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Book Summary of Common Stocks and Uncommon Profits
by Philip A. Fisher

What is this book about?

"Common Stocks and Uncommon Profits and Other Writings" by Philip A. Fisher is a seminal book in the field of investing, particularly in growth stocks. The book focuses on Fisher's investment philosophy, which emphasizes thorough research, particularly through what he calls "scuttlebutt" — gathering information about a company from a variety of sources like suppliers, customers, and competitors. The book outlines key principles for selecting stocks, timing purchases and sales, and building a successful long-term investment strategy.

Who should read the book?

This book is ideal for:

1. Long-term Investors: Those who are interested in growth stocks and want to develop a solid investment strategy based on fundamental analysis.
2. Investment Professionals: Analysts, portfolio managers, and financial advisors who want to deepen their understanding of stock selection and investment philosophy.
3. Finance Students: Individuals studying finance or economics who want to learn about one of the most influential investment strategies in the history of modern finance.
4. Individual Investors: Anyone interested in managing their own portfolio and looking to learn from one of the greats in the investment world.

10 Big Ideas from the Book

1. Scuttlebutt Technique: Gathering information from multiple sources connected to a company (e.g., suppliers, customers, competitors) to get a comprehensive view of its business prospects.

2. Fifteen Points to Look for in a Stock: A checklist of qualities that make a stock worth investing in, including factors like management integrity, potential for growth, and product strength.
3. Long-term Investment: Fisher advocates holding stocks for a long time, preferably indefinitely, if they continue to meet his criteria for growth and stability.
4. Focus on Quality: Fisher emphasizes investing in companies with high-quality management and strong competitive advantages.
5. Avoiding Fads: He warns against investing in industries or companies that are experiencing short-term popularity but lack sustainable competitive advantages.
6. Patience in Investing: Fisher advises that investors should be patient, both in waiting for the right opportunities to buy and in holding onto stocks for the long haul.
7. Conservative Investing: Even within growth investing, Fisher promotes a conservative approach, favoring companies with a proven track record over speculative opportunities.
8. Management Evaluation: A significant part of Fisher's analysis involves assessing the quality of a company's management, particularly their integrity and long-term vision.
9. Don’t Over-Diversify: Fisher argues against excessive diversification, advocating instead for a focused portfolio of high-quality stocks.
10. Sell Only for the Right Reasons: Fisher believes in selling stocks only when the fundamental reasons for holding them have changed, not due to short-term market fluctuations.

Summary of Part 1: Common Stocks and Uncommon Profits

Part 1 of "Common Stocks and Uncommon Profits" by Philip Fisher is the core of the book, where Fisher presents his detailed investment philosophy and guidelines for selecting and managing stocks. Below is a summary of the key concepts and principles covered in this section.

1. Clues from the Past

Fisher begins by emphasizing the importance of historical analysis in understanding stock performance. He argues that investors can learn valuable lessons by studying past successes and failures in the stock market. The idea is to avoid repeating mistakes and to identify patterns that might indicate future performance.

2. What "Scuttlebutt" Can Do

The "scuttlebutt" technique is a cornerstone of Fisher's investment strategy. It involves gathering detailed information about a company from sources such as suppliers, customers, competitors, and employees. This qualitative research helps investors gain a comprehensive understanding of a company's strengths, weaknesses, and potential for growth.

3. What to Buy: The Fifteen Points to Look for in a Common Stock

This chapter is perhaps the most famous part of Fisher's work. He outlines 15 key points that he believes are essential in identifying a worthwhile stock investment:

1. Does the company have products or services with sufficient market potential?
2. Does the management have a determination to continue to develop products or processes?
3. How effective are the company’s research and development efforts?
4. Does the company have an above-average sales organization?
5. Does the company have a worthwhile profit margin? (Key Ratio: Gross Profit Margin)
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor 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, which will give the investor important clues about the company’s future outlook?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future, will the growth of the company require equity financing that could result in a considerable dilution of the existing shareholders’ interests?
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?

4. What to Buy: Applying This to Your Own Needs

Fisher advises investors to tailor their stock selection based on their individual circumstances, such as financial goals, risk tolerance, and investment time horizon. The "fifteen points" should be applied flexibly, with some points weighing more heavily depending on the investor's personal situation.

5. When to Buy

Timing is critical in investment. Fisher suggests that buying opportunities arise when a company with strong fundamentals is temporarily undervalued due to market overreactions, economic downturns, or other transient factors. Patience and thorough analysis are essential before making a purchase.

6. When to Sell: And When Not To

Fisher believes in holding onto stocks for the long term, but he outlines certain situations when selling might be necessary:

• When the company no longer meets the criteria outlined in the fifteen points.
• When better investment opportunities arise.
• When the stock becomes significantly overvalued.

However, Fisher warns against selling just because a stock has gone up in price or due to short-term market fluctuations.

