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

by Philip A. Fisher

“What are you doing that your competitors aren't doing yet?”

Doing what everybody else is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all.

POINT 1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?

POINT 2. 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?

POINT 4. Does the company have an above-average sales organization?

POINT 5. Does the company have a worthwhile profit margin?

POINT 6. What is the company doing to maintain or improve profit margins?

When profit margins of a whole industry rise because of repeated price increases, the indication is not a good one for the long-range investor.

POINT 7. Does the company have outstanding labor and personnel relations?

POINT 8. Does the company have outstanding executive relations?

POINT 9. Does the company have depth to its management?

POINT 10. How good are the company's cost analysis and accounting controls?

POINT 11. 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?

As has been true many times before and since, it is the constant leadership in engineering, not patents, that is the fundamental source of protection. The investor must be at least as careful not to place too much importance on patent protection as to recognize its significance in those occasional places where it is a major factor in appraising the attractiveness of a desirable investment.

POINT 12. Does the company have a short-range or long-range outlook in regard to profits?

POINT 13. 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?

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?

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.

Actually dividend considerations should be given the least, not the most, weight by those desiring to select outstanding stocks. Perhaps the most peculiar aspect of this much-discussed subject of dividends is that those giving them the least consideration usually end up getting the best dividend return.

They forget that 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. It takes lots more dollars to buy the same number of shares of stock. This, of course, is the classic form of inflation. In other words, war is always bearish on money. To sell stock at the threatened or actual outbreak of hostilities so as to get into cash is extreme financial lunacy.

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. There are so many details, both favorable and unfavorable, that should also be considered in selecting one of these companies that it is obviously impossible in a monograph of this length to cover them adequately. For those interested, I have attempted to summarize this subject as concisely as I could in the first three chapters of Conservative Investors Sleep Well.* A brief outline appears in the Appendix. 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. Hold the stock until either (a) there has been a fundamental change in its nature (such as a weakening of management through changed personnel), or (b) it has grown to a point where it no longer will be growing faster than the economy as a whole. Only in the most exceptional circumstances, if ever, sell because of forecasts as to what the economy or the stock market is going to do, because these changes are too difficult to predict. Never sell the most attractive stocks you own for short-term reasons. However, as companies grow, remember that many companies that are quite efficientl...