Common Stocks and Uncommon Profits (by Philip A. Fisher)

Includes other writing.

• Common Stocks and Uncommon Profits: qualitative approach based on identifying solid and lasting outperformers based on outstanding production, sales and research backed by solid financial practices with competent management of high integrity:
  • Scuttlebutt method -- gather qualitative information about the company from many sources, particularly the people who are closely involved with the company and the industry. Insider gossip > news that everyone knows (but it might not be the whole story).
  • Sources of information:
    • Competitors,
    • Customers,
    • Insiders in the field,
    • Management presentations (although you need to look below the surface),
    • Former employees (although be careful with grievances),
    • Current employees, if you have access,
    • Trade associations.
  • Key points (it's a checklist and you're looking for companies that check most boxes):
    • Products and services with potential to grow sales.
    • R&D to make more awesome products and services in the future.
    • Above average sales department to ensure demand tomorrow and with a plan for the day after.
    • High profit margin with good outlook for the future.
    • Good relations between top management and middle management + employees.
    • Solid financial practices.
    • Ability to finance the operations without issuing too much new stock.
    • Great management:
      • Depth: delegation, decision making at lower levels, responsibility.
      • Focus on the long term.
      • Transparent communication to the investors.
      • Unquestionable integrity.
    • Industry specific aspects: what else is important for the companies in this industry?
  • When to buy: predicting the future is futile, but we can see the present. If the company is solid but the market sentiment about it is negative, it's good time to buy.
    • Possible pattern: releasing new product/tech, some troubles, negativity in the press, but basically the product works and it's revolutionary.
  • When to sell:
    • If you bought by mistake.
    • If the company was a good buy but has deteriorated.
    • If you see an even better investment (accounting for risk and taxes).
  • How to find companies to investigate:
    • Experts in the field, other like-minded investors, ...
    • If it's too hard to find all needed information on a company, give it up.
    • The best time to approach the management is when you already know lots of gossip. Then you can ask the right questions.
  • Don't diversify too much (>20 is too much). Concentrate in the most attractive opportunities and know them well.
  • Have courage to diverge from the crowd when you're sure you're right.

• Conservative investors sleep well: if you buy great companies at a fair price, you're verly unlikely to lose money.
  • Note: You need to periodically make sure that the company stays great.

• Investment philosophy (summary copy-pasted from the book):
  • 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.
  • 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 efficiently run when they are small fail to change management style to meet the different requirements of skill big companies need. When management fails to grow as companies grow, shares should be sold.
  • For those primarily seeking major appreciation of their capital, de-emphasize the importance of dividends. The most attractive opportunities are most likely to occur in the profitable, but low or no dividend payout groups. Unusual opportunities are much less likely to be found in situations where high percentage of profits is paid to stockholders.
  • Making some mistakes is as much an inherent cost of investing for major gains as making some bad loans is inevitable in even the best run and most profitable lending institution. The important thing is to recognize them as soon as possible, to understand their causes, and to learn how to keep from repeating the mistakes. Willingness to take small losses in some stocks and to let profits grow bigger and bigger in the more promising stocks is a sign of good investment management. Taking small profits in good investments and letting losses grow in bad ones is a sign of abominable investment judgment. A profit should never be taken just for the satisfaction of taking it.
  • There are a relatively small number of truly outstanding companies. Their shares frequently can't be bought at attractive prices. Therefore, when favorable prices exist, full advantage should be taken of the situation. Funds should be concentrated in the most desirable opportunities. For those involved in venture capital and quite small companies, say with annual sales of under $25,000,000, more diversification may be necessary. For larger companies, proper diversification requires investing in a variety of industries with different economic characteristics. For individuals (in possible contrast to institutions and certain types of funds), any holding of over twenty different stocks is a sign of financial incompetence. Ten or twelve is usually a better number. Sometimes the costs of the capital gains tax may justify taking several years to complete a move toward concentration. As an individual's holdings climb toward as many as twenty stocks, it nearly always is desirable to switch from the least attractive of these stocks to more of the attractive.
  • A basic ingredient of outstanding common stock management is the ability neither to accept blindly whatever may be the dominant opinion in the financial community at the moment nor to reject the prevailing view just to be contrary for the sake of being contrary. Rather, it is to have more knowledge and to apply better judgment, in thorough evaluation of specific situations, and the moral courage to act “in opposition to the crowd” when your judgment tells you you are right.
  • In handling common stocks, as in most other fields of human activity, success greatly depends on a combination of hard work, intelligence, and honesty.