7. The Hullabaloo about Dividends

Fisher discusses the role of dividends in stock selection, arguing that they should not be the primary focus. Instead, the emphasis should be on a company’s ability to reinvest profits to generate higher returns. He believes that investors should prioritize growth potential over dividend payouts.

8. Five Don’ts for Investors

Fisher provides five key warnings for investors to avoid common pitfalls:

1. Don’t buy into promotional companies.
2. Don’t ignore a good stock just because it is traded over the counter.
3. Don’t buy a stock only because you like the “tone” of its annual report.
4. Don’t assume that the high price at which a stock is selling is necessarily an indication that further growth has ended.
5. Don’t quibble over eighths and quarters. (i.e., don’t let small price fluctuations affect your decision to buy a good stock.)

9. Five More Don’ts for Investors

In this chapter, Fisher continues with five additional cautions:

1. Don’t overstress diversification.
2. Don’t be afraid of buying on a war scare.
3. Don’t forget your Gilbert and Sullivan. (i.e., don’t get caught up in market fads and fears.)
4. Don’t fail to consider time as well as price in buying a true growth stock.
5. Don’t follow the crowd.

10. How I Go about Finding a Growth Stock

Fisher shares his personal approach to identifying growth stocks, emphasizing the importance of in-depth research, patience, and a focus on long-term potential. He reiterates the importance of the fifteen points and the scuttlebutt technique in building a strong portfolio.

11. Summary and Conclusion

The first part of the book concludes with a recap of Fisher’s investment philosophy. He reinforces the importance of thorough research, long-term perspective, and the careful selection of stocks based on the fifteen points. The emphasis is on finding companies with sustainable growth potential and holding them as long as they meet the investment criteria.

Key Ratios to Remember and Their Values:

• Gross Profit Margin: This ratio is emphasized by Fisher as a key indicator of a company’s profitability. A higher gross profit margin indicates a strong business model and effective cost control. Fisher does not specify an exact value but suggests that the company should have a "worthwhile" margin that supports its growth and stability.

• Profit Margin Maintenance: Fisher also highlights the importance of a company’s ability to maintain or improve its profit margins over time. This involves a combination of operational efficiency, cost control, and pricing power.

These principles and ratios are critical in Fisher’s approach to identifying and holding high-quality growth stocks for long-term success.

Summary of Part 2: Conservative Investors Sleep Well

Part 2 of "Common Stocks and Uncommon Profits and Other Writings" by Philip Fisher, titled "Conservative Investors Sleep Well," is dedicated to the needs of conservative investors. Fisher provides a framework for evaluating investments with an emphasis on safety, stability, and long-term growth. This section is particularly valuable for investors who prioritize capital preservation alongside growth.

Introduction

Fisher begins by discussing the importance of a conservative investment approach, particularly for those who prioritize stability and want to avoid undue risk. He argues that by carefully selecting companies that are financially sound and have strong management, conservative investors can achieve solid returns without exposing themselves to significant losses.

The Four Dimensions of a Conservative Investment

Fisher introduces four key dimensions that he believes are essential for evaluating whether an investment is conservative and likely to provide peace of mind.

1. The First Dimension: The Quality of the Company’s Products and Services

• High-Quality Products: Fisher emphasizes the importance of investing in companies that offer high-quality products or services with a strong competitive position in the market. Companies that can maintain or improve their market share through superior products are less likely to face downturns.
• Key Ratio: Market Share Stability/Growth - While Fisher doesn't provide specific numbers, the focus is on companies that either maintain or grow their market share consistently.

2. The Second Dimension: The Quality of the Management

• Management Integrity and Competence: Fisher discusses the importance of strong, competent, and ethical management. He believes that management's ability to navigate the company through challenges and capitalize on opportunities is critical for long-term success.
• Key Ratio: Return on Equity (ROE) - Fisher suggests looking at ROE as a measure of management effectiveness. Although he doesn’t specify exact values, a consistently high ROE is generally a positive indicator.

3. The Third Dimension: The Financial Strength of the Company

• Strong Financials: Fisher advises conservative investors to focus on companies with strong financial positions, including a solid balance sheet, low debt levels, and ample liquidity. Companies with strong financials are better equipped to withstand economic downturns and other challenges.
• Key Ratios:
  • Debt-to-Equity Ratio: Fisher implies that a low debt-to-equity ratio is preferable for conservative investments. He doesn’t provide specific values but generally advocates for minimal debt.
  • Current Ratio: This ratio (current assets divided by current liabilities) should be well above 1, indicating strong liquidity and the ability to meet short-term obligations.

4. The Fourth Dimension: The Company's Competitive Position

• Sustainable Competitive Advantage: Fisher stresses the importance of investing in companies with a sustainable competitive advantage, which allows them to maintain or improve profitability over time. This could be due to factors like technological leadership, brand strength, or cost advantages.
• Key Ratios:
  • Gross Profit Margin: A consistently high gross profit margin can indicate a competitive advantage, as it suggests the company can charge premium prices or operate with lower costs.
  • Operating Margin: A healthy operating margin is another indicator of competitive strength, reflecting the company’s ability to control costs and maintain profitability.

