BY WEALTH ADVISER
“Common Stocks and Uncommon Profits” is a seminal work on investing by Philip A. Fisher, first published in 1958. This influential book outlines Fisher’s investment philosophy, which focuses on identifying and investing in high-quality growth companies for the long term.
Fisher introduces his famous “scuttlebutt” method for researching companies, which involves gathering information from various sources beyond just financial statements. He presents fifteen points to look for in a common stock, emphasising factors such as a company’s growth potential, management quality, and innovative capacity.
The book challenges conventional wisdom on many fronts, including views on diversification and dividend policy. Fisher advocates for a concentrated portfolio of well-researched stocks and often favours companies that reinvest profits for growth rather than paying dividends.
Throughout the book, Fisher draws on his decades of experience in the stock market, providing case studies and practical advice. He stresses the importance of patience, thorough research, and maintaining a long-term perspective in investing.
“Common Stocks and Uncommon Profits” remains a classic in investment literature, offering timeless insights for both novice and experienced investors seeking to achieve superior returns in the stock market.
1. What are the key principles of Philip A. Fisher’s investment philosophy?
Fisher’s investment philosophy centres on investing in high-quality growth companies for the long term. He emphasises thorough research, including talking to people connected to the company (the “scuttlebutt” method), and looking for companies with strong management, innovative products, and potential for sustained growth. Fisher advocates buying when a company is undervalued and holding for the long term, often years or decades, as long as the company’s fundamentals remain strong.
2. How does Fisher define and identify growth stocks?
Fisher defines growth stocks as shares in companies that have the potential to increase their earnings at a rate significantly above the average for their industry or the overall market. He identifies these by looking for companies with strong research and development capabilities, effective marketing strategies, and the ability to develop new products or markets. Fisher also emphasises the importance of a company’s competitive position and its ability to maintain high profit margins over time.
3. What is the “scuttlebutt” method and how is it used in researching companies?
The “scuttlebutt” method is Fisher’s approach to gathering information about a company from a variety of sources beyond just financial statements. It involves talking to employees, competitors, suppliers, customers, and industry experts to gain a comprehensive understanding of a company’s operations, reputation, and potential. This method aims to uncover insights that may not be apparent from public financial data alone, providing a more complete picture of a company’s strengths and weaknesses.
4. What are the fifteen points Fisher recommends looking for in a common stock?
Fisher’s fifteen points include factors such as a company’s growth potential, profit margins, research and development efforts, sales organisation effectiveness, cost analysis and accounting controls, management quality, and longterm outlook. He also considers factors like the company’s ability to develop new products, its competitive position, and its labour and personnel relations. These points form a comprehensive framework for evaluating a company’s potential as a long-term investment.
5. How does Fisher approach the timing of buying and selling stocks?
Fisher advocates buying stocks when they are undervalued relative to their long-term potential, regardless of shortterm market conditions. He recommends holding stocks for the long term, often years or decades, as long as the company’s fundamentals remain strong. Fisher discourages selling based on short-term market fluctuations or attempts to time the market. He suggests selling only when there’s a fundamental change in the company’s prospects or when a significantly better investment opportunity arises.
6. Why does Fisher emphasise the importance of management quality in investment decisions?
Fisher views management quality as crucial because it directly impacts a company’s ability to innovate, adapt to changing market conditions, and maintain competitive advantages. He believes that superior management can steer a company through challenges and capitalise on opportunities, leading to sustained growth and profitability. Fisher looks for managers who are not only competent in dayto-day operations but also have a long-term vision for the company and the ability to develop future leadership.
7. What role do dividends play in Fisher’s investment strategy?
Fisher generally de-emphasises the importance of dividends, particularly for growth companies. He believes that companies with significant growth potential are better off reinvesting their profits into the business rather than paying them out as dividends. Fisher argues that the longterm capital appreciation from a well-managed, growing company will typically far exceed the value of dividend payments. However, he does recognise that dividends can be appropriate for more mature companies with limited growth prospects.
8. How does Fisher’s approach challenge the efficient market theory?
Fisher’s approach challenges the efficient market theory by asserting that through diligent research and analysis, investors can identify undervalued companies and achieve superior returns. He argues that the market often misprices stocks in the short term due to emotional factors or lack of information. Fisher’s “scuttlebutt” method, in particular, suggests that investors can gain valuable insights not immediately reflected in market prices, contradicting the idea that all relevant information is always fully incorporated into stock prices.
9. What is Fisher’s view on diversification in investing?
Fisher advocates for a relatively concentrated portfolio, arguing that over-diversification can lead to mediocre returns. He believes that if an investor has done thorough research and found truly outstanding companies, they should concentrate their investments in these few high-quality stocks. Fisher suggests that for most individual investors, holding between 10 to 20 stocks is sufficient diversification. He argues that the benefits of diversification beyond this point are outweighed by the difficulty of finding many truly exceptional investment opportunities.
10. How does Fisher evaluate a company’s research and development capabilities?
Fisher places significant emphasis on a company’s research and development (R&D) capabilities as a key indicator of future growth potential. He looks for companies that consistently invest in R&D and have a track record of successfully bringing new products to market. Fisher evaluates not just the amount spent on R&D, but also the efficiency and effectiveness of these efforts. He considers factors such as the company’s ability to attract top talent, its patent portfolio, and its success rate in commercialising new technologies.
