Common Stocks and Uncommon Profits and Other Writings (Wiley Investment Classics)

by Philip A. Fisher

POINT 14. Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?

POINT 15. Does the company have a management of unquestionable integrity?

if there is a serious question of the lack of a strong management sense of trusteeship for stockholders, the investor should never seriously consider participating in such an enterprise.

In short, the company into which the investor should be buying is the company which is doing things under the guidance of exceptionally able management.

It is that a worthwhile improvement in earnings is coming in the right sort of company, but that this particular increase in earnings has not yet produced an upward move in the price of that company's shares.

I believe this class of investor should ignore any guesses on the coming trend of general business or the stock market. Instead he should invest the appropriate funds as soon as the suitable buying opportunity arises.

advantages. He is making his bet upon something which he knows to be the case, rather than upon something about which he is largely guessing. Furthermore, since by definition he is only buying into a situation which for one reason or another is about to have a worthwhile increase in its earning power in the near- or medium-term future, he has a second element of support.

they should stagger the timing of further buying. They should plan to allow several years before the final part of their available funds will have become invested. By so doing, if the market has a severe decline somewhere in this period, they will still have purchasing power available to take advantage of such a decline.

The other four influences are the trend of interest rates, the over-all governmental attitude toward investment and private enterprise, the long-range trend to more and more inflation, and—possibly most powerful of all—new inventions and techniques as they affect old industries.

I believe there are three reasons, and three reasons only, for the sale of any common stock which has been originally selected according to the investment principles already discussed. The first of these reasons should be obvious to anyone. This is when a mistake has been made in the original purchase and it becomes increasingly clear that the factual background of the particular company is, by a significant margin, less favorable than originally believed. The proper handling of this type of situation is largely a matter of emotional self-control. To some degree it also depends upon the investor's ability to be honest with himself.

The first of these reasons should be obvious to anyone. This is when a mistake has been made in the original purchase and it becomes increasingly clear that the factual background of the particular company is, by a significant margin, less favorable than originally believed.

This is particularly true if the mistake is recognized quickly. When this happens, losses, if any, should be far smaller than if the stock bought in error had been held for a long period of time.

However, there is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us.

This is the ego in each of us. None of us likes to admit to himself that he has been wrong.

More money has probably been lost by investors holding a stock they really did not want until they could “at least come out even” than from any other single reason.

Sales should always be made of the stock of a company which, because of changes resulting from the passage of time, no longer qualifies in regard to the fifteen points outlined

This is why investors should be constantly on their guard. It explains why it is of such importance to keep at all times in close contact with the affairs of companies whose shares are held.

When companies deteriorate in this way they usually do so for one of two reasons. Either there has been a deterioration of management, or the company no longer has the prospect of increasing th...

Either there has been a deterioration of management, or the company no longer has the prospect of increasing the markets for its...

More often it occurs because a new set of top executives do not measure up to the standard of performance set by their predecessors.

a company will reach a stage where the growth prospects of its markets are exhausted.

There is a good test as to whether companies no longer adequately qualify in regard to this matter of expected further growth. This is for the investor to ask himself whether at the next peak of a business cycle, regardless of what may happen in the meantime, the comparative per-share earnings (after allowances for stock dividends and stock splits but not for new shares issued for additional capital) will probably show at least as great an increase from present levels as the present levels show from the last known peak of general business activity.

opportunities for attractive investment are extremely hard to find. From a timing standpoint, they are seldom found just when investment funds happen to be available. If an investor has had funds for investment for quite a period of time and found few attractive situations into which to place these funds, he may well place some or all of them in a well-run company which he believes has definite growth prospects. However, these growth prospects may be at a slower average annual rate than may appear to be the case for some other seemingly more attractive situation that is found later. The already-owned company may in some other important aspects appear to be less attractive as well.

The company that can show an average annual increase of 12 per cent for a long period of years should be a source of considerable financial satisfaction to its owners.

There is always the risk that some major element in the picture has been misjudged.

an alert investor who has held a good stock for some time usually gets to know its less desirable as well as its more desirable characteristics.

once a stock has been properly selected and has borne the test of time, it is only occasionally that there is any reason for selling it at all.

Most frequently given of such reasons is the conviction that a general stock market decline of some proportion is somewhere in the offing.

have seen many investors dispose of a holding that was to show stupendous gain in the years ahead because of this fear of a coming bear market.

I have not seen one time in ten when the investor actually got back into the same shares before they had gone up above his selling price.

That which really matters is not to disturb a position that is going to be worth a great deal more later.

The managements whose dividend policies win the widest approval among discerning investors are those who hold that a dividend should be raised with the greatest caution and only when there is great probability that it can be maintained.

Similarly, only in the gravest of emergencies should such dividends be lowered.

The corporation that keeps shifting its dividend policies becomes as unsuccessful in attracting a permanent shareholder following. Its shares do not make the best long-range investments.

Five Don'ts for Investors

1. Don't buy into promotional companies.

In contrast, when a company is still in the promotional stage, all an investor or anyone else can do is look at a blueprint and guess what the problems and the strong points may be. This is a much more difficult thing to do. It allows a much greater probability of error in the conclusions reached.

All too often, young promotional companies are dominated by one or two individuals who have great talent for certain phases of business procedure but are lacking in other equally essential talents.

2. Don't ignore a good stock just because it is traded “over the counter.”

3. Don't buy a stock just because you like the “tone” of its annual report.

4. Don't assume that the high price at which a stock may be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price.

What is important here is thoroughly understanding the nature of the company, with particular reference to what it may be expected to do some years from now.

5. Don't quibble over eighths and quarters.

If the stock seems the right one and the price seems reasonably attractive at current levels, buy “at the market.”

1. Don't overstress diversification.

A. All investments might be confined solely to the large entrenched type of properly selected growth stock,

This means that he would not invest over 20 per cent of his total original commitment in any one of these stocks.

An investor using this guide of 20 per cent of his original investment for each company should see that there is no more than a moderate amount of overlapping,

B. Some or all of his investments might fall into the category of stocks about midway between the young growth companies with their high degree of risk and the institutional type of investment described above.

C. Finally there are the small companies with staggering possibilities of gain for the successful, but complete or almost complete loss of investment for the unsuccessful.