Common Stocks and Uncommon Profits !

Philip narrates how he got into the markets from a school boy desperate to buy a share, to managing Fisher and Co. The book is divided into three parts, part one being common stocks and uncommon profits, part two conservative investor sleep well and part three developing an investment philosophy.

PART I Common stocks and Uncommon profit

Chapter 1 Clues from the past

This chapter outlines what changes were made in the market in the last century from coming up of FED to banking regulations. Fisher found out that what works is finding great companies and staying with them for an extended period of time. He explains business cycles, management’s vision, depression, inflation, unemployment, deficits, bond yields and other basic terminology which takes up substance from the past. He lays down all these points to provide two conclusions:

To explain timing of markets in this complex economical environment in very difficult.
More opportunities are available today than it was 50 years ago and more will be available as you know further.
“Opportunities today are much better than previous time there are actually always opportunities waiting.”

Chapter 2 What Scuttlebutt can do

This chapter explains what scuttlebutt is and the ways to do so. Ex-employees, current employees and competitors as the best sources to scuttlebutt.

Chapter 3 What to buy

Without over stretching something or giving jargons, Fisher lays down 15 vanilla points, objective points on what to look at in the company. A few of them include - to distinguish between –fortunate and able vs. fortunate because they are able, management’s attitude, effective R&D, sales organization, worthwhile profit margin, relation with employees, diversified management, longevity in product/service. Production + sales + research as golden combination.

He uses the What –When – Where- How approach to analyze companies and uses case studies to substantiate every point made in the chapter.

Chapter 4 What to buy -Applying this to your own needs

He compares growth vs. value investing, dividend yield of growth stocks over a reasonable time, value to deep value etc. points and case studies to dissect and make the paradigm easier to digest. He further goes on to explain growth investing using

a)spectrum –from Ampex to IBM

b)peculiarities – may touch original prices several times

c)prices.

Qualities of an  expert – a)honesty b)benchmark comparison c)reason of outperformance (looking at portfolio structure). He divides type to investors into 2 categories – One who wants high dividends while latter who vouch for low dividend yield and high growth.

Chapter 5 When to buy

“If the right stocks are brought and held for long enough they will certainly produce some profit.” One of the most prominent question among investors – Philips takes most of the things – P/E, EPS, cyclicals, economic forecasts and market timing.

Five forces which influences general stock prices include mass psychology, trend of interest rates, attitude of government towards enterprises, inflation and disruptions.

He believes that it is more important to identify the long term bets rather than chase to time the market. “Since a decline of 40 -50% from the peak is not at all uncommon for even the best stock in normal  business depression, instead he should invest appropriate funds as soon as the suitable buying opportunity arises.” Sure timetable is impossible to predict and the percentage of failure in the cost of doing business. As institutions take time to realize the cycle (to see the improvement in numbers) in order to look for temporary quest for earnings how stories gets lost and stocks get butchered. The chapter is filled with case studies to knit the story to buy companies where tailwinds are highly likely to hit.

Chapter 6 When to sell and  when not to

Accept your mistakes as soon as possible, review your losers and take points. Sell when the company comes out of the 15 point framework provided – like deterioration of management or growth derailing, or availability of better opportunity.

Philip gives the analogy of college students and the RoI they get after 10 years to substantiate the overpriced tag attached to some stocks. “If the job has been done when a common stock is purchased, the time to sell it is –almost never.”

Chapter 7 The Hullabaloo about Dividends

“Dividend considerations should be given the least weight by those desiring to select outstanding stocks.” Retained earnings have very less value if –there is change in underlying industry, new capex cycle comes into play, entry of new players etc. Philip terms dividend as a costly affair as it attracts taxes and has an opportunity cost embedded. He gives the farm analogy and the restaurant analogy to explain the topic further.    