11. What importance does Fisher place on a company’s sales and marketing abilities?
Fisher considers a strong sales and marketing organisation crucial for a company’s success. He believes that even the best products won’t sell themselves, and that an effective sales force is necessary to maintain and expand market share. Fisher looks for companies with sales teams that understand their products deeply and can effectively communicate their value to customers. He also emphasises the importance of marketing in identifying and responding to changing customer needs, which is essential for longterm growth.
12. How does Fisher assess labour and personnel relations within a company?
Fisher views positive labour and personnel relations as a key indicator of a well-managed company. He looks for companies that treat employees fairly, provide opportunities for advancement, and maintain good morale. Fisher believes that companies with satisfied employees are more likely to have higher productivity and lower turnover, which contributes to long-term success. He assesses this by looking at factors such as employee turnover rates, the company’s ability to attract top talent, and the general reputation of the company as an employer.
13. What is Fisher’s perspective on corporate integrity and ethics?
Fisher places a high value on corporate integrity and ethics, considering them essential for long-term investment success. He believes that companies with strong ethical standards are less likely to engage in practices that could lead to scandals or legal issues, which can devastate shareholder value. Fisher looks for management teams that demonstrate a strong sense of responsibility to shareholders, employees, and the community. He argues that ethical behaviour builds trust with customers, employees, and investors, contributing to sustainable long-term growth.
14. How does Fisher’s investment approach account for business cycles and economic trends?
While Fisher acknowledges the impact of business cycles and economic trends, he advises against trying to time the market based on these factors. Instead, he focuses on identifying companies with strong fundamentals that can weather economic downturns and emerge stronger. Fisher believes that truly great companies can grow even during challenging economic times. He advises investors to maintain a longterm perspective and not be swayed by short-term economic fluctuations, as long as the underlying strengths of their chosen companies remain intact.
15. What is Fisher’s view on the use of price-earnings ratios in stock evaluation?
Fisher cautions against relying too heavily on price-earnings (P/E) ratios in stock evaluation. While he acknowledges their usefulness as a quick reference, he argues that they can be misleading, especially for growth companies. Fisher believes that a high P/E ratio might be justified if a company has exceptional growth prospects. Conversely, a low P/E ratio doesn’t necessarily indicate a bargain if the company’s growth potential is limited. He advocates for a more comprehensive analysis that considers a company’s growth prospects, competitive position, and management quality alongside traditional valuation metrics.
16. How does Fisher’s investment philosophy address the impact of inflation?
Fisher recognises inflation as a significant concern for investors and believes that well-selected growth stocks offer one of the best protections against it. He argues that companies with strong competitive positions and pricing power can often increase their prices to keep pace with inflation, maintaining their real earnings power. Additionally, Fisher points out that as inflation erodes the value of money, the replacement cost of a company’s assets often increases, potentially enhancing the real value of the business. This makes growth stocks particularly attractive in inflationary environments.
17. What can we learn from the case studies of specific companies that Fisher presents?
Fisher’s case studies provide practical illustrations of his investment principles in action. They demonstrate how thorough research and patience can lead to substantial returns, even when a company faces temporary setbacks. These examples also highlight the importance of looking beyond financial statements to understand a company’s true potential. The case studies often show how factors like management quality, research and development capabilities, and competitive positioning contribute to a company’s long-term success. They also illustrate the potential pitfalls of short-term thinking or failing to recognise fundamental changes in a company’s prospects.
18. How does Fisher’s personal experience shape his investment strategies?
Fisher’s investment strategies are deeply rooted in his personal experiences in the financial markets. His career, spanning several decades and multiple market cycles, informed his long-term, growth-oriented approach. Fisher’s early experiences during the Great Depression and subsequent bull markets taught him the importance of focusing on company fundamentals rather than short-term market movements. His success with the “scuttlebutt” method came from years of practicing and refining this approach. Fisher’s strategies also reflect lessons learned from both his successes and mistakes, emphasising the importance of continuous learning and adaptation in investing.
19. What is Fisher’s “three-year rule” for stock holding?
Fisher’s “three-year rule” suggests that investors should be willing to hold a stock for at least three years after purchase, assuming the company’s fundamentals remain strong. This rule is designed to give enough time for a company’s long-term potential to be realised and to avoid selling prematurely due to short-term market fluctuations. Fisher argues that if an investor isn’t willing to hold a stock for at least three years, they probably shouldn’t buy it in the first place. However, he also emphasises that this rule doesn’t mean automatically selling after three years; many of his most successful investments were held for much longer periods.
20. How does Fisher recommend analysing annual reports and other corporate communications?
Fisher advises investors to approach annual reports and corporate communications critically, looking beyond the glossy presentation to understand the underlying business realities. He recommends focusing on the substance of the report rather than being swayed by its tone or presentation. Fisher suggests paying particular attention to discussions of research and development efforts, new product pipelines, and management’s plans for addressing challenges. He also advises comparing reports over several years to identify trends and assess management’s track record in meeting stated goals. However, Fisher emphasises that annual reports should be just one part of a comprehensive research process, complemented by his “scuttlebutt” method and other forms of analysis.
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