Key Takeaways from Common Stocks & Uncommon Profits
Hey everyone, hope you had a wonderful Thanksgiving. As you may have noticed I took a few weeks off from posting to enjoy some family time. While I wasn’t writing, I got a ton of reading done. If you’ve been following along, earlier this year my dad issued a challenge for me to start reading investment books. You can read my recap of book #1 here. Today it’s time to recap book #2 in the challenge: Common Stocks and Uncommon Profits by Philip Fisher.
While The Intelligent Investor took me a long time to get through, I was able to complete this book much more quickly. While it was originally published in 1958, the writing style felt more current.
Here are my key lessons learned:
The book centers around Fisher’s “15 Points,” which function as a checklist for 15 key aspects to look for in a common stock worthy of investment. Some of the questions asked revolve around whether the company shows potential for an increase in sales, the research and development efforts of the company, what the company is doing to innovate and increase margins, and the effectiveness of management team in place.
While Fisher indicates that a common stock doesn’t necessarily need to check off all 15 points to be a worthy investment, he advises that a good common stock will come very close to fulfilling all 15. This means that while you may research a large number of common stocks, you won’t invest in very many. The 15 points purposely help prune out the majority of companies.
This is a method for gathering information from industry contacts – people at the companies themselves, competitors, and people who know the industry well. By gathering a breadth of information from a variety of people about a specific company, a more well-rounded view can be gained, and thus it becomes more clear about whether it’s worth investing in the company in question. Invest in companies that have compelling growth prospects, which can be discovered through proper research.
Buy and Hold for the Long Term
After going through all the effort it takes to find a common stocks that is deemed worthy through the 15 points, Fisher advises to invest and hold for the long term. Through the ups and downs of the market, the highest quality growth stocks will eventually continue to grow. Don’t try to time the market or wait for quality companies to hit rock bottom prices, invest in top notch companies and enjoy the ride. Warren Buffett practices this method of investing as well, trading infrequently and holding quality companies for decades. This is arguably the biggest takeaway from the entire book.
Fisher describes that there are only two times when you should sell: if a mistake was made, or when the “peak earning position is less than what it will be in the future.” Even if a stock appears overpriced in the present, as long as the peak earning position is deemed to be in the future, it’s better to hold your current position to capture future growth and avoid tax liability. Don’t just sell because a stock goes up, and don’t buy just because a stock goes down.
Fisher talks about how diversification is important, but also indicates some caveats. It’s important to not go overboard and spread yourself too thin by investing in dozens of common stocks. This ends of keeping you from capturing the full growth potential. He also discusses the importance of only investing in the industries and companies you truly know well. Fisher says it best when he remarks, “I don’t want a lot of good investments, I want a few outstanding ones.”
Many people in the personal finance community are enamored with dividend paying growth stocks, and with good reason. However, Fisher talks about why he prefers to invest in companies that don’t pay out dividends. His argument is that companies should focus on allocating their assets towards what will be most beneficial for their long-term growth. If a company pays out a significant amount of earnings to investors it limits the cash flow they have available and potentially slows the company’s growth. Ultimately Fisher doesn’t look for companies paying out the highest amount of dividends, he looks for consistency in a company’s policy.
Overall, this book was a great read with some highly important takeaways. Finding the right common stocks to invest in takes significant time and effort, but once found it’s best to hold them for the long-term. This book helped re-affirm that passive investing is the most effective investment strategy for me. I’d rather dump money into low cost index funds than spend the necessary time and energy it takes to find the proper growth stocks.
I have already begun reading the third book in the challenge, Common Sense on Mutual Funds by John Bogle. My goal is to complete all 4 books before the end of the year. I’ll keep you all posted on my progress.