Common Stocks and Uncommon Profits Summary provides a free book summary, key takeaways, insightful review, best quotes, and author biography of Philip A. Fisher’s book.
In 1958, an investment guide was on The New York Times’ bestseller list. This was the first time something like this happened. Since then, that guide became a classic of the personal finance category. This book was Philip A. Fisher’s Common Stocks and Uncommon Profits. It went on to educate students and influenced leading investors, including Warren Buffett. More than 50 years later, the book’s teachings still resonate. While some firms Fisher mentions are long out-of-business, many are still prosperous. And though some anecdotes bring nostalgia, he prophesizes flat-screen TVs. The book reflects how Fisher teased out valuable insights by questioning firms. One of his main questions was, “what are you doing differently than your rivals?” We recommend this inspiring bestseller to business students, private investors, and beginner securities analysts.
This Summary Will Help You Learn
- Why extended holdings in common stock could produce high returns,
- How “scuttlebutt” can help learn everything you want to know about a firm,
- What “10 don’ts” and “15 points” to apply when assessing a stock, and
- Why conservative investors have a peaceful sleep.
- People investing in common stocks must focus on long-range returns. They must not attempt selling high and buying low.
- Use “scuttlebutt” to get knowledge of a firm. This is the information you get by speaking with consumers, competitors, and suppliers.
- Purchase shares of companies that have well-planned strategies for long-term growth and profits. Then keep them till you are sure that the company’s future is not bright anymore.
- For a more focused search, use 15 points which judge a company’s finances and management.
- You can seek companies with robust profit margins, great marketing, and healthy employee relations.
- Pick an investment advisor with at least 5-years’ experience in both bad-and-good markets.
- Assign the majority of your money to huge “institutional stocks.” Besides, invest a small part to smaller and upcoming companies.
- Capitalize on downturns to purchase stocks in a small number of extraordinary firms.
- Stay away from typical mistakes — for example, overdiversification or following others. However, if you do commit an error, learn from it.
- Make conservative investments to get a good night’s sleep.
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Common Stocks and Uncommon Profits Summary
Know When to Hold ’Em
People purchase common stocks hoping to make money. However, they must be cautious about the typical process of selling high and buying low. The best way to get strong returns is to identify winning firms. Or finding ones set to become successful. Then, hold their stocks for the long-run. It should at least be a decade or even more. However, finding such companies is not easy. But, it is surely possible if you are ready to work hard. So, ask valid questions and use all your resources.
Invest smartly for the long-run. Hence, find firms that are likely to grow quicker than their rivals. Or faster than the whole market. Find firms that have capable and visionary managers who will guide such growth. You will not discover them by looking at statistics. Instead, use scuttlebutt. This is the information you get by speaking with a company’s consumers, rivals, and suppliers. Mostly, you will get a consistent view in such discussions.
Also, exploit the business “grapevine” by questioning experts in the company’s field. Besides this, speak with the firm’s trade association leaders. You may even interview previous employees. However, take their answers with a pinch of salt. Why? Because former staff might have a biased view. Prepare analytical questions. More importantly, ensure complete confidentiality to all those you are questioning. Approach the company’s management only after finishing your due diligence.
“The 15 Points to Look for in a Common Stock”
For findings companies worth investing, identify how they perform against the below 15 questions:
- Does the company show “sufficient market potential” for long-term sales growth? – Seek companies having an upward “long-run sales curve.” For instance, 90% of American houses had TVs by 1960s. So, it looked that the future for TV makers had hit a plateau. However, alert companies started to redirect their vision to color TVs. And, some even began envisioning flat screens.
- Can the company’s management guide innovation for tomorrow’s products? – The firm’s senior management should have a positive visionary attitude. This is key to helping the business achieve its promise. It is especially true when expanding R&D efforts indicate new technologies and opportunities.
- Does the company use research and development to advance its agenda? –
- Hiring staff has great research talent. Coordinating their work to launch new products will ensure a firm’s success in the future.
- “Does the company have an above-average sales organization?” – Investors do not generally analyze companies’ marketing potential. However, survival is unlikely without sales.
