Common Stocks and Uncommon Profits and Other Writings

Philip A. Fisher

• Publisher: Wiley
• Year: 2015
• ISBN:
  9781119143130
• Edition: 2
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

Widely respected and admired, Philip Fisher is among the most influential investors of all time. His investment philosophies, introduced almost forty years ago, are not only studied and applied by today's financiers and investors, but are also regarded by many as gospel. This book is invaluable reading and has been since it was first published in 1958. The updated paperback retains the investment wisdom of the original edition and includes the perspectives of the author's son Ken Fisher, an investment guru in his own right in an expanded preface and introduction

"I sought out Phil Fisher after reading his Common Stocks and Uncommon Profits...A thorough understanding of the business, obtained by using Phil's techniques...enables one to make intelligent investment commitments."
— Warren Buffet

Part One
COMMON STOCKS AND UNCOMMON PROFITS

Preface

The publication of a new book in the field of investment may well require some explanatory statement from its author. The following remarks will therefore have to be somewhat personal in order to supply an adequate explanation for my venturing to offer another book on this subject to the investing public.

After one year in Stanford University's then brand-new Graduate School of Business Administration, I entered the business world in May 1928. I went to work for, and twenty months later was made the head of, the statistical department of one of the main constituent units of the present Crocker-Anglo National Bank of San Francisco. Under today's nomenclature I would have been called a security analyst.

Here I had a ringside seat at the incredible financial orgy that culminated in the autumn of 1929 as well as the period of adversity that followed. My observations led me to believe that there was a magnificent opportunity on the West Coast for a specialized investment counseling firm that would make itself the direct antithesis of that ancient but uncomplimentary description of certain stockbrokers—men who know the price of everything and the value of nothing.

On March first 1931, I started Fisher & Co. which, at that time, was an investment counseling business serving the general public but with its interests centered largely around a few growth companies. This activity prospered. Then came World War II. For three and a half years, while I was engaged in various desk jobs for the Army Air Force, I spent part of such spare time as I had in reviewing both the successful and, more particularly, the unsuccessful investment actions that I had taken and that I had seen others take during the preceding ten years. I began seeing certain investment principles emerge from this review which were different from some of those commonly accepted as gospel in the financial community.

When I returned to civilian life I decided to put these principles into practice in a business atmosphere as little disturbed by side issues as possible. Instead of serving the general public, Fisher & Co. for over eleven years has never served more than a dozen clients at one time. Most of these clients have remained the same during this period. Instead of being mainly interested in major capital appreciation, all Fisher & Co. activity has been focused upon this one objective. I am aware that these past eleven years have been a period of generally rising stock prices during which anyone engaged in such activities should have made good profits. Nevertheless by the degree to which these funds have consistently forged ahead of the generally recognized indices of the market as a whole, I find that following these principles has justified itself even more thoroughly in the postwar period than was the case in the ten prewar years when I was only partially applying them. Perhaps even more significant, they have been no less rewarding during those of these years when the general market was static or declining than when it was sharply advancing.

In studying the investment record both of myself and others, two matters were significant influences in causing this book to be written. One, which I mention several times elsewhere, is the need for patience if big profits are to be made from investment. Put another way, it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens. The other is the inherently deceptive nature of the stock market. Doing what everybody else is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all.

For these reasons over the years I have found myself explaining in great detail to the owners of the funds I manage the principles behind one or another action I have taken. Only in this way would they have enough understanding of why I was acquiring some, to them, totally unknown security so that there would be no impulse to dispose of it before enough time had elapsed for the purchase to begin justifying itself in market quotations.

Gradually the desire arose to compile these investment principles and have a printed record to which I could point. This resulted in the first groping toward organizing this book. Then I began thinking of the many people, most of them owners of far smaller funds than those belonging to the handful of individuals it is my business to serve, who have come to me over the years and asked how they as small investors could get started off on the right path.

I thought of the difficulties of the army of small investors who have unintentionally picked up all sorts of ideas and investment notions that can prove expensive over a period of years, possibly because they had never been exposed to the challenge of more fundamental concepts. Finally I thought of the many discussions I have had with another group also vitally interested in these matters, although from a different standpoint. These are the corporate presidents, financial vice presidents and treasurers of publicly owned companies, many of whom show a deep interest in learning as much as possible about these matters.

I concluded there was need for a book of this sort. I decided such a book would have an informal presentation in which I would try to address you, the reader, in the first person. I would use much the same language and many of the same examples and analogies that I have employed in presenting the same concepts to those whose funds I manage. I hope my frankness, at times my bluntness, will not cause offense. I particularly hope that you will conclude the merit of the ideas I present may outweigh my defects as a writer.

