Rubicoin’s latest Five Minute Read reviews Phillip Fisher’s Common Stocks and Uncommon Profits, the go-to-guide for growth investing!
Warren Buffett has often credited Benjamin Graham with teaching him the skills he needed to succeed in the stock market. Graham was a proponent of investing in companies that were greatly undervalued, regardless of the quality of the business. This was known as “cigar-butt investing” – picking up old cigars that have been left on the street so you can get a few free puffs out of them.
But as time went on, Buffett began to evolve his strategy. This was largely influenced by his investing partner Charlie Munger, who convinced Buffett to pay a premium for great businesses that could grow over time.
In a 1989 letter to shareholders, Buffett wrote:
“Time is the friend of the wonderful business, the enemy of the mediocre… It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. Charlie understood this early; I was a slow learner. But now, when buying companies or common stocks, we look for first-class businesses accompanied by first-class managements.”
Buffett had begun to subscribe to Phillip Fisher’s way of thinking.
Common Stocks and Uncommon Profits
Common Stocks and Uncommon Profits was first published in 1958 by Phillip Fisher, thought of by many as the father of growth investing. Fisher’s strategy was to seek out highly innovative companies with talented managers that could compound returns over a long period of time. One of his most famous investments was in Motorola, a company he bought in the mid ‘50s when they were still just a radio manufacturer.
He also challenged the notion of a successful stock picker as “an introverted, bookish individual with an accounting-type mind”. Quite like Peter Lynch, Fisher believed that an individual could call upon their own skillset, and with a bit of interest and work ethic, could discover great investments without the help of any financial professionals.
In fact, Fisher was quite down on financial professionals as a whole, despite being one himself. He was particularly critical of those who tried to predict macroeconomic movements, and noted that if you were to read back through reports pre-dating the Great Depression, you would find many intelligently presented arguments from so-called experts that were entirely contradictory.
“The amount of mental effort the financial community puts into this constant attempt to guess the economic future from a random and probably incomplete series of facts makes one wonder what might have been accomplished if only a fraction of such mental effort has been applied to something with a better chance of proving useful.”
Fisher maintained that the best way to understand a business was to simply ask people about it – find out what “the talk” was. This meant asking competitors, suppliers, customers, former employees… anyone remotely involved with the company.
He called this type of research ‘Scuttlebutt’ – derived from the nautical term for a cask of water, and what we would now call the ‘water-cooler chat’.
Fisher warned that you should never to rely on one source of information however, as you never know what prejudices or biases that person might have about the company.
There are fifteen questions that Fisher believed you should ask when assessing a company. While you’ll rarely find one that ticks all fifteen boxes, finding just a few of these elements could lead to a fantastic long-term investment.
For example, one should ask:
- Does the company have products or services with sufficient market potential to make sizable increases in sales for a least several years?
- Does the management have a determination to continue to develop products or processes that will further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
- What is the company doing to maintain or improve profit margins?
- Does the company have depth to its management?
Fisher was extremely forward thinking. He wanted to know how a company was going to perform – not just over the next few years – but over the next few decades.
Fisher also provided a list of don’ts for would-be investors, which included:
- Not overstressing diversification. It’s important not to have all your eggs in one basket, but the more stocks you own, the more work you are giving yourself. You may end up putting money into companies that you think are merely above average, when you could be putting more money into the companies you think are brilliant.
- Not following the crowd.
- Not quibbling over eighths and quarters. You shouldn’t hold back on buying a stock just because it’s slightly above what you wanted to pay. Long-term investors should think long-term and invest in companies that they believe have the potential to increase many times over.
How To Use The Book Today
As it was written in the fifties, there are plenty of points in this book that will probably seem rather dated.
For example, it may have been quite common just to pick up the phone and call a supplier about their relationship with a company back then, but I doubt these days you’d get many eager respondants.
Luckily, there’s plenty of other ways to ‘scuttlebutt’ in the internet age without cold-calling suppliers and manufacturers and getting hung up on.
Sites like Glassdoor.com will offer you anonymous reviews of various companies and CEOs. You can get incredible insights from current and former employees into what they think management is doing right, what they are doing wrong, and where the company is headed – all for free.
Likewise, you’ll get great information from online forums and chat rooms from people who have dealt with the company directly. Recently, I was researching a company that deals with software for property managers, an industry with which I am not familiar. With a quick Google search, I found an online forum where property managers were talking openly about what software they use, what the benefits are, and how their software compares to others.
Or it can be as simple as just asking people you know in the industry. You might not know anyone working in Facebook, but you might know someone who works in advertising. You could find out what percentage of their spend is going to Facebook, and if they think that will increase or decrease over the next few years.
What’s important to remember is that no one piece of information is going to give you the green light for investment. ‘Scuttlebutt’ is about getting a broad sense of a company’s prospects from various sources.
Should I Buy This Book?
Keep in mind that the book was written in the fifties, so there is a lot of talk about chemical companies, farm machinery, and railroads that might seem irrelevant today.
But this is considered to be one of the best investing books out there, and the points about what makes a great business are timeless and can be transposed to modern times.
If you’re interested in growth investing, this book is a must. At times it can be long-winded and hard to digest, but the skills Fisher teaches are invaluable for those who are eager to learn about and discover great long-term businesses.
On the front of the book, you’ll find a plug from Warren Buffett who writes, “I’m an eager reader of whatever Phil has to say, and I recommend him to you.”
And if it’s good enough for the Oracle from Omaha, it’s good enough for us.