Common Stocks and Uncommon Profits and Other Writings

by Philip A. Fisher

the intelligent investor should not buy common stocks simply because they are cheap but only if they give promise of major gain to him.

However, if the company is deliberately and consistently developing new sources of earning power, and if the industry is one promising to afford equal growth spurts in the future, the price-earnings ratio five or ten years in the future is rather sure to be as much above that of the average stock as it is today.

Against this background, it can be seen why investors so frequently pass up stocks which would have brought them huge future gains, for ones where the gain is very much smaller. By giving heavy emphasis to the "stock that hasn't gone up yet" they are unconsciously subscribing to the delusion that all stocks go up about the same amount and that the one that has already risen a lot will not climb further,

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.

They seem to be unable to grasp how great can be the change in just a few years' time in the real value of certain types of modern corporations. Therefore they emphasize these past earnings records in a sincere belief that detailed accounting descriptions of what happened last year will give a true picture of what will happen next year.

The matter of "appraisal" is the heart of understanding the seeming vagaries of price-earnings ratios. It should never be forgotten that an appraisal is a subjective matter. It has nothing necessarily to do with what is going on in the real world about us. Rather, it results from what the person doing the appraising believes is going on, no matter how far from the actual facts such a judgment may be. In other words, any individual stock does not rise or fall at any particular moment in time because of what is actually happening or will happen to that company. It rises or falls according to the current consensus of the financial community as to what is happening and will happen regardless of how far off this consensus may be from what is really occurring or will occur.