Book Review: Common Stocks and Uncommon Profits

Common Stocks and Uncommon Profits (1960) by Philip A. Fisher

In this concise and compelling book, the author outlines an approach that has come to be known as growth investing. He seeks companies that have very strong growth potential and may produce gains of several hundred percent in a very short time. However, unlike "get-rich-quick" schemes, his approach is based on a comprehensive analysis of a company and a thorough understanding of everything about its business, prospects, and so forth. He presents 15 sensible points to look for in a company, such as a product or service with great growth potential; management effectiveness and integrity; strong research and development; large and improving profit margins; outstanding labor, personnel, and executive relations; good cost and accounting controls; and a long-range outlook. He argues that much of the useful information concerning these points can be obtained via the "scuttlebutt" method, which involves tapping into various branches of the business grapevine to get a multifaceted, in-depth view of a company.

After discussing when to buy and to sell growth stocks, the author addresses the "hullabaloo about dividends." He basically considers the payment of dividends to be a poor use of a company's money, which I agree with in the limited context of a company with strong growth potential that is capable of re-investing all of its money into its business in ways that are highly effective in producing strong growth that will promote accelerated capital appreciation for shareholders. However, this depends on a lot of assumptions (critically, whether that strong growth can be realized), which is why it only makes sense not to pay a dividend if a company meets the 15 points he outlined for a growth company.

The author also presents 10 "don'ts" for investors that generally constitute good advice. For example, he says that investors should not: (a) buy into a promotional company that has no track record; (b) buy a stock because they like the "tone" of the annual report; (c) quibble over eighths and quarters (i.e., fail to buy or to sell a stock because the market price is a few pennies away from their target price); (d) overstress diversification (he recommends concentrated portfolios); and (e) follow the crowd. He concludes with some general advice on how to go about finding a growth stock, which at the time depended strongly on his "scuttlebutt" method. It might be easier nowadays with the wider access to information and customized stock screeners, but his emphasis on conducting a comprehensive analysis of a company -- to a greater extent than what 99% of investors likely do -- remains as valid today as it was over 50 years ago. Overall, I think his approach can be extremely successful, but it requires a tremendous amount of work (it would basically make investing a full-time job) and a keen eye for analyzing a company and its growth prospects.

Note: I read this book in May 2012.