Chapter 8 and 9 Five Don’ts for Investors

Both the chapters cover 10 straight objective points clubbed with case studies and concepts. He explains diversification using categories and risk appetite. Classifying companies into 3 categories namely A,B and C, a comprehensive explanation is presented by Philip in this chapter. Other concepts include time stop instead of price, EPS as evolving picture and contrarian investing. A must read chapter, filled with examples and facts.

“The great shifts in the way financial community appraises the same set of facts at different times are by no means confined to stocks as a whole.”

“The ability to see through majority opinions to find what facts are really there is a trait that can bring rich rewards in the field of common stocks.

Chapter 10, 11- How I go about finding a Growth Stock and Conclusion

Typical growth stock = 15 point criteria +Sales growth + deep Moat. Observation and general financial statements plays a key role in selecting a business.

What not to do is – Not to read brokerage reports in advance, or talk to business executives or brokers in the initial stage of stock research. Philip gives some crude points which he uses to filter out his ideas like – reading balance sheet to know the general nature of capitalization, earnings statements, profit margins, extent of research activity and non-recurring costs. Most of the parameters vary from business to business but this is a general guideline he follows. He concludes by putting in the psychological aspect is investing by quoting “In stock market, a good nervous system is even more important than a good head.”

“To make big money on investments it is unnecessary to get some answer to every investment that might be considered. What is necessary is to get a right answer to a large proportion of the very small number of times actual purchases are made.”

“One fifth of my first investigations starts from ideas gleaned from friends in industry and four fifths from culling what I believe are the most attractive selections of a small number of able management men.” 

PART II Conservative Investors Sleep Well

Conservative investment is the one most likely to conserve i.e. maintain the purchasing power at a minimum risk and use instruments to do so using your framework. Dividing the points in 4 dimensions across 6 chapters, this part is comprehensive and makes it easy to understand the  meaning, methodology and peculiarities of conservative investments.

Chapter 1 lays down and elaborate points like lowest cost producer, higher profit margins, higher R&D spending and outstanding marketing and financial ability clubbed together to drive towards growth. What affects the present and future profitability.

Why growth is important for conservative investments? “Only by growing better a company be sure of not growing worse.”

In Chapter 2, Philip brings up the people factor, the management of the company. Disciplined, humble make ablest of the management. It is important to have growth oriented mindset along with proper execution plans. “Companies that do perfect advantageous people oriented policies and techniques usually find more and more ways to benefit from them.” The quality of people controlling and policies they create.

Chapter 3 revolves around the investment characteristics of the businesses and how to judge them. Profitability, safety of investment, return on assets and return on capital employed are a few ways. The degree to which there does or does not exist within the nature of business itself, certain inherent characteristics which makes an above average profitability possible.

Chapter 4, 5 and 6 helps us to understand the concept of pricing of conservative investment. “Every significant price move of any individual common stock in relation to stocks as whole occurs because of a changed appraisal of that stock by the financial community.” The conservative investor must be aware of the nature of current financial community appraisal of any industry in which he is interested in. A stock can remain overvalued for long period but if it has growth and fuel, the weak hands would move out causing small burst but as earnings come in, financial community again moves in. It includes case studies and examples of various appraisals from 1950s and 60s and the role this appraisal plays.

PART III Developing an investment philosophy

In the last part of the book, Philip explains the importance of having an investment philosophy, and how his own evolved over time. “No investment philosophy, unless it is just a carbon copy of someone else’s approach, develops in its complete form in one day or year.” He explains how, through all these years of bear markets, bull markets, inflation, management churn, mistakes, how he evolved with the market.

How he used to scuttlebutt, his mistakes and how mistakes teach better than success, stocks he couldn’t purchase in bear markets, from being a market timer to time in the market approach, correct reasoning to specific action,  the three year rule (to buy and hold for at least a view of three years as appraisal from financial community may take longer time to realize the opportunity) and market efficiency. He concludes by saying - with hard work, skill and self discipline you can get uncommon profits from common stocks.

One of the most popular book among fund managers and investors, it gets all the ingredients at one place. Case study and data to justify every point he give, his investment mistakes and inspiration to find what works. Go get a copy, read and re read.