Wealth-Building Strategies from "Common Stocks and Uncommon Profits"

Philip Fisher's classic book 'Common Stocks and Uncommon Profits' offers timeless principles that resonate with anyone seeking to build wealth through the stock market. Fisher emphasizes the importance of thorough research, a long-term perspective, and investing in quality companies. I'll talk about some real-world examples and personal experiences to illustrate their effectiveness. Whether you're a budding investor or seeking to refine your strategy, these insights can guide you towards financial success.

The Power of Research

Fisher championed a meticulous research approach, emphasizing the 'scuttlebutt' method. This involves gathering insights from various sources such as customers, suppliers, and competitors to gain a deeper understanding of a company. This depth of knowledge empowers investors to make informed decisions.

For instance, I once came across a reputable tech company that was undervalued in the market. By employing the scuttlebutt method, I spoke with a few employees and learned about the company's innovative projects that were not yet public knowledge. This firsthand insight fueled my early investment, resulting in significant gains as the company's stock price soared.

Investing for the Long Haul

Patience remains a cardinal virtue in investing. Fisher advocated for buying and holding quality stocks rather than succumbing to the temptation of selling due to temporary market fluctuations. For example, during the peak of the Great Recession downturn in 2009, I held onto my positions in companies that I understood and "knew" were not going away anytime soon. Holding on to my Apple, Google, American Express, and Coca-Cola shares has proven to be a very wise choice. While others panicked and sold, I recognized their proven track records and trusted in the inevitable recovery, which ultimately rewarded my patience handsomely.

Evaluating Quality Companies

Fisher's principle of investing in companies with strong management and competitive advantages forms the cornerstone of sustainable wealth creation. He outlined 'Fifteen Points' for assessing management quality, considering factors such as honesty and long-term vision. Throughout my investing journey, I've utilized these principles, focusing on companies with robust fundamentals. One such example was a consumer goods company renowned for its leading market position and effective leadership, providing steady dividends even during economic downturns.

The Fifteen Points to look for in a Common Stock:

Relating to the Company's Products or Services:

1. Products or Services with Market Potential: Does the company offer products or services with sufficient market potential to allow for significant sales growth for several years? This focuses on the long-term demand for what the company offers.

2. Commitment to Developing New Products/Processes: Does management have a determination to continue developing new products or processes that will further increase sales potential when current product lines mature? This highlights the importance of innovation and adaptability.

3. Effective Research and Development (R&D): How effective are the company's R&D efforts relative to its size? This assesses whether the company is efficiently investing in its future.

Relating to the Company's Profitability:

4. Above-Average Sales Organization: Does the company have an above-average sales organization? A strong sales force is crucial for translating products into revenue.

5. Worthwhile Profit Margins: Does the company have a worthwhile profit margin? This indicates efficiency and pricing power.

6. Efforts to Maintain/Improve Margins: What is the company doing to maintain or improve its profit margins? This shows management's focus on profitability and cost control.

Relating to the Company's People:

7. Good Labor and Personnel Relations: Does the company have sound labor and personnel relations? Positive employee relations contribute to productivity and stability.

8. Excellent Executive Relations: Does the company have excellent executive relations? Strong leadership and teamwork at the top are essential.

9. Depth of Management: Does the company have depth of management? This ensures continuity and prevents over-reliance on a few key individuals.

Relating to Other Important Factors:

10. Cost Analysis and Accounting Controls: How good are the company's cost analysis and accounting controls? Efficient cost management and accurate financial reporting are crucial.

11. Other Aspects of the Business: Are there other aspects of the business, somewhat peculiar to the particular company, which will give the investor important clues as to how outstanding it may be in relation to its competition? This encourages looking for unique advantages.

12. Long-Range Outlook: Does the company have a long-range outlook? A focus on long-term growth is key to Fisher's philosophy.

13. Integrity of Management: Does the management have unquestionable integrity? This is paramount. Fisher considers this the most important point.

14. How Good Is the Company's Corporate Citizenship?: How good are the company's corporate citizenship? This considers the company's impact on society and its ethical practices.

15. Competitive Advantage: Does the company have a competitive advantage? This could be a unique product, a strong brand, or a cost advantage that makes it difficult for competitors to replicate its success.

Obviously gaining insight to many of these things requires an enormous amount of research and know-how (like how do you determine whether or not a company has good cost analysis and accounting controls?), but the main point of this whole article is that the top companies have these things in place already and understanding as much as you can about a company can pay dividends, pun intended, in the long run. Did the average investor know about Enron's shenanigans before they collapsed...probably not and how would an average investor gain insight into any of that? No easy way to know. Due diligence goes a long ways. Sticking with well-known and well-respected companies is the key to long-term success.

So, the key takeaways from these points are:

Focus on Quality over Quick Profits: Fisher's 15 points emphasize investing in high-quality companies with strong fundamentals, rather than trying to time the market or chase short-term gains.

Deep Qualitative Research is Essential: These points go beyond simple financial metrics and require in-depth research into a company's management, competitive landscape, and long-term vision. The "scuttlebutt" method is a crucial part of this process.

Management is Paramount: The integrity, competence, and long-term focus of a company's management are considered by Fisher to be the most critical factors. A great business with poor management is likely to underperform.

Long-Term Perspective is Key: These points are designed for long-term investors. Fisher believed in buying and holding quality stocks through market cycles, allowing the power of compounding to work its magic.

Growth Potential is Important: While quality is essential, Fisher also looked for companies with significant growth potential, driven by factors like innovative products, strong sales organizations, and expanding markets.

Interconnectedness of Factors: The 15 points are not isolated criteria but rather interconnected aspects of a successful business. Strong management, for example, is likely to lead to effective R&D, good employee relations, and a long-term outlook.

Not a Rigid Checklist: While the 15 points provide a valuable framework, they are not meant to be a rigid checklist. Few companies will excel in all 15 areas. The goal is to use them to assess the overall quality and potential of a business.

Emphasis on Competitive Advantage: Identifying a company's sustainable competitive advantage (moat) is crucial. This is what protects its profitability and allows it to thrive over the long term.

In essence, Fisher's 15 points provide a comprehensive framework for identifying companies with the potential for "uncommon profits" through long-term investment. They encourage investors to think like business owners, focusing on the underlying quality and long-term prospects of the companies they invest in.

Action Items

• Identify Potential Companies: Compile a list of companies within industries you understand or possess expertise in. Focus on those that have demonstrated consistent performance.

• Conduct Thorough Research: Analyze each company's competitive landscape, management practices, and financial health using both quantitative and qualitative methods.

• Embrace the Scuttlebutt Method: Gather firsthand insights by reaching out to employees, customers, and suppliers to gain a deeper understanding of the company's operations and reputation. This is easier said than done obviously as we're not always in a position to reach out to employees, customers, or suppliers these days. Note that this book was written in 1958 when times were quite a bit different in terms of 'gathering' information. While the core of Fisher's "scuttlebutt" method—gathering qualitative insights from diverse sources—remains valuable, its execution is challenged by today's information overload, stricter regulations, complex global supply chains, and impersonal communication. Adapting the method by leveraging online resources, expert interviews, and industry events, while triangulating information, is crucial for effective research in the modern age.

• Develop a Long-Term Strategy: Avoid impulsive selling during market fluctuations. Cultivate a long-term perspective and focus on holding stocks for the long haul as they recover and grow.

By applying the principles from Fisher's 'Common Stocks and Uncommon Profits,' investors can cultivate the mindset needed to approach the markets with confidence. In short, prioritize quality, embrace long-term perspectives, and adopt patient investment strategies.