"Common Stocks and Uncommon Profits" (Philip Fisher, 1958)

Introduction

Philip Fisher(1907-2004)’s book “Common Stocks and Uncommon Profits” is a classic investment guide explaining Fisher’s investment philosophy and approach to stock investing. Philip Fisher is known as the father of growth investing. Along with Benjamin Graham, Fisher is recognized as one of the two most influential mentors to Warren Buffett.

Although written in 1958, this book has become an investment classic, still widely read by stock investors. Fisher discusses the importance of investing in companies with strong long-term growth potential. Below, I’ve summarized some passages that particularly resonated with me. Note that I have rephrased or condensed some parts. Also, I’ll mark my thoughts as "Neo" to distinguish them from the book’s content. Let’s begin.

What to Buy

The Fifteen Points to Look for in a Common Stock:

1. Does the company offer products or services with significant market potential for substantial sales growth over the next few years?
2. Is management committed to developing new products or processes that enhance sales potential as existing product lines mature?
3. How effective is the company's R&D compared 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 robust are the company’s cost analysis and accounting controls?
11. Are there industry-specific factors that offer insights into the company’s competitive standing?
12. Does the company have a short-term or long-term profit outlook?
13. Will future growth require enough equity financing that it could dilute existing shareholders' benefits?
14. Does management communicate openly with investors during good times but become silent during bad times?
15. Does the company have a management of unquestionable integrity?

Look for companies that meet most of the 15 criteria. Investors need to trust their judgment, as attractive opportunities are rare. Even a strong performer in a growing industry may no longer qualify if its prospects diminish, warranting a sale. However, well-selected stocks that have proven themselves over time rarely need to be sold.

When to Buy

Delaying the purchase of attractive stocks out of fear that the overall stock market will decline will lead to very costly consequences in the long run. If the company is truly the right one, it will surely surpass its previous high during the next bull market. But if you sell such a stock, how will you know when to repurchase it?

(Neo: Both Philip Fisher and Warren Buffett said that if you buy a stock that’s worth holding for a lifetime, and it continues to meet the reasons for its initial purchase, there’s no need to sell it. But considering Warren Buffett recently sold about half of his Apple holdings in 1H of 2024, perhaps market timing is still necessary after all?)

The five powerful forces affecting stock prices: (1) Economic cycles, (2) interest rate trends, (3) government policies towards businesses, (4) inflation trends, (5) new inventions and technologies (the most powerful force).  
Fisher noted that the concern over the downside of economic cycles might cause investors to miss great investment opportunities. He argued that the economic cycle is just one of the five powerful forces influencing stock prices.

(Neo: Following Fisher's five forces provides a broader understanding of the stock market, much like Michael Porter’s five forces framework aids in industry analysis.")

When to Sell

Most investors suffer significant losses in stocks they no longer want to hold but still keep around solely because they hope to “at least break even.” This can lead to even greater losses, especially if they could have reinvested the money in a more profitable stock. (Neo: I believe every investor has experienced this and can relate to it. It reminds me of the saying, "An investor who can't cut losses will never succeed.")

If you sell a good stock out of fear of a stock price decline: 

1. The anticipated bear market or price drop never comes, and the price keeps rising.  
2. You wait for a much cheaper price than the one you sold at, but the stock never drops that low.
3. Even if the price drops to your desired level, fear of another potential issue prevents you from repurchasing it. In the end, you miss out on future gains.

If the company you want to invest in is the right one and the current price is also reasonably attractive, buy it at the "market price." The difference of 25-50 cents in the bid price is truly negligible compared to the potential profit you might lose if you fail to purchase the stock. If the stock doesn't have long-term potential, there was no reason to buy it in the first place.

(Neo: While Warren Buffett initially focused on buying good companies cheaply, he later embraced the strategy of purchasing great companies at fair prices, inspired by Fisher and Charlie Munger. Buffett famously stated in his 1989 letter to shareholders, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.")

Don’ts for Investors

Individual investors should avoid newly promoted companies, regardless of their appealing descriptions. Established firms often present solid investment opportunities. A minimum of three years in operation, annual sales over $10 million, and positive operating profits should be the baseline for consideration. (Neo: Another  legendary investor I admire, Peter Lynch, said something very similar.)

If an investor holds too many stocks, it's not a sign of prudence but rather a lack of confidence in their decisions. It’s important to acknowledge that every investor will inevitably make a few mistakes and spread out their investments to ensure these mistakes are not fatal. However, it’s even more important to focus on the best stocks rather than having a large number of them. In stock investing, the total returns from a few outstanding stocks far exceed the combined returns from many average stocks. You will deeply feel the importance of the number of shares you hold when the stock price rises sharply. (Neo: I have a friend who made a fivefold profit by investing early in Nvidia but held only three shares. Should he laugh or cry? Probably both.)

Don't let the fear of war deter your investments. Historically, the U.S. stock market has declined sharply during major wars, but post-war levels have consistently surpassed pre-war levels. War tends to drive monetary inflation, making it unwise to sell stocks for cash during such times. Instead, invest gradually as fear escalates, since war devalues currency and raises stock prices in nominal terms. Focus on companies that can maintain demand for their goods or pivot to wartime production. (Neo: The point I would add is that if war always serves as a driver of monetary inflation, it creates a strong tailwind for assets like gold and Bitcoin.)

If you cannot obtain sufficient information, do not invest. In the world of investing, you don’t need answers to every question about every investment. What matters is having the right answers in the few cases where you actually decide to buy stocks.

Thanks for reading. Wish you grow rich slowly and surely!

This blog post includes excerpts from the book “Common Stocks and Uncommon Profits”, published by Wiley, quoted under fair use as permitted by copyright laws in relevant jurisdictions. The content includes both direct excerpts from the original work and my personal thoughts, rephrasings, and interpretations. All original text and images from the book are the property of the respective author and publisher, and are not to be used for commercial purposes.