If you spend enough time scrolling through the various value investing blogs, you are bound to come across a few lists time and time again; one of those lists is Phil Fisher’s “Fifteen Points to Look for in a Common Stock” (they’re even outlined on Wikipedia here). However, Fisher has also supplied investors with another list that I’ve never seen profiled on these blogs. A quick Bing search suggests that this list has not made the rounds as one might expect.
I find this particularly surprising because the list is his conclusion to his famous book “Common Stock and Uncommon Profits,” where he essentially itemizes the most important concepts that he picked up over half a century of investing. Usually, I would add my own two cents to such a list. Rather than diminishing this masterpiece with my own rambling, I’ve decided it would be better to simply bold a few points that really jump off the page at me. I’m indebted to Fisher for such a succinct summation of a true investment classic. With that said, if you have not read the book, make it a priority; this list alone does not encapsulate Fisher’s genius:
1. Buy into companies that have disciplined plans for achieving dramatic long-range growth in profits and that have inherent qualities making it difficult for newcomers to share in that growth.
2. Focus on buying these companies when they are out of favor; that is, when, either because of general market conditions or because the financial community at the moment has misconceptions of its true worth, the stock is selling at prices well under what it will be when its true merit is better understood.
3. Hold the stock until either (a) there has been a fundamental change in its nature (such as a weakening of management through changed personal), or (b) it has grown to a point where it no longer will be growing faster than the economy as a whole. Only in the most exceptional circumstances, if ever, sell because of forecasts as to what the economy or the stock market is going to do, because these changes are too difficult to predict. Never sell the most attractive stocks you own for short-term reasons.
4. For those primarily seeking major appreciation of their capital, de-emphasize the importance of dividends. The most attractive opportunities are likely to occur in the profitable, but low or no dividend groups. Unusual opportunities are much less likely to be found in situations where high percentage of profits is paid to stockholders.
5. Making some mistakes is as much an inherent cost of investment for major gains as making some bad loans is inevitable in even the best run and most profitable lending institution. The important thing is to recognize them as soon as possible, to understand their causes, and to learn how to keep from repeating the mistakes. Willingness to take small losses in some stocks and to let profits grow bigger and bigger in the more promising stocks is a sign of good investment management. Taking small profits in good investments and letting losses grow in bad ones is a sign of abominable investment judgment. A profit should never be taken just for the satisfaction of taking it.
6. There are a relatively small number of truly outstanding companies. Their shares frequently can’t be bought at attractive prices. Therefore, when favorable prices exist, full advantage should be taken of the situation. Funds should be concentrated in the most desirable opportunities… For individuals, any holding of over twenty different stocks is a sign of financial incompetence.
7. A basic ingredient of outstanding common stock management is the ability to neither accept blindly whatever may be the dominant opinion in the financial community at the moment nor to reject the prevailing view just to be contrary for the sake of being contrary. Rather, it is to have more knowledge and to apply better judgment, in thorough evaluation of specific situations, and the moral courage to act “in opposition to the crowd” when your judgment tells you you’re right.
8. In handling common stocks, as in most other fields of human activity, success greatly depends on a combination of hard work, intelligence, and honesty.
Reading through the book, you can’t help but imagine how Warren Buffett (NYSE:BRK.A)(BRK.B), so ingrained in his approach of searching endlessly for stocks trading below NCAV, began to recognize the astuteness of the decidedly different viewpoint presented by Fisher (the book was originally published in the late 1950s, and read by Buffett in the early 1960s); the combination of a truly great company and time offered a path beyond soggy cigar butts – an approach that would have a quickly dried up Berkshire's opportunity set as the company continued to grow in size. I’ll pen an article in the near future that looks closely at the transaction and outcome of the See’s Candy purchase – an investment that looks much more like a Fisher-type idea than what's commonly associated with Ben Graham.
About the author:
I think Charlie Munger has the right idea: "Patience followed by pretty aggressive conduct."
I run a fairly concentrated portfolio, with 2-5 positions accounting for the majority of my equity portfolio. From the perspective of a businessman, I believe this is sufficient diversification.