Fisher expands on the fourth dimension by discussing various aspects that can enhance or diminish a company's competitive position. He encourages investors to look at industry dynamics, barriers to entry, and the company’s ability to innovate and adapt to changes.

Conclusion of Part 2

Fisher concludes that by focusing on these four dimensions, conservative investors can build a portfolio of companies that offer both safety and growth potential. The emphasis is on avoiding high-risk investments and instead focusing on well-managed, financially strong companies that are leaders in their industries.

Key Ratios to Remember and Their Values:

• Market Share Stability/Growth: Look for companies that consistently maintain or grow their market share.
• Return on Equity (ROE): A consistently high ROE indicates effective management.
• Debt-to-Equity Ratio: Prefer companies with a low debt-to-equity ratio, indicating financial stability.
• Current Ratio: This should be well above 1, indicating strong liquidity.
• Gross Profit Margin: A consistently high gross profit margin is a sign of a competitive advantage.
• Operating Margin: A healthy operating margin indicates good cost control and profitability.

These key ratios and dimensions are critical in ensuring that investments are both conservative and capable of delivering steady, long-term returns with minimal risk. Fisher’s approach in this section is designed to help investors sleep well at night, knowing their investments are secure and well-chosen.

Summary of Part 3: "Developing an Investment Philosophy"

Part 3 of "Common Stocks and Uncommon Profits" by Philip A. Fisher delves into the foundational elements of developing a successful and enduring investment philosophy. Fisher draws from his extensive experience to outline key principles and insights that investors should internalize to achieve long-term success in the stock market.

1. Understanding the Origins of a Philosophy

• The Birth of Interest: Fisher discusses how his interest in investing was sparked and how early experiences shaped his approach.
• Formative Experiences: These early lessons are pivotal in shaping an investor’s thinking. Fisher emphasizes learning from both successes and mistakes to build a robust investment philosophy.

2. Learning from Experience

• Key Insight: Experience is the best teacher in investing. Fisher recounts his experiences with Food Machinery Corporation as a critical learning opportunity that taught him about patience, market behavior, and the importance of qualitative factors in investment decisions.

3. The Philosophy Matures

• E Pluribus Unum: Fisher introduces the idea that a strong investment philosophy is not just about numbers but understanding the broader picture of a company's place in the market.
• Do Few Things Well: He stresses the importance of focusing on a few key investments rather than diversifying excessively. This allows investors to thoroughly understand and monitor their investments.

4. Key Ratios and Their Importance

Fisher discusses the relevance of several financial ratios but warns against over-reliance on them without considering qualitative factors:

• Profit Margins:

  • Fisher advocates for investing in companies with higher-than-average profit margins, as these companies typically have more resources to finance growth internally.
  • Key Insight: Evaluate profit margins in conjunction with sales turnover to understand a company’s efficiency and potential for growth.

• Return on Invested Capital (ROIC):

  • While acknowledging its importance, Fisher cautions against distortions that can arise from historical asset costs.
  • Key Insight: Focus on profit margins per dollar of sales rather than ROIC alone for a more accurate assessment of a company’s financial health.

• Price-Earnings Ratios (P/E Ratios):

  • Fisher warns that P/E ratios can be misleading if not considered in the context of a company’s growth potential and management quality.
  • Key Insight: The future growth trajectory of a company’s earnings should be a significant factor in determining the appropriateness of its P/E ratio.

5. Avoiding the Crowd

• Contrarian Thinking: Fisher encourages independent thinking and cautions against following market trends blindly. Successful investing often involves going against the crowd when sound reasoning supports it.

6. Long-Term Perspective

• Patience and Performance: Fisher stresses that the key to significant returns is a long-term perspective. Investors should focus on the potential of a company to grow over many years rather than seeking short-term gains.

7. Is the Market Efficient?

• The Fallacy of the Efficient Market: Fisher critiques the Efficient Market Hypothesis, using examples like Raychem Corporation to illustrate that the market does not always price stocks correctly. Investors can find opportunities by identifying discrepancies between a company’s market price and its intrinsic value.

Conclusion

The core of Fisher's philosophy in Part 3 is that successful investing is as much about understanding the qualitative aspects of a business—such as management quality, innovation capacity, and competitive advantage—as it is about analyzing quantitative metrics. By developing a deep understanding of these factors, investors can create a robust, long-term investment strategy that withstands market fluctuations.

Key Ratios to Remember

1. Profit Margins: Look for companies with higher-than-average profit margins to ensure they have the resources to grow.
2. ROIC: Use cautiously, considering the context of profit margins per dollar of sales.
3. P/E Ratios: Consider the company’s growth potential and management quality when evaluating P/E ratios, not just the current ratio.

This philosophy encourages a disciplined, thoughtful approach to investing, where quality, patience, and independent thinking are paramount.

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