In the decades following the Great Depression, the focus of investing in common stocks shifted from trying to time the business cycle to appreciating a company's enduring characteristics and value. One of the forefathers of this evolution was Philip Fisher, an exceptionally successful investment manager and the author of Common Stocks and Uncommon Profits, purportedly the first investment book to make the New York Times best-seller list.
While thousands of similar books have been written in the half-century since then, very few have stood the test of time so well -- the one book that rivals it is Benjamin Graham's 1949 classic The Intelligent Investor. Indeed, it's no exaggeration to say that Fisher's book is a foundational text that every serious investor should read.
Fisher was technically a growth investor, spending his time digging into the details -- a process he referred to as "scuttlebutt" -- of promising young companies that would go on to earn his clients fabulous returns. However, his underlying investment philosophy belies such one-dimensional characterization.
Strip away everything else, and Fisher believed in buying great companies and holding on to them for a long time. As he wrote after conducting a study on the qualities of profitable investments:
The greatest investment reward comes to those who by good luck or good sense find the occasional company that over the years can grow in sales and profits far more than industry as a whole. It further shows that when we believe we have found such a company we had better stick with it for a long period of time.
This seems quaint in its simplicity, but I can assure you that the vast majority of individual investors would markedly improve their investment returns by following it.
Beyond this, the single most valuable contribution of Fisher's book is his list of 15 characteristics to look for in a common stock. Structured as questions that should be answered before one decides whether to buy a stock, the list is nearly as exhaustive today as it was in 1958:
- Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
- 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?
- Does the company have an above-average sales organization?
- Does the company have a worthwhile profit margin?
- What is the company doing to maintain or improve profit margins?
- Does the company have outstanding labor and personnel relations?
- Does the company have outstanding executive relations?
- Does the company have depth to its management?
- How good are the company's cost analysis and accounting controls?
- 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?
- Does the company have a short-range or long-range outlook in regard to profits?
- 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?
- Does management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
- Does the company have a management of unquestionable integrity?
While few companies would make it through such an exacting gauntlet unscathed, Fisher believed that no worthwhile investment would fail to qualify on multiple counts. "A company could well be an investment bonanza if it failed fully to qualify on a very few of them," he wrote. However, he continued, "I do not think it could come up to my definition of a worthwhile investment if it failed to qualify on many."
Of course, few individual investors have the time, expertise, or inclination to go through such a comprehensive analysis every time they buy a stock. And that's understandable. But if that describes you, then it's probably best to either seek out the advice of others who are so inclined or to keep things simple by investing in a broad-market exchange-traded fund.
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