long-term growth. Fisher explores not only how to maintain an investment portfolio, but how to choose the most promising stocks based on company management and potential. He insists on an individualized approach to managing and investing in the stock market and a ten-year minimum plan to see a return on investments. Fisher’s main take-away is that conservative investing is not as flashy as some other strategies, but will guarantee returns over your lifetime.
About the Author
Philip A Fisher was a famous stockbroker and the author of four books on investing: Paths to Wealth through Common Stocks, Conservative Investors Sleep Well, Developing an Investment Philosophy, and Common Stocks and Uncommon Profits. He worked as an investment manager from 1931 to 1999 when he retired at age 91. Though he worked in the stock market long before the emergence of Silicon Valley, Fisher advocated for investing in mission-driven, smart start-up companies with innovative strategies for success. He died in 2004.