- “Does the company have a worthwhile profit margin?” – Sound research and marketing are zero in the absence of bottom-line profitability. Companies have a wide profit margin to see repeat investors.
- “What is the company doing to maintain or improve profit margins?” – Keep a future-centric outlook. Look for companies which are increasing their scale and productivity. Focus on the brilliance of the work being done. Plus, pay attention to novel ideas for curbing costs and growing profits.
- “Does the company have outstanding labor and personnel relations?” – Strong firms show that they value their employees by fair payment. Plus, they resolve labor issues faster.
- “Does the company have outstanding executive relations?” – Seek a company which promotes from inside and has strong leadership.
- “Does the company have the depth to its management?” – Be cautious of “key man” situations. These are the case where the company is over-reliant on one man. Evolving firms must build their executive positions for the future.
- “How good are the company’s cost analysis and accounting controls?” – When a firm does not have tight control over finances, its growth may slow down. Scuttlebutt can often disclose apparent lapses in a firm’s control.
- Does the company show strengths specific to its industry? – For instance, an engineering company with excellent technical talent may beat its competition.
- “Does the company have a short-range or long-range outlook [on] profits?” – Firms which forgo their current profits for future growth are likely to survive longer. Public firms need to perform outstandingly for their external shareholders.
- Will the firm need to raise equity shortly? – If yes, potential investors must concern about their stock’s dilution. Purchase stocks in a company which can fund its growth in the long-run.
- Do executives share bad news as well as good with shareholders? – A growing company is likely to face problems. However, stay away from firms which are not accessible during rough times.
- “Does the company have a management of unquestionable integrity?” –Management must showcase a robust sense of trusteeship to their shareholders. Utilize your scuttlebutt resources to get details about inside information. For example, nepotism, insider deals, or questionable behavior remove offenders from your list.
Investment research is specialized. You may not always perform a detailed study to find the best stocks. It is possible that you do not have the time. Or merely the interest to do it yourself. So, choose a reputed advisor who pursues the above checklist. Plus, he/she should have at least 5-years of experience in both good-and-bad markets.
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Buying and Selling
Only use your extra money to invest in common shares. Do not risk your emergency money. Or the funds you require for your kids’ education. Build your investment criteria around a long-run increase of a growth share. Invest the majority of your funds in institutional stocks which are still growing. For example, IBM, DuPont, Dow Chemical Company, etc. Invest a smaller portion in a small and upcoming firm. Choose companies that offer the greatest potential for gains in the long-run.
Let go of immediate dividends for capital gain. Why? Because dividends should be your lowest priority to purchase a stock. A company which reinvests its profits for future growth will deliver better in long-run. However, a company which rewards its existing shareholders generously is unlikely to do so. What to do if you depend on dividends for a major share of your income? Then look for reliability or regularity of a steady payout schedule.
The five forces affecting the stock market
Deciding when to purchase is as tough as finding which one to buy. Trying to predict the market is the same as the pseudoscience in the Middle Ages. So, pay attention to buying signals. For instance, buy shares in a firm just before it launches a new product. Examine possible industry situations for buying prospects. Reel your purchases over time to benefit from interim price falls. Also, be cautious of the five powerful forces that affect the stock market. These are:
- Business cycle
- Movements of interest rate
- Government’s take on business and investment
- Inflation predictions, and
- Potentially enormous shifts in existing products and industries
When is it wise to sell?
However, it would be smart to sell the stocks in 3 specific instances. These are:
- When you have made a mistake – admit it. Gulp down your pride and sell.
- When a company does not match the 15-pointer checklist any longer, this is especially when all its growth opportunities are exhaust.
- If something better comes your way, for instance, a new firm which better fits the 15-pointer criteria. However, this will not often happen if your research is thorough.
Avoid selling in a bear market. Why? Because you cannot estimate the correct time to purchase again. Plus, avoid selling after a rise in your share price. A temporary price rise does not imply a stock’s time is over. Especially when you have established, it is an excellent stock with long-run potential.
