Common Stocks and Uncommon Profits (Philip Fisher) 1 comments

Philip Fisher's book is one of the classic investment texts in all aspects. It is a venerable text written more than forty years ago, and it can be said to pioneer an investment philosophy that was in vogue during the bull years of the 1980s till 2000; today, this style of what is known as growth investing is adopted by many institutions, and forms a cornerstone of Warren's Buffett's investment philosophy, together with the value investment beliefs of Benjamin Graham.

The book is divided into three parts, but the first two essentially describe this philosophy, while the last part relates his personal experiences on the market which shaped his philosophy. It is the first two parts which are worth reading to get a thorough understanding of growth investing.

Philip Fisher believed that bargain stocks (meaning undervalued stocks according to Benjamin Graham) often languished for long periods and the investor who held these ran the risk of holding on to dead dogs whose fundamentals would continue to get worse. In other words, he felt low valuations were there for a reason; a precursor to the Efficient Market Hypothesis. On the other hand, companies which were superior in research and development (the reader will notice that Philip Fisher was very interested in technology and its ability to enhance and protect a company's niche), marketing and financial control and possessing superlative management proved to be excellent businesses with consistent earnings growth; their prices therefore rose to higher prices as they gain recognition by the investment community. This led him to conclude that the investor should well see these stocks as "conservative" investments and look for such stocks to put their money in.

The word scuttlebutt was first coined in this book to describe the legwork one should do to gain insight into a company prior to buying its stock. Philip Fisher described several: speaking to management, to industry insiders, to scientists. (An interesting omission was talking to brokers.)

One important observation that I made after reading the book was how the focus was placed on watching the business fundamentals, rather than the market price-volume trends. In fact, even in his chapters on timing when to buy and when to sell, Philip Fisher talked about watching the R&D progress and marketing sales of the firms and tracking any deterioration in business fundamentals as a means to make such decisions; never once did he talk about market price momentum, volume surges and all that chartist stuff. Like Benjamin Graham, he was a fundamentals guys, though both men obviously did not share similar investment philosophies. (However, my view is that the small investor won't be able to enjoy the same kind of access that the author had to eminent scientists or company management; hence it is my belief that sometimes price-volume data do offer some kind of clues to any deterioration in company fundamentals that are not yet made public.)

The thing about reading investment books is that no matter whether one agrees with the author's main views, there are always pieces of wisdom that one can take away from each book. This being an investment classic, I am sure the reader will find many insights worth their weight in gold. For example, I found one of his comments particularly illuminating, that one often should not set "target prices" when timing the stock purchase, but could consider setting "target dates of purchase" eg. periods when results of R&D are expected to be announced (hopefully successful). In short, this is buying prior to a probable stock catalyst. Another example, in my view, would be buying into an illiquid undervalued stock just before the release of its results, and not earlier (because no catalyst).