Introduction

“Common Stocks and Uncommon Profits” by Philip Fisher is an influential text in the investment strategies genre, first published in 1958. Fisher’s wisdom has profoundly impacted the investment philosophies of legendary investors, including Warren Buffett. This summary distills key insights from the book, coupled with actionable steps for investors.

Point: Fisher’s foundational strategy is the “Scuttlebutt Method,” which involves gathering as much information as possible about a target company by speaking with employees, customers, competitors, and suppliers.

Actionable Step:
– Network extensively within industries of interest. Make calls to current and former employees, talk to customers, and study competitor practices to get a holistic view of the business.

Example:
– Fisher cites Gillette, a razor and blade company, as an example where understanding its competitive pricing, product quality, and market expansion plans would offer profound insights into its long-term potential. Speaking with retail representatives and consumers could uncover details about their satisfaction levels and brand loyalty.

Point: Fisher describes fifteen points to analyze potential stock investments, covering a range of business aspects from management excellence to product innovation.

Actionable Step:
– Create a checklist based on Fisher’s fifteen points to systematically evaluate each prospective investment.

Example:
– For management excellence, an investor could look into Texas Instruments. Fisher suggests evaluating the management’s long-term vision and adaptability to technological changes—an attribute particularly evident as Texas Instruments shifted towards integrated circuits in the 1960s.

Point: One of Fisher’s paramount considerations is the quality of management, emphasizing honesty, long-range vision, and personnel management.

Actionable Step:
– Investigate a management team’s track record through shareholder meetings and industry reports to gauge their integrity and capability.

Example:
– An example Fisher provides is Motorola, where strong and transparent leadership was crucial for driving the company’s innovation and maintaining its competitive edge. Investors should look for management teams with similar high ethical standards and forward-thinking approaches.

Point: Fisher stresses the value of companies with excellent products or services in rapidly growing markets, particularly where they have a competitive edge.

Actionable Step:
– Focus on industries poised for growth and identify companies with unique, high-demand offerings, such as tech start-ups with pioneering software solutions.

Example:
– Fisher illustrates this with his discussion on the company Dupont. Their diversified yet specialized chemical products provided them with a strong competitive position in various industrial markets.

Point: High-profit margins are indicative of strong business models. Fisher argues that consistently high margins represent a significant competitive advantage.

Actionable Step:
– Screen potential investments for companies with consistently high profit margins, demonstrating efficient operations and strong pricing power.

Example:
– Fisher could point to Coca-Cola as an example during the 1950s. Controlled costs and premium pricing allowed Coca-Cola to maintain impressive profit margins, an important factor for long-term profitability.

Point: Firms that invest substantially in R&D are often leaders in innovation and have better prospects for continued growth.

Actionable Step:
– Analyze R&D expenditures relative to competitors. Companies with substantial R&D spending may have better long-term growth prospects.

Example:
– Fisher highlights the importance of firms like IBM that consistently invest in research. This not only drives innovation but also ensures the company stays ahead of technological trends.

Point: An investor should assess a company’s long-term growth prospects, avoiding those with short-term outlooks or cyclical businesses.

Actionable Step:
– Examine the longevity and adaptability of a company’s products/services. Assess whether the company is investing in future growth markets.

Example:
– Fisher mentions the automotive industry changes and how companies like General Motors adapted to market demands over decades, ensuring sustained growth.

Point: Companies with sustainable competitive advantages over their peers often yield higher returns for investors.

Actionable Step:
– Evaluate how well a company can fend off competitors—consider factors like brand strength, patents, licensing, and customer loyalty.

Example:
– An example would be Procter & Gamble, which maintains a competitive edge through broad distribution channels, strong customer loyalty, and a wide range of products.

Point: A solid financial position provides resilience during tough times, allowing businesses to continue investing and growing.

Actionable Step:
– Investigate a company’s balance sheet to understand debt levels, cash reserves, and assets. Firms with lower debt ratios and higher cash reserves are typically more stable.

Example:
– Fisher might illustrate this with Hewlett-Packard during its early years, emphasizing its strong financial control and limited reliance on debt which enabled continuous innovation despite economic downturns.

Point: Companies that can adapt to changing conditions and consumer demands often succeed over the long term.

Actionable Step:
– Assess past actions taken by the company in response to industry changes. Prioritize companies with a proven history of successful pivots.

Example:
– Fisher references firms in the rapidly evolving electronics sector, such as Westinghouse, which needed to demonstrate agility in their business strategies to stay relevant.

Point: Good employee relations often translate into higher productivity and lower turnover, benefiting the business’s bottom line.

Actionable Step:
– Research company culture through employee reviews and industry reports. Firms frequently listed among “best places to work” might indicate good workplace practices.

Example:
– Fisher discusses the importance of skilled labor in technology firms, suggesting companies like Intel, which later became known for fostering innovation-friendly environments, would be sound investments.

Point: Leading market positions typically provide pricing power and economies of scale.

Actionable Step:
– Focus on industrial leaders with commanding market shares, vast distribution networks, and economies of scale affecting competitive prices.

Example:
– Fisher could refer to AT&T’s dominance in the communications industry, where their extensive infrastructure and leading market position provided substantial competitive advantages.

Point: Dividend policies reflect the company’s confidence in its financial stability and growth prospects.

Actionable Step:
– Look for companies with a history of steady or growing dividends, which often signals a healthy financial state and management’s confidence in sustained earnings.

Example:
– Fisher analyzes utilities companies like Consolidated Edison, which maintained steady dividend payments reflecting their dependable revenue streams and sound financial practices.

Philip Fisher’s “Common Stocks and Uncommon Profits” remains a cornerstone in investment literature, offering investors a comprehensive framework to identify superior stock investments. By emphasizing deep research, management quality, and long-term growth, Fisher’s principles guide investors toward making informed, strategic decisions. Whether it’s through applying the Scuttlebutt Method, analyzing profit margins, or scrutinizing management teams, adhering to these practices can significantly enhance one’s investment acumen.

Summary: To implement Fisher’s advice:
– Engage in thorough, informed research.
– Utilize a comprehensive checklist for company evaluation.
– Prioritize long-term growth, robust management, and sound financial health.
Adhering to these strategies could considerably increase the likelihood of achieving uncommon investment success.