In this summary of Chapter 10 of Common Stocks and Uncommon Profits, we are able to drill down into some classic Phillip Fisher growth investing tips.
When it comes down to it, there’s really two things that you need to do, but first you need to understand that there is no shortcut to finding a good growth stock.
There are literally thousands of stocks and it takes time to go through them all and find one that is worthy of your hard-earned money.
So, how does Fisher actually find a company to invest in?
For Fisher specifically, he talks about how about he gathered his leads of what companies to invest in.
20% of the companies that he looked deep into came from business executive/scientific classroom leads, or in other words, industry/investment experts.
But, that 20% grouping of companies only generated 16% of his profits, so in other words, they under performed the remainder of his portfolio by 4%.
On the other hand, the remaining 80% of companies that he looked into accounted for 84% of his portfolio’s profits, so it was performing stronger than the first 20%.
That 80% grouping of companies came from many men that Fisher recommended in the business world – maybe they were very experienced or maybe brand new into the business but had a great train of thought. It likely was from people in his “inner circle” that were very close to trends that were going on in a certain industry or a certain company.
He preferred these types of people because he could usually get to some of the key points that he was interested in faster than your normal investment banker – and the answers were truer and less “political”.
In other words, Fisher is trying to say that when he would trust those that were close around him for ideas of good companies to invest in, it typically resulted in better profits for him, rather than listening to some “industry expert” about a certain company.
So, now you’ve found some companies that you want to investigate – what should you invest in?
Step 1 is to take a look at Fisher’s 15 points, which I have summarized for you here.
With that being said, he does really bottle it down to two major areas of focus since it might be hard to get 15 points in a casual conversation with someone.
- Specifically, Is the company being steered towards unusual growth in sales, and
- Is it relatively easy for competitors to displace this company? What is the barrier of entry?
So, essentially are sales continuing to increase and gain momentum and how hard is it for other competitors to enter into the market? Personally, I think that these two things are so incredibly important to evaluate, so I am perfectly aligned with Fisher on this one.
One thing that Fisher said that really stood out to me is that typically, common knowledge is not a good resource of information.
Not only will this common knowledge Intel likely have a lot of errors, but the information is just that – it’s common knowledge. Likely, it’s already built into the price of the stock and it seems that people will simply latch onto things and regurgitate the same information.
You can see this in many forms of media regarding many topics. One place, outside of investing, that sticks out to me is in sports.
You might see a team put out a statement about a certain player that was suspended and then you’ll have tens of different media sources “writing” an article that literally only has that statement. They’re just saying the same thing over and over and over…
On the other hand, a great source of original data is with research laboratories such as Stanford Research Institute or Battelle. People of these groups have great understanding of the business and things that make the business investable, but they’re typically very unwilling to share because they don’t want to violate any confidentiality or testing or regulations.
So, you need to do some due diligence on your part to really make sure that you understand the business at its core and work to develop a relationship with these people, so they trust you and will share interesting research findings.
So, now you’ve created a list of companies that you want to invest in – what next?
Well, here’s three things that you should not do:
- Do not approach anyone in management at this stage
- Do not spend hours and hours going over old annual reports and making minute studies of minor year-by-year changes in the balance sheet
- Do not ask every stockholder what they think of the stock
Instead of these three “do nots”, maybe you can do the following:
- Glance over the balance sheet to determine the general nature of the capitalization and the financial position
- If there is a SEC prospectus, you should read the all of the general items that would be beneficial to know as an investor, such as the sales, competition, margins, industry trends, major owners of common stock, depreciation, cash on hand, and really just anything that could point you down a path to be a more knowledgeable investor
- This is a huge one for Fisher and for me as
well. Take it upon yourself to talk to
as many people as you can – current shareholders, employees, users of the
products – anyone that interacts with that company in any way whatsoever. They are likely going to share with you some
unbiased information about their opinions of the company based on their
interaction with them. But what if you
don’t know anyone?
- If you don’t know anyone that can get you some good, unbiased information, you need to walk away
- This is a huge one for Fisher and for me as well. Take it upon yourself to talk to as many people as you can – current shareholders, employees, users of the products – anyone that interacts with that company in any way whatsoever. They are likely going to share with you some unbiased information about their opinions of the company based on their interaction with them. But what if you don’t know anyone?
- Approach management!
- I think that this might seem intimidating, but you should be prepared to ask questions for if and when you are able to interact with them. Your scuttlebutt conversations will likely drive the types of questions that you would like to know answers too.
- Does the management team give you a good, trustworthy feel? Or, do you somewhat feel like they’re trying to pull one over on you? Are they giving honest answers to questions or are they avoiding them? The comfort that you have with a company has to be high for investing – it’s a necessity.
- One quote that Fisher had that I loved was “He should never visit the management of any company he is considering for investment until he has first gathered together at least 50% of all the knowledge he would need to make the investment”. Essentially, Fisher is saying that you need to know the core of the business before you really take a dive deep and start interactions with the management of that company. Not only will this help you identify the types of information that you should try to uncover in that conversation, but it will help you seem more prepared to the management and they’ll be more willing to share honest answers with you.
Fisher tells that when he visits a company, there’s really about a 50% chance he’s going to invest in that company.
And it’s not because it’s just a coin flip, but it’s because he’s already done a ton of leg work on that company and is just looking for a few final answers. He says that he only visits about 1/50 companies that he looks into, so if he’s only investing in ½ companies he visits, then essentially 1/100 companies that Fisher looks into, he will invest in.
Yes, this is a huge time commitment, but if you really take the time to complete the due diligence, it will pay off for you in the end.
In my eyes, I think a lot Fisher’s points for understanding a company might be hard for the average investor, but I do think there’s ways to accomplish a lot of the things that he’s suggested, for instance:
- Look for users of the product
- Look at friends that work at that company or in the same industry
- Talk with friends or coworkers that invest to hear what their opinions are of the company or the industry
- Speak with Management
- This admittedly will be hard to do but search for any public showings that they might have such as being on CNBC, a 10K, earnings calls, anything at all that you can get your hands on.
At the end of the day, it’s really just about time and effort. If you’re willing to put in the time and effort, you’re going to be successful. If you aren’t willing, then you won’t be successful. It’s really that simple.