PHILIP A. FISHER

San Mateo, California
September 1957

1
Clues from the Past

You have some money in the bank. You decide you would like to buy some common stock. You may have reached this decision because you desire to have more income than you would if you used these funds in other ways. You may have reached it because you want to grow with America. Possibly you think of earlier years when Henry Ford was starting the Ford Motor Company or Andrew Mellon was building up the Aluminum Company of America, and you wonder if you could not discover some young enterprise which might today lay the groundwork for a great fortune for you, too. Just as likely you are more afraid than hopeful and want to have a nest egg against a rainy day. Consequently, after hearing more and more about inflation, you desire something which will be safe and yet protected from further shrinkage in the buying power of the dollar.

Probably your real motives are a mixture of a number of these things, influenced somewhat by knowing a neighbor who has made some money in the market and, possibly, by receiving a pamphlet in the mail explaining just why Midwestern Pumpernickel is now a bargain. A single basic motive lies behind all this, however. For one reason or another, through one method or another, you buy common stocks in order to make money.

Therefore, it seems logical that before even thinking of buying any common stock the first step is to see how money has been most successfully made in the past. Even a casual glance at American stock market history will show that two very different methods have been used to amass spectacular fortunes. In the nineteenth century and in the early part of the twentieth century, a number of big fortunes and many small ones were made largely by betting on the business cycle. In a period when an unstable banking system caused recurring boom and bust, buying stocks in bad times and selling them in good had strong elements of value. This was particularly true for those with good financial connections who might have some advance information about when the banking system was becoming a bit strained.

But perhaps the most significant fact to be realized is that even in the stock market era which started to end with the coming of the Federal Reserve System in 1913 and became history with the passage of the securities and exchange legislation in the early days of the Roosevelt administration, those who used a different method made far more money and took far less risk. Even in those earlier times, finding the really outstanding companies and staying with them through all the fluctuations of a gyrating market proved far more profitable to far more people than did the more colorful practice of trying to buy them cheap and sell them dear.

If this statement appears surprising, further amplification of it may prove even more so. It may also provide the key to open the first door to successful investing. Listed on the various stock exchanges of the nation today are not just a few, but scores of companies in which it would have been possible to invest, say, $10,000 somewhere between twenty-five and fifty years ago and today have this purchase represent anywhere from $250,000 to several times this amount. In other words, within the lifetime of most investors and within the period in which their parents could have acted for nearly all of them, there were available scores of opportunities to lay the groundwork for substantial fortunes for oneself or one's children. These opportunities did not require purchasing on a particular day at the bottom of a great panic. The shares of these companies were available year after year at prices that were to make this kind of profit possible. What was required was the ability to distinguish these relatively few companies with outstanding investment possibilities from the much greater number whose future would vary all the way from the moderately successful to the complete failure.

Are there opportunities existing today to make investments that in the years ahead will yield corresponding percentage gains? The answer to this question deserves rather detailed attention. If it be in the affirmative, the path for making real profits through common stock investment starts to become clear. Fortunately, there is strong evidence indicating that the opportunities of today are not only as good as those of the first quarter of this century but are actually much better.

One reason for this is the change that has occurred during this period in the fundamental concept of corporate management and the corresponding changes in handling corporate affairs that this has brought about. A generation ago, heads of a large corporation were usually members of the owning family. They regarded the corporation as a personal possession. The interests of outside stockholders were largely ignored. If any consideration at all was given to the problem of management continuity—that is, of training younger men to step into the shoes of those whose age might make them no longer available—the motive was largely that of taking care of a son or a nephew who would inherit the job. Providing the best available talent to protect the average stockholder's investment was seldom a matter in the forefront of the minds of management. In that age of autocratic personal domination, the tendency of aging management was to resist innovation or improvement and frequently to refuse even to listen to suggestions or criticism. This is a far cry from today's constant competitive search to find ways of doing things better. Today's top corporate management is usually engaged in continuous self-analysis and, in a never-ending search for improvement, frequently even goes outside its own organization by consulting all sorts of experts in its effort to get good advice.

In former days there was always great danger that the most attractive corporation of the moment would not continue to stay ahead in its field or, if it did, that the insiders would grab all the benefits for themselves. Today, investment dangers like these, while not entirely a thing of the past, are much less likely to prove a hazard for the careful investor.

