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

by Philip A. Fisher

Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself.

2. Don't be afraid of buying on a war scare.

Nevertheless, at the conclusion of all actual fighting—regardless of whether it was World War I, World War II, or Korea—most stocks were selling at levels vastly higher than prevailed before there was any thought of war at all.

stock prices are quotations expressed in money. Modern war always causes governments to spend far more than they can possibly collect from their taxpayers while the war is being waged. This causes a vast increase in the amount of money, so that each individual unit of money, such as a dollar, becomes worth less than it was before.

This, of course, is the classic form of inflation.

In other words, war is always bearish on money.

he should ignore the scare psychology of the moment and definitely begin buying. This is the time when having surplus cash for investment becomes least, not most, desirable.

Therefore, the thing to do is to buy but buy slowly and at a scale-down on just a threat of war. If war occurs, then increase the tempo of buying significantly. Just be sure to buy into companies either with products or services the demand for which will continue in wartime, or which can convert their facilities to wartime operations.

3. Don't forget your Gilbert and Sullivan.

Foremost among such statistics are the price ranges at which a stock has sold in former years. For some reason, the first thing many investors want to see when they are considering buying a particular stock is a table giving the highest and lowest price at which that stock has sold in each of the past five or ten years.

The point which is of real significance is that the price is based on the current appraisal of the situation.

The fact that a stock has or has not risen in the last several years is of no significance whatsoever in determining whether it should be bought now. What does matter is whether enough improvement has taken place or is likely to take place in the future to justify importantly higher prices than those now prevailing.

Just knowing, by itself, that four or five years ago a company's per-share earnings were either four times or a quarter of this year's earnings has almost no significance in indicating whether a particular stock should be bought or sold. Again, what counts is knowledge of background conditions. An understanding of what probably will happen over the next several years is of overriding importance.

They are helpful as long as it is realized they are only auxiliary tools to be used for specialized purposes and not major factors in deciding the attractiveness of a common stock.

This serves as a base from which to start measuring what the price-earnings ratio may be in the future.

Here again, however, it must be kept in mind that it is the future and not the past which governs.

“Don't be influenced by what doesn't matter.” Statistics of former years' earnings and particularly of per-share price ranges of these former years quite frequently “have nothing to do with the case.”

4. Don't fail to consider time as well as price in buying a true growth stock.

This is to buy the shares not at a certain price, but at a certain date.

5. Don't follow the crowd.

Examples could be given for industry after industry which in the past twenty years has been looked upon first one way, then another, by the financial community, with a resultant change in quoted values.

analysis. The business executive-scientist classification which I had believed was my main source of original ideas causing me to investigate one company rather than another, actually had furnished only about one-fifth of the leads that had excited me enough to engage in a further study.

Are these lines where, as the industry grows, it would be relatively simple for newcomers to start up and displace the leading units? If the nature of the business is such that there is little way of preventing newcomers from entering the field, the investment value of such growth as occurs may prove rather slight.

There are three things I emphatically do not do. I do not (for reasons that I think will soon become clear) approach anyone in the management at this stage. I do not spend hours and hours going over old annual reports and making minute studies of minor year-by-year changes in the balance sheet. I do not ask every stockbroker I know what he thinks of the stock. I will, however, glance over the balance sheet to determine the general nature of the capitalization and financial position. If there is an SEC prospectus I will read with care those parts covering breakdown of total sales by product lines, competition, degree of officer or other major ownership of common stock (this can also usually be obtained from the proxy statement), and all earning statement figures throwing light on depreciation (and depletion, if any), profit margins, extent of research activity, and abnormal or non-recurring costs in prior years' operations.

I will use the “scuttlebutt”method I have already described just as much as I possibly can.

only by having what “scuttlebutt” can give you before you approach management, can you know what you should attempt to learn when you visit a company.

Without it you may be unable to determine that most basic of points—the competency of top management itself.

It is my opinion that in almost any field nothing is worth doing unless it is worth doing right.

I believe one rule he should always follow is this: he should never visit the management of any company he is considering for investment until he has first gathered together at least 50 per cent of all the knowledge he would need to make the investment. If he contacts the management without having done this first, he is in the highly dangerous position of knowing so little of what he should seek that his chance of coming up with the right answer is largely a matter of luck.

the degree of willingness to furnish information—that is, how far the company will go in answering specific questions and discussing vital matters—depends overwhelmingly on this estimate of each visitor. Those who just drop in on a company without real advance preparation, often have two strikes against them almost before the visit starts.

I believe it so impossible to get much benefit from a plant visit until a great deal of pertinent “scuttlebutt” work has been done first, and that I have found that “scuttlebutt” so many times furnishes an accurate forecast of how well a company will measure up to my fifteen points, that usually by the time I am ready to visit the management there will be at least a fair chance that I will want to buy into the company.

Briefly summarized, the first dimension of a conservative investment consists of outstanding managerial competence in the basic areas of production, marketing, research, and financial controls. This first dimension describes a business as it is today, being essentially a matter of results. The second dimension deals with what produced these results and, more importantly, will continue to produce them in the future. The force that causes such things to happen, that creates one company in an industry that is an outstanding investment vehicle and another that is average, mediocre, or worse, is essentially people.

a corporate chief executive dedicated to long-range growth who has surrounded himself with and delegated considerable authority to an extremely competent team in charge of the various divisions and functions of the company.

top management take the time to identify and train qualified and motivated juniors to succeed senior management whenever a replacement is necessary.

In general, however, the company with real investment merit is the company that usually promotes from within.

The higher up in an organization the newcomer may be, the more costly the indoctrination can be.

Of one thing the investor can be certain: A large company's need to bring in a new chief executive from the outside is a damning sign of something basically wrong with the existing management—no matter how good the surface signs may have been as indicated by the most recent earnings statement.

1. The company must recognize that the world in which it is operating is changing at an ever-increasing rate.

No matter how comfortable it may seem to do so, ways of doing things cannot be maintained just because they worked well in the past and are hallowed by tradition.

change and improvement arose from innovative thinking to make a workable system better—not from a forced reaction to a crisis.

2. There must always be a conscious and continuous effort, based on fact, not propaganda, to have employees at every level, from the most newly hired blue-collar or white-collar worker to the highest levels of management, feel that their company is a good place to work.

Concerning matters of general interest, letting everyone know not only exactly what is being done but why frequently eliminates friction that might otherwise occur.

When grievances occur, decisions on what to do about them should be made quickly. It is the long-smoldering grievance that usually proves the most costly.

3. Management must be willing to submit itself to the disciplines required for sound growth.

Its focus must be on earning sufficient current profits to finance the costs of expanding the business.

For the conservative investor, the test of all such actions is whether management is truly building up the long-range profits of the business rather than just seeming to.

The first dimension of a conservative stock investment is the degree of excellence in the company's activities that are most important to present and future profitability. The second dimension is the quality of the people controlling these activities and the policies they create. The third dimension deals with something quite different: the degree to which there does or does not exist within the nature of the business itself certain inherent characteristics that make possible an above-average profitability for as long as can be foreseen into the future.

Profitability can be expressed in two ways. The fundamental way, which is the yardstick used by most managements, is the return on invested assets.

When the cost of capital equipment has risen as much as it has in the last forty years, comparisons of the return on total invested capital between one company and another may be so distorted by variations in the price levels at which different companies made major expenditures that the figures are highly misleading.

comparing the profit margins per dollar of sales may be more helpful as long as one other point is kept in mind.