Key learnings from ‘Common Stocks and Uncommon Profits’ by Phil Fisher. It is one of the finest books entailing the practical aspects of stock market investments. The book “Common Stocks and Uncommon Profit” is divided into 3 parts. In this blog, I will be covering just the first part which is the same as the title of the book. The other 2 parts are “Conservative Investors Sleep Well” and ” Developing an investment philosophy”.
As the name of the book suggests, Phil Fisher lays out the principles he has followed in his very successful and lengthy investment career to use common stocks to multiply the wealth.
Key learnings from ‘Common Stocks and Uncommon Profits’ by Phil Fisher
1. Greatest investment reward comes to those who find the rare companies that can grow in sales and profits far more than the industry as a whole. Finding is just a small part but to stick with it for a long period of time is the essence of creating wealth.
“Greatest gain in a business is made when a company is developing its competitive advantage”
Although it is much easier said than done, in particular, the later part.
2. Scuttlebutt is the other way to get an inside understanding into the company i.e. getting an edge over the others. That involves speaking to current or ex-employee, supplier, customer etc.
Scuttlebutt not only helps you to a better understanding of the company but the conviction to hold on the investment opportunity. It is a very effective way to find good companies as well.
3. When a sudden change in market conditions opens up a large increase in sales and profit for a very few years, enormous profit can be made by one who spots and bought the trend early. In the book, Phil Fisher gives the example of how TVs took the market from Radios and those who bought shares of TV manufacturers early on were the real beneficiary.
In the recent past, similar was the case of Graphite electrode manufacturers who was the direct beneficiary of the shift of Steel manufacturing from the Blast furnace to Electric Arc Furnace. HEG gave a return of 20 times in just 24 months.
4. In the book, Phil Fisher puts a lot of emphasis on R&D as a tool to stay ahead of the competition.
India companies, in general, lack the R&D expertise due to unwillingness to spend the amount required in addition to the lack of skill available. A good way to counter this shortcoming is via technology tie up. Many Indian companies has shown tremendous progress post such tie-ups such as Avanti Feeds etc
5. Another interesting observation made by him is the marginal companies i.e. the companies which usually have low-profit margins show a remarkable increase in profit margins in good years which at those times is better than lower cost companies(market leaders) but similarly, the drop in profit margins are also remarkable in bad times for such marginal companies.
And if there are positive changes taking place within such marginal companies moving them away from the marginal league by way of operational efficiency or new product launch, is the case for a sensibly good investment opportunity.
IN SIMPLE WORD IT REPRESENTS COMPANY TURNAROUND.
6. How does the company treat its customer is of great significance. In a way, it represents management’s willingness to listen to its stakeholders.
7. Is the company going for or will go for a lot of equity dilution. Equity dilution reduces the profit for shareholders thus reduces the EPS and increasing the Price to Earning ratio.
If the CMP for any stock is 100, EPS=10, No of shares= 10, then P/E ratio= 100/10=10
Now, if the number of shares is doubled to 20, EPS gets halved to 5. P/E ratio becomes 100/5=20. That is the valuation increases.
8. With regards to timing, Phil says that economic forecasts are futile. Economists have forecasted the bull run to continue for a long long time in 1929. Similar predictions were made in 2008 and are being made till now. So, it’s much more important to time the purchase of the particular stock. Focus on beaten-down stocks which have started to show shoots of green.
He also advocates staggered buying as noone knows what the future holds. A sharp correction post the first buy will offer investor to lower his cost of purchase.
10. Buying a stock, just because they are paying dividends is a costly affair.
A hefty dividend paying company might imply that they have exhausted all the growth opportunities. Also, a sign of sub-standard management.
Key learnings from ‘Common Stocks and Uncommon Profits’ by Phil Fisher" How to analyze a stock?
Although, Phil Fisher in the book Common Stocks and Uncommon Profits have listed down 15 points to analyze a stock. I have chosen the 8 most relevant to us.
1. Is the market size big enough: A wonderful company called as Mayur Uniquoter has been struggling for growth for many years due to limited growth opportunity(Very small market size). It emphasizes the importance of market to which the company will cater to.
2. Management’s willingness to come up with new products/ processes: Always striving to get better
3. Effective R&D
4. Enough profit margin: Lack of profit would imply that the company will have to depend on external sources of funding for any growth opportunity
5. Company’s strategy to improve the profit margins: Bringing efficiency, adding new products, etc
6. Is the company better than it’s peers
7. Does the company have the borrowing power or it will require equity dilution: If the company is already over-leveraged, the ability to further borrow would be limited
8. Integrity of the management: Very important. One way to check if the management is talking only during good times and silent in bad times
Key learnings from ‘Common Stocks and Uncommon Profits’ by Phil Fisher "Few don'ts for the investors"
1. Don’t buy into promotional companies
2. Don’t buy a stock just because you like the tone of its annual report
3. Don’t confuse high P/E ratio an end to the growth story of the company
4. Don’t put too much focus on diversification: Since it’s very important to track the performance of your portfolio companies. Too many stocks in the portfolio make things worse.
5. Don’t be afraid to buy into a war scare: A war scare is the threat of war between countries. Any such scare leads to a sharp correction in the stock market. But it rarely happens is such news becoming a reality.
I am sure most of us would be aware of a similar scare created last year. According to NEWS channels it was almost certain that North Korea and the US will go to war. But it turned out to be other way around where they are trying to sort issues out.
6. Don’t fail to consider time as well as price in buying a true growth stock
7. Don’t follow the herd: It’s very important to be an independent thinker to make money in the market.
Warrent Buffett & Charlie Munger discussing the book “Common Stocks and Uncommon Profits”.
Overall, an excellent book to get the practical knowledge of the market.