One facet of the change that has come over corporate management is worthy of attention. This is the growth of the corporate research and engineering laboratory—an occurrence that would hardly have benefited the stockholder if it had not been accompanied by corporate management's learning a parallel technique whereby this research could be made a tool to open up a golden harvest of ever-growing profits to the stockholder. Even today, many investors seem but slightly aware of how fast this development has come, how much further it is almost certainly going, and its impact on basic investment policy.

Actually, even by the late 1920's, only a half dozen or so industrial corporations had significant research organizations. By today's standards, their size was small. It was not until the fear of Adolf Hitler accelerated this type of activity for military purposes that industrial research really started to grow.

It has been growing ever since. A survey made in the spring of 1956, published in Business Week and a number of other McGraw-Hill trade publications, indicated that in 1953 private corporate expenditures for research and development were about $3.7 billion. By 1956 they had grown to $5.5 billion and present corporate planning called for this to be running at the rate of better than $6.3 billion by 1959. Equally startling, this survey indicated that by 1959, or in just three years, a number of our leading industries expect to get from 15 per cent to more than 20 per cent of their total sales from products which were not in commercial existence in 1956.

In the spring of 1957 the same source made a similar survey. If the totals revealed in 1956 were startling in their significance, those revealed just one year later might be termed explosive. Research expenditures were up 20 per cent from the previous year's total to $7.3 billion! This represents almost a 100 per cent growth in four years. It means the actual growth in twelve months was $1 billion more than only a year before had been expected as the total growth that would occur in the ensuing thirty-six months. Meanwhile, anticipated research expenditures in 1960 were estimated at $9 billion! Furthermore, all manufacturing industries, rather than just a few selected industries as represented in the earlier survey, expected that 10 per cent of 1960 sales would be from products not yet in commercial existence only three years before. For certain selected industries, this percentage—from which sales representing merely new model and style changes had been excluded—was several times higher.

The impact of this sort of thing on investment can hardly be overstated. The cost of this type of research is becoming so great that the corporation which fails to handle it wisely from a commercial standpoint may stagger under a crushing burden of operating expense. Furthermore, there is no quick and easy yardstick for either management or the investor to measure the profitability of research. Just as even the ablest professional baseball player cannot expect to get a hit much more often than one out of every three times he comes to bat, so a sizable number of research projects, governed merely by the law of averages, are bound to produce nothing profitable at all. Furthermore, by pure chance, an abnormal number of such unprofitable projects may happen to be bunched together in one particular span of time in even the best-run commercial laboratory. Finally, it is apt to take from seven to eleven years from the time a project is first conceived until it has a significant favorable effect on corporate earnings. Therefore, even the most profitable of research projects is pretty sure to be a financial drain before it eventually adds to the stockholder's profit.

But if the cost of poorly organized research is both high and hard to detect, the cost of too little research may be even higher. During the next few years, the introduction of many kinds of new materials and new types of machinery will steadily narrow the market for thousands of companies, possibly entire industries, which fail to keep pace with the times. So will such major changes in basic ways of doing things as will be brought about by the adoption of electronic computers for the keeping of records and the use of irradiation for industrial processing. However, other companies will be alert to the trends and will maneuver to make enormous sales gains from such awareness. The managements of certain of such companies may continue to maintain the highest standards of efficiency in handling their day-to-day operations while using equally good judgment in keeping ahead of the field on these matters affecting the long-range future. Their fortunate stockholders, rather than the proverbial meek, may well inherit the earth.

In addition to these influences of the changed outlook in corporate management and the rise of research, there is a third factor likewise tending to give today's investor greater opportunities than those existing in most past periods. Later in this book—in those sections dealing with when stocks should be bought and sold—it would seem more appropriate to discuss what, if any, influence the business cycle should have on investment policies. But discussion of one segment of this subject seems called for at this point. This is the greater advantage in owning certain types of common stocks, as a result of a basic policy change that has occurred within the framework of our federal government, largely since 1932.

Both prior to and since that date, regardless of how little they had to do with bringing it about, both major parties took and usually received credit for a...

Table of contents

• Cover
• Introducing Wiley Investment Classics
• Title page
• Copyright
• Dedication
• Preface
• Introduction
• PART ONE COMMON STOCKS AND UNCOMMON PROFITS
• PART TWO CONSERVATIVE INVESTORS SLEEP WELL
• PART THREE DEVELOPING AN INVESTMENT PHILOSOPHY
• Appendix Key Factors in Evaluating Promising Firms
• Index
• EULA