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Book Review

Common Stocks and Uncommon Profits
by Philip Fisher
reviewed by Marco den Ouden

This review was originally published in The Break Out Report on 04/18/2004

Philip Fisher is one of two key influences on the thinking of super-investor Warren Buffett, currently closing in fast to replace Bill Gates as the richest man in the world. The other influence, of course, was the founder of value investing, Benjamin Graham.  Buffett biographer Robert Hagstrom says that Buffett is 85% Graham and 15% Fisher.

And Fisher’s seminal work is his 1958 classic, Common Stocks and Uncommon Profits. Where Graham focused on looking for under-valued stocks, Fisher focused on searching for growth stocks.

The book is relatively short – just over 150 pages, and is available in a recently published compendium from Wiley Investment Classics that includes his later works Conservative Investors Sleep Well and Developing an Investment Philosophy.

The core of the book is Fisher’s “Fifteen Points to Look for in a Common Stock”. Fisher looks for two key things – what the company does and the quality of its management. The first three of his fifteen points focus on the company’s products and services.

A growth company, says Fisher, must “have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years”. An increase in profitability alone as a result of better cost control and more efficient utilization of resources can lead to short term gains, says Fisher, but this is speculation and not investing.  Nor is putting money into the go-go stock of the moment.  Such companies may advance sales considerably for a few years and then hit saturation, after which growth stops. What Fisher is looking for is sustained growth. And he avers that this can be accomplished because a company is “fortunate and able” or because it is “fortunate because it is able”.  The difference is that the former are beneficiaries of changes in technology whereas the latter instigate changes in technology. Which brings us to Fisher’s second point.

A company’s management, say Fisher, “must 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”. In other words, the company must constantly re-invent itself. And this ties in with the third point – research and development must be effective in relation to the company’s size. In fact, Fisher is big on Research and Development and looks for companies that invest heavily in this area. The company’s profitability is sustained and advanced by successful R&D.

Fisher’s other twelve points relate to the management and finances of a company. These include an above-average sales force, worthwhile profit margin, outstanding labor relations, management depth, excellent cost and accounting controls, a long-range outlook, adequate financing and management integrity.

Although he knocks it off in a short three pages, an important element of Fisher’s strategy is his research methodology. He calls it “scuttlebutt”. Scuttlebutt literally means gossip, but Fisher means much more than that. He’s not talking online chat forums like Raging Bull or Silicon Investor which really are just gossip and notoriously unreliable.

By scuttlebutt, Fisher means talking to others than the investment community and the management of a company. He avers that you can learn a lot about a company by talking to employees, customers and competitors. If competitors, for example, fear the company you’re checking out, that speaks volumes. And employees and former employees are often more candid than management would be in revealing problems. Fisher advises, however, that sources must be given strict confidentiality or their reliability will be suspect.

Other elements in this investment classic include a chapter on when to buy. Fisher pooh-poohs market timing as “silly” because our ability to forecast future trends is unreliable at best. He suggests looking over back issues of the Commercial and Financial Chronicle to see how ineffective such predictions are.

But he does suggest that one can time an investment based on the company itself. He argues that when a company is developing a new process or product, it takes time to get it off the ground. Investors may bid up the stock at first on speculative hype. When profits fail to materialize during this establishment phase, these same investors bail and send the stock price plummeting. The stock hits bottom just as it is about to turn its investment into profits and that is the time to buy.

The book also includes a chapter on when to sell and when not to. “If the job has been correctly done when a common stock is purchased,” says Fisher, “the time to sell is – almost never”. Shades of Buffett!

The book is chock full of good ideas including ten “Don’ts for Investors” which include don’t worry about high P/E ratios, don’t quibble over price, don’t over-diversify, don’t follow the crowd, and particularly apropos today, don’t be afraid of buying on a war scare.

Almost fifty years later, Fisher’s book still packs a punch. Its ideas are solid and, in the hustle bustle world of instant information on the Internet, all too often forgotten. Everyone wants instant gratification and looks for short-term gain. But investing in companies that have a growing market for their products, strong and forward-looking management, and extensive research and development and holding them is an investment strategy that has proven the test of time. The fact that Warren Buffett is once again contending for top dog in Forbe’s billionaires list is proof of that.


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