Monday, October 13, 2014

Common Stocks and Uncommon Profits

In our quest for investment knowledge it is best to learn from the best.  Renowned investor, Warren Buffett, has said that his investment style is 85% Benjamin Graham and 15% Philip Fisher. This naturally leads us to wonder, what is Philip Fisher's investment style? In Philip Fisher's 1958 publication Common Stocks and Uncommon Profits, he distills his wisdom from a career as a securities analyst.

First of all Fisher sees stocks as part ownership in companies and thus they should be analyzed as such. One key lesson Fisher shares is the way he gains knowledge about companies he's considering investing in. He calls his method the "scuttlebutt" method. The scuttlebutt method is a way of learning about a company through the business grapevine. After thoroughly researching the fundamentals of a company, Fisher would start asking questions to people with knowledge about the dealings of the company such as competitors, customers, former employees, suppliers, etc.. This is a way of gathering information that may not be accessible by reading annual reports and helps paint a picture of the company's economic future. The scuttlebutt method seeks a deeper understanding to what makes the company a success, or uncovers any alarm bells signaling upcoming dangers.

Also, within Common Stocks and Uncommon Profits is Fisher's 15 key questions which he asks about the prospective investment:
  1.  Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
  2. Does the management 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?
  3. How effective are the company's research and development efforts in relation to its size?
  4. Does the company have an above average sales organization?
  5. Does the company have a worthwhile profit margin?
  6. What is the company doing to maintain or improve profit margins?
  7. Does the company have outstanding labour and personnel relations?
  8. Does the company have outstanding executive relations?
  9. Does the company have depth to its management?
  10.  How good are the company's cost analysis and accounting controls?
  11. 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 competitors?
  12. Does the company have a short-range or long-range outlook in regards to profit?
  13. In the foreseeable future will the growth of the company require sufficient equity financing so that the large number of shares then outstanding will largely cancel the existing shareholders' benefit from this anticipated growth?
  14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
  15. Does the company have a management of unquestionable integrity?
Fisher elaborates on each question, explaining the importance of the question and the answer he is looking for. If the answer to a majority of these questions are favourable than it is likely that the investment has great long-term growth potential.

Today Philip Fisher would be labelled as a "growth" investor since he seeks capital appreciation in companies with long-term growth potential. In some cases he may even prefer a company that doesn't pay a dividend so that profits can be re-investing into the company financing its growth. In this case the belief is that the company has the capability to grow faster than the gains the investor could obtain investing elsewhere.

Common Stocks and Uncommon Profits is a classic investment guide and should be on the book shelf of any do-it-yourself investor: