Saturday, August 04, 2007

Common Stocks and UnCommon Profits- Philip A. Fisher

This blog is a review of this great book and we will go through some salient features.

I had read this book long back and had decided to buy it today. This book is probably one of the most fundamental books on stock Investing.
Warren Buffet had said his investing style is 85% Ben Graham and 15% Phil Fisher. I think it is the reverse. My opinion is most of Warren's suceess has come from following Phil Fisher.

Funny thing is, this book basically stresses common sensical fundamentals required for investing and I bet 90% of the investors overlook these rules.

15 Points to Look for in a Common Stock

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

  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?

  3. How effective are the company's research and development efforts in relation to its size?

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

  5. Does the company have a worthwhile profit margin?

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

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

  8. Does the company have outstanding executive relations?

  9. Does the company have depth to its management?

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

  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 will be in relation to its competition?

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

  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?

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

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

When to Sell Stocks?
  1. Mistake was made on your investment selection. Stock does not meet the 15 points required for a good common stock. Eg- After you take position you find that the business has some serious issues.
  2. Deterioration of the management or company and its markets. Basically company has reached its saturation phase and company cannot come out with new innovative products.
  3. When a better oppurtunity exists and growth of the new company is far greater than the old one. Investor should approach this very high caution.
  4. Never sell a stock because some experts predict a bear market. If a stock has a great story and will have newer highs when bull market returns then it is very stupid to sell. Investor will not know when to sell and when to buy it back. Eventually investor will have less shares than his orginal position and he will have to pay capital gains taxes.

Five Don'ts for Investors

  1. Don't buy into promotional companies.

  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. Eg- Annual reports are marketing pieces to sell the stock so dont make a decision just based on that.

  4. Don't assume that the high price at which a stock may be selling in relation to its earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price.
    Eg-He argues that just because a stock is selling at higher p/e than its peers does not mean it is overvalued. Some great stocks always are sold with higher p/e because they always grow at a faster rate and maintain that advantage all throughout.
  5. Don't quibble over eighths and quarters. Eg- When you are buying a stock and feel it is reasonble, just buy at the market.
Five More Don'ts for Investors

  1. Done overstress diversification
  2. Dont be afraid of buying on a war scare.
  3. Dont forget your Gilbert and Sullivan.
  4. Dont fail to consider time as well as price in buying a true growth stock.
  5. Dont Follow the crowd.

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