In wrapping up his book, “Common Stocks and Uncommon Profits and Other Writings,” author and legendary investment manager Philip Fisher set out eight points that made up his investment philosophy.
Earlier in the book he laid out his “15 Points” for identifying investable stocks:
- The company has products or services that will allow it to increase sales for the next several years.
- Management plans to keep turning out new products, ensuring that the company will continue to grow if or when its current products become commodities.
- The company's R&D is effective, not wasted.
- It has an above-average sales organization.
- Profit margins are worthwhile.
- The company is also maintaining or improving those margins.
- It operates with outstanding labor and personnel relations.
- The management team's members work well together.
- Management depth is strong.
- The company has robust cost and accounting controls.
- It has competitive advantages over its competitors.
- Management focuses on long-term profitability, not on short-term results.
- The firm has enough capital to avoid diluting existing shareholdings.
- It comes forward and explains when problems appear.
- Managers have unquestioned integrity.
Fisher did not expect any company to score high marks on all these points, but the more the better.
At the end of the book, the author followed up with an eight-point investment philosophy. There will be some similarities with the 15 Points, but enough distinction to warrant their own space. As Fisher wrote, “This then is my investment philosophy as it has emerged over a half century of business experience. Perhaps the heart of it may be summarized in the following eight points:”
- Only buy into companies with “disciplined plans” for generating “dramatic” long-term growth in profits. These companies also must have inherent qualities, what we would now call a moat, so competitors cannot take away those profits. For more on the ways in which firms qualify or disqualify for those inherent qualities, see the section on “Conservative Investors Sleep Well.”
- Buy shares of these companies only when they are out of favor, when the stock is selling well below what its future price will be when the market better understands its true worth. To do so will be a contrarian action or a response to general market conditions. In either case, it will involve a certain amount of courage.
- Hold that stock forever if you can, or until one of two situations emerges. First, if there has been some fundamental change in the company, including a weakening of management, then it is time to sell. Second, sell if the firm has grown so big that it can no longer grow faster than the economy as a whole. And, “Only in the most exceptional circumstances” should you sell because of forecasts about stock markets or the economy.
- For those seeking larger capital gains, ignore dividends. Fisher expected that companies with low or no dividends would be the most likely to generate outstanding profits. Holding on to funds that would have gone to dividends will allow all or most retained earnings to be used to generate new growth and future profits.
- Expect you will make some mistakes; Fisher called this an inherent cost of investing for major gains. But, never ignore mistakes. Instead, recognize them as soon as possible, understand their causes, and figure out how to avoid making them again. He added, “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.”
- Acknowledge there are relatively few companies that are truly outstanding, and that their shares are often not available at attractive prices. On the rare occasions when attractive prices become available, take full advantage. In addition, investors should concentrate on just a few outstanding companies in their portfolios. According to Fisher, “For individuals (in possible contrast to institutions and certain types of funds), any holding of over twenty different stocks is a sign of financial incompetence. Ten or twelve is usually a better number.”
- Investors must not blindly accept the “dominant opinion in the financial community” —nor should they be contrarians just for the sake of being contrary. Instead, an investor should have more knowledge and be able to apply better judgement by thoroughly evaluating specific situations, not to mention having the courage to go against “the crowd” when you believe you are right.
- Finally, Fisher observed that success comes from a combination of hard work, intelligence and honesty. These are obviously the criteria for success in many other types of endeavors.
The author added that we enter the arena with varying degrees of aptitude, but all of us can do better if we make a disciplined effort to do more. That leaves just the element of luck, which he addressed this way:
“While good fortune will always play some part in managing common stock portfolios, luck tends to even out. Sustained success requires skill and consistent application of sound principles. Within the framework of my eight guidelines, I believe that the future will largely belong to those who, through self-discipline, make the effort to achieve it.”
While much of Philip Fisher’s writing now seems familiar to value investors — particularly to those who follow Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) — it would not necessarily have been so well known when the original was published in 1958 and when “Conservative Investors Sleep Well” came out in 1975. Value investors of the 1950s would have been more familiar with Benjamin Graham’s work, including an emphasis on buying cheap stocks, regardless of their value.
Fisher, on the other hand, decided relatively early, in the 1930s, that he would commit himself to quality stocks, rather than what Buffett called “cigar-butt” stocks (every discarded butt has at least a couple of puffs remaining). This was to prove influential among many investors, including Munger, and Munger in turn pushed Buffett to focus on quality stocks for the long term.
Both Munger and Buffett have acknowledged their debt to Fisher. Buffett has reported that he considers “Common Stocks and Uncommon Profits and Other Writings” one the great books on investing and that Graham and Fisher are the two greatest influences on his investing style.
In a 2017 article for GuruFocus, Rupert Hargreaves wrote, “Buffett himself has stated he is '85% Graham and 15% Fisher.' I would argue this ratio has shifted to 85% Fisher and 15% Graham as Buffett’s strategy has strayed from value toward growth.”
(This article is one in a series of chapter-by-chapter digests. To read more, and digests of other important investing books, go to this page.)