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:

Life and Times of the Greatest Investor Who Ever Lived

Warren Buffett is undoubtedly the best investor of all time. When people hear about Warren Buffett they wish to imitate his investment results and because of this countless books have written about his investing philosophy. To get a deeper understanding of how Warren's investment philosophy came to be, it's important to understand what Warren Buffett is like as a person. In Roger Lowenstein's "Buffett: The Making of an American Capitalist" he paints a picture of how Warren grew up, his development as a young adult, and his triumphs and failures managing his holding company Berkshire Hathaway.

Warren Buffett has always been a business person at heart. In his youth he used to buy a 6 pack of Coke from his family's grocery store for 25 cents and sell individual cans to his neighbours for 5 cents each to net a tidy profit of 5 cents. He also ran a paper route as a boy, which taught him the art of sales, how to make deliveries on time, and how to collect payments from customers. As a teenager Warren bought a few used pin ball machines and placed them in local barber shops, Warren eventually sold this business. After which he invested the money in a fixer up Cadillac that he would rented out. Throughout his youth he gained valuable experience running various businesses. One of Warren's most memorable quotes is "being a businessman has made him a better investor and being an investor has made him a businessman."

An important relationship that developed in Warren's investment career was when he went to graduate school at Columbia University, where he was mentored by Benjamin Graham, the author of Security Analysis and The Intelligent Investor. Benjamin Graham's investment philosophy made a lot of sense to Warren. Graham's investment philosophy was to purchase stocks that the market had undervalued. This was the "cigar butt" approach to investing, where you could pick up a cigar butt off the floor virtually for free and get a few puffs out of it. Warren followed this practice until he studied Philip Fisher's investment philosophy which was based more on valuing companies based on their brand value, the quality of management and other less quantitative qualities. Warren started looking for companies that were not only cheap relative to value metrics but also had a long term competitive advantage in its industry. This blend of investment philosophies is the reason for Warren's success.

One of the most incredible investment stories of our time is the story of how Warren turned a dying textiles manufacturing company, Berkshire Hathaway, into the world's most prosperous holding company. When Warren purchased Berkshire Hathaway he was still using the "cigar butt" approach to investing, purchasing the company because it was priced cheaply. The business was cheap because the textiles industry was dying in North America, losing market share to cheaper textiles manufactures operating in developing countries. Warren had tough management decisions to make in order to keep Berkshire Hathaway from becoming a failed investment. He could either keep plunging capital into the textile mills or start diverting precious capital to more lucrative investments. Fortunately, with Warren's incredible vision he chose the latter. Warren diverted Bershire's capital by purchasing insurance companies, which had a much better return on capital. Eventually all of Bershire's mills were closed, however what remained was the most successful holding company of all time.

A final note on Warren is that although he is one of the top ten wealthiest people on earth, he lives a very modest lifestyle. He has lived in the same house that he bought in the 1960's. He doesn't believe in giving his children a huge inheritance, in fact he believes in having high inheretence taxes so that the wealth one accumulates should return to the capilist system that helped create it. He believes in taxing the wealthy at higher rates. Warren himself plans on giving all of his wealth away to charity. He tap dances to work everyday and loves his job. If you're a frugal person than Warren's investment philosophy is for you and learning from him would be beneficial for your investment portfolio. If you study enough about Warren perhaps one day you will create your own Berkshire Hathaway.

Warren's Life: