Common Stocks and Uncommon Profits by Philip A. Fisher (1957)
Hindsight must be the most useless and distracting tool in the investor’s armoury, but it does serve one purpose–it enables you to immediately identify and read the seminal works on the subject, rather than wasting your untethered-to-the-desk hours on drivel. If you do happen to peruse a best-of list, then it won’t take long to encounter a recommendation for Fisher’s 1957 work Common Stocks and Uncommon Profits, and so I decided to pick myself up a copy and see what I could learn from it.
My edition–2003–opens with an interesting description of the man by his son, Ken, now a Forbes (and occasional FT) writer, as well as a successful investment manager in his own right. Philip emerges as a cool, solitary man who listens to very few people and does his own thinking; precisely the qualities you would want in either an assassin or an investment advisor. In a fascinating and, at times, quite moving introduction, Ken talks frankly about his father’s aging but, for me, one particular anecdote stands out. It concerns a dinner contest at an investment conference, which he found himself attending with his father.
The object of the contest was to predict the price change of the Dow Jones Industrials Average for the following day. While obviously the contest was little more than a bagatelle, Phil Fisher’s attitude to it strikes me as a clear example of what Howard Marks (the investor, not Mr. Nice) means by first and second-level thinking. Having refused even a token attempt to engage in the charade of news flow analysis and accompanying futile effort to prophesise the market reaction, Fisher boldly predicted a rise of over 3%. He told his son that, if he guessed a conventional number (up a fraction) and happened to win, then people would correctly think that he had just been lucky. If, on the other hand, he won with a bold outlier guess, then people would think that he knew something. To me, this is second-level thinking. He did win, of course, and the prize was a colour television (another minor lesson here for investors in technology).
The book itself contains two huge ideas: scuttlebutt and fifteen points to look for in a stock:
Scuttlebutt
Fisher uses this peculiar-sounding term to refer to the informal gathering of information–for example, chatter from a target company’s competitors, employees, suppliers, customers and so on. This sounds dubious to me because I would have thought it very unlikely that you would be able to learn anything worthwhile, and anything that can be legally disclosed for that matter, in this way. Nowadays, there is so much information freely available on the Web that trying to pan the gold from the silt is already a problem. Throw in a few glasses of wine and some conspiratorial conversations with frustrated employees or resentful suppliers and you will–at best–end up with a dangerous mixture of facts and opinion, not to mention a sizable bill.
Of course you might also end up with misinformation as, surely, there must be a significant risk that your source will tell you something simply to suit their own nefarious agenda, rather than to aid your own more noble purpose? No, for me, the scope for hanging around City wine bars hobnobbing with Chairmen and CEOs is sadly limited and talking to my fellow underlings would be inadvisable.
Fisher does acknowledge the impracticality of scuttlebutt and suggests that you should still be aware of what is needed so that you can hire a professional advisor to do the work for you. Realistically, this means investing in Unit Trusts, which would contravene my “minimise fees” rule, so I am benching scuttlebutt.
The fifteen points
The fifteen points provides a qualitative framework that helps you to identify well-run companies with healthy future prospects. I found these points to be wonderfully thought provoking. My book had to be repeatedly tabled while I thought about what I had read, applied it to my own portfolio and my varied purchasing rationales, and then condemned myself for a wide range of errors. For example, holding shares in four different tobacco companies provides no extra diversification than I could obtain from holding just one, as each is subject to the same sector risks. Additionally, holding four separate shares makes the process of monitoring my portfolio more arduous than it needs to be, and probably also ensures that I do a worse job of it than I would do if I had to monitor just one. I could say something similar for my pharmaceutical companies.
Unfortunately I could also say, regarding those pharmaceuticals, that Phil Fisher would probably have silently marked me down for purchasing AstraZeneca, given both its steadily shrinking earnings (Fisher was, in no uncertain terms, a growth man) and remarkably ineffective R&D. Nevertheless, this is hindsight and having already opined about how distracting it can be, I will avoid kicking myself too much for past mistakes and instead try to avoid them in future.
This book was written in 1957, something that can cause parts of the text to jar–for example, the continual references to companies being run by “good men“. It is always men, everywhere, especially giving advice. One issue that seems to have been as hot a potato (hullabaloo is Fisher’s term) in 1957 as it is in 2014 is dividends–namely, how much a company should pay out. I won’t go into this here, because it is a huge issue, but I will give one quote which I found amusing:
“Some executives get a sense of confidence and security from steadily piling up unneeded liquid reserves. They don’t seem to realize that they are buttressing their own feelings of security by not turning over to the stockholder wealth which he should be entitled to use in his own way and as he sees fit. Today there are tax laws which tend to curb this evil so that while it still occurs, it is no longer the factor which it once was.” Perhaps it might be time to update those tax laws?
Oh, and having lambasted myself earlier, I will provide one more quote, which did give me some encouragement:
“If the job has been correctly done when a common stock is purchased, the time to sell it is–almost never.”
I suspect that this book will be taken down from the shelf many times in the future.