I flipped through Philip Fisher’s Common Stocks and Uncommon Profits a few days ago. The first time I read this book, I set it down a half dozen times before finally finishing it. That doesn’t take away from the books importance. It belongs in the list of classic investing books.
Fisher’s investment style is a completely different approach from Graham’s value investing. Though, there is a little bit of value of in him. In part three of the book, Fisher breaks down his investment philosophy:
Buy into companies that have disciplined plans for achieving dramatic long-range growth in profits and that have inherent qualities making it difficult for newcomers to share in that growth.
Focus on buying these companies when they are out of favor; that is when, either because of general market conditions or because the financial community at the moment has misconceptions of its true worth, the stock is selling at prices well under what it will be when its true merit is better understood.
Buffett actually said it simpler:
It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
If anything, it’s a glimpse into why Buffett is a self-confessed Fisher fan.
Fisher laid the groundwork for identifying companies with the potential for long-term growth. He preferred to hold a small number of quality stocks for almost forever (sound familiar?).
His 15 points take a qualitative look at a company to see if it has the R&D, product line, and management in place to deliver decades of growth:
- Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
- 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?
- How effective are the company’s research and development efforts in relation to its size?
- Does the company have an above-average sales organization?
- Does the company have a worthwhile profit margin?
- What is the company doing to maintain or improve profit margins?
- Does the company have outstanding labor and personnel relations?
- Does the company have outstanding executive relations?
- Does the company have depth to its management?
- How good are the company’s cost analysis and accounting controls?
- 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 competition?
- Does the company have a short-range or long-range outlook in regard to profits?
- In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth?
- Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?
- Does the company have a management of unquestionable integrity?