Now you know how to make a sound investment. Below is what you should do next:
- “Don’t buy into promotional companies” – Stay away from the urge to “get in on the ground floor” of unproven firms.
- “Don’t ignore a good stock just because it is traded ‘over the counter’” – Nonexchange-listed stocks also have good liquidity now.
- Don’t buy based on the annual report – PR staff usually writes them for promotional purposes.
- Don’t think a stock’s high P/E means there’s no upside left – A share with a high P/E ratio, given the company keeps reinvesting, can provide appreciation prospects.
- “Don’t quibble over eighths and quarters” – Buy your ideal stock at the market. Avoid waiting for the share to attain some magical price. This may never happen.
- “Don’t overstress diversification” – An over-diversified portfolio is as problematic as a non-diversified one. You cannot closely monitor 25 investments and review their prospects.
- “Don’t be afraid of buying on a war scare” – Today, shares fall at the possibility of war. However, they bounce back once hostility stops. Government’s spending on defense is inflationary. Hence, stocks tend to become worth investing than keeping cash.
- “Don’t be influenced by what doesn’t matter” – Do not focus much on information on old stock price performance. This has no bearing on future potential.
- “Don’t fail to consider time as well as price in buying a true growth stock” –Be alert of firm actions which may momentarily reduce the stock price. Purchase once such factors are well discounted.
- “Don’t follow the crowd” – As markets comprise of humans, mass psychology abounds. Stay away from the herd mentality. Instead, decide on your terms and research.
“Conservative Investors Sleep Well”
Wise investors aim to preserve buying power at the least level of risk. For this, a conservative investor must consider four factors when studying a company. These are:
- Its low production cost. This includes a robust sales process, great financial knowledge, and remarkable technology.
- Its investment in its people and their recognition.
- Some natural attributes which keep the company at the top. For example, vast economies of scale or technical expertise.
- An honest evaluation of its P/E ratio compared to the market.
Want a good night’s sleep? Follow these eight precepts refined during a distinguished 50-year career in stock picking:
- Purchase shares of companies having definite plans to attain long-term profit growth.
- Buy the stocks when they are out of favor.
- Hold your investments until you are sure that the firm’s prospects are not rosy anymore.
- Avoid depending on dividends.
- Learn from the mistakes you make.
- Use market downturns to purchase a smaller number of extraordinary firms.
- Trust your gut, not the herds.
- In investing, success depends mainly on a blend of honesty, hard work, and intelligence.
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Common Stocks and Uncommon Profits Review
If you are seeking a simple to read and understand, quick-paced, useful formulas, plus a fast way to earn a fortune, this book is not for you. If you are a rookie or even an experienced investor who thinks that you do not have an understanding of the investing game, and if you are ready to endure a lot of reading to get some fundamental precepts of investing analysis, then reading Fisher’s seminal classic would be worth your time and money. In his classic manner, Fisher lays out the notions and answers to queries which you might not have thought to be pertinent.
In this book, Fisher brings his 50 years of investing experience into play besides highlighting factors which the mainstream financial media fails to cover. Being a reader, you will not be overloaded with too much financial trivia. Instead, you will get to know about general trends and techniques of investment assessment, which usually are not considered by the statistic-focused investors. Nonetheless, to be able to garner the gems of necessary stock information, you will need to let go of financial data, tables, charts, and figures usually demonstrated in stock analysis.
In one of the main chapters, Fisher outlines the 15 questions investors must ask when deciding about a stock. A small quibble which the readers might have is that the majority of the issues are for manufacturing firms. Nonetheless, with some thought, they could be modified to suit the companies in the service sector too. The benefit of such a comprehensive analysis is that readers will quickly remove the duds.
About the Author
Philip A. Fisher began his investment company, Fisher & Co. in 1931. He only managed the portfolio for a dozen select customers at any given time. Fisher also authored Paths to Wealth Through Common Stocks and Conservative Investors Sleep Well.
After reading this Common Stocks and Uncommon Profits Summary, what do you think? This book summary will help you assume a better control over your long-run investments with some impressive insights.
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