Common Stocks and Uncommon Profits – Book Review

When Warren Buffet was asked for his top book recommendations, his list included the following four books (in no particular order of importance):

  1. The Wealth of Nations by Adam Smith
  2. The Intelligent Investor by Benjamin Graham
  3. Security Analysis by Benjamin Graham & David Dodd
  4. Common Stocks and Uncommon Profits by Philip Fisher

Buffet has admitted that his own investing style is a mix of teachings from Ben Graham and Philip Fisher. I have already read the Intelligent Investor and Security Analysis multiple times and I am sure to read these several more times in my investing journey. However, I have never read Philip Fisher. The book was first published in the 1950s, so before even picking up this book, I had a sense that some of the observations may be dated. But I wanted to take a look anyway.

Before we get into the book itself, I wanted to first explore a little more about Philip Fisher, the person behind the book.

Who is Philip Fisher?

Fisher made his humble beginnings as a dropout of the then newly created program/school Stanford School of Business Administration in 1928, to start working as a security analyst. He started his own investment firm called Fisher and Co. in 1931 and remained at the helm till his retirement in 1999. Immediately after starting his firm, due to the advent of World War II, he was forced to take up several desk jobs at the US Army Air Force. He used this opportunity to research and refine his own investment philosophy which he later put into practice after the end of the war.

I could not find a whole lot more information about him through the interweb beyond what he mentioned in his book and also what his son, Kenneth Fisher, has mentioned in the preface. He was known to a very private person, not known to give a lot of interviews. However, after publishing this book, he rose to prominence. Per what I have gathered reading around the internet, Fisher and Co. had a very small number of selected clients who were able to secure attractive returns using Phil Fisher’s approach. Today, he is widely regarded as a pioneer of growth investing and recognized by Morningstar as one of the greatest investors of all time.

Phil Fisher was one of the early proponents of the “buy and hold” strategy. To stress this point further, one of his most successful investments was a purchase of Motorola, which he bought in 1955 and held until his death in 2004. His other investments were Texas Instruments, a stock that I currently hold in my dividend portfolio, Dow Chemicals and so on.

During the later half of his life, he began suffering from dementia and/or Alzheimer’s disease and he ended up selling all of his holdings except for Motorola. Per his son Kenneth Fisher, he would never have sold his investments had he been of sound mind or his younger self and his investment returns would have looked much much better as a result. Fisher was known as a strong supporter of companies that would invest in research and development and a master at evaluating companies in the tech sector. This was a good 50 years before the advent of Silicon Valley.

Lets get into the book itself.

Book Dedication

The book starts of with a rather interesting dedication. Let me quote it here:

This book is dedicated to all investors, large and small, who do NOT adhere to the philosophy: “I have already made up my mind, don’t confuse me with facts.”

I paused after reading that statement because there is an interesting paradox. At times, as investors (and perhaps as individuals) we can be very closed-minded and not as receptive to opposing viewpoints. Maybe it is with the understanding that having a conflicted mind can impact our investing philosophy and mess with our heads. This trait can be good but it can also be bad as it stunts our learning process. It takes a strong mind to be open to counter viewpoints and somehow let that organically grow one’s own investing mindset.

Scuttlebutt technique

One of the strategies that Fisher repeatedly uses to evaluate businesses before deciding to buy them is coined as “scuttlebutt”. What does this mean?

Fisher recommends that in addition to studying a company’s financial statements, a wise investor can learn a lot more about any given company through the following avenues:

  1. By going to five companies that are competitors and asking them intelligent questions about the strengths & weaknesses of the other four. Fisher claims that, more often than not, this approach will give the investor a surprisingly detailed and accurate picture of the overall landscape of the sector and the business itself.
  2. By questioning vendors and customers that directly interact with the company.
  3. By questioning research scientists who rely on products manufactured by this said company.
  4. By questioning former employees of the company. Although, Fisher cautions about using this input with a pinch of salt as there could be bias in opinions here.

Fisher admits that while a typical retail investor may not (or cannot) have the leverage to go on such fact-finding missions, he/she can use these as a yardstick when choosing a professional advisor that can help them with such analysis.

With the scuttlebutt technique as the baseline, Fisher recommends the following 15 principles to look for in a stock before investing in them:

  1. Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for atleast several years?
  2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
  3. How effective are the company’s research and development efforts in relation to its size?
  4. Does the company have an above average sales organization?
  5. Does the company have a worthwhile profit margin?
  6. What is the company doing to maintain or improve profit margin?
  7. Does the company have outstanding labor and personnel relations?
  8. Does the company have outstanding executive relations?
  9. Does the company have depth in its management?
  10. How good are the company’s cost analysis and accounting controls?
  11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will given the investor important clues as to how outstanding the company may be in relation to its competition?
  12. Does the company have a short-range or long-range outlook in regard to profits?
  13. In the foreseeable future will the growth of the company require sufficient equity financing so that the large number of shares then outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth?
  14. Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?
  15. Does the company have management of unquestionable integrity?

For a book that was published more than 60 years ago, I am amazed to see that so many of these principles are timeless and very much applicable even today. Fisher admits that it is unlikely that one would find a company that would meet all 15 of these principles, but he recommends to avoid companies that do not pass several of the above.

Selling Out of Positions

After going through all the research and investigation on what to buy and when to buy, an investor would naturally be curious about when to sell to gather profits. For this, Fisher states the following:

If the job has been correctly done when a common stock is purchased, the time to sell it is – almost never.

Evidently, Fisher is a supporter of the philosophy or buying and holding. He goes into several reasons why investors choose to incorrectly sell out of their positions. I particularly liked the discussion on selling out when the investor believes a stock is overvalued/overpriced:

This brings us to another line of reasoning so often used to cause well-intentioned but unsophisticated investors to miss huge future profits. This is the argument that an outstanding stock has become overpriced and therefore should be sold….Before reaching hasty conclusions, let us look a little below the surface. Just what is overpriced? What are we trying to accomplish? Any good stock will sell and should sell at a higher ratio to current earnings than a stock with a stable rather than an expanding earnings power…All of this is trying to measure something with a greater degree of preciseness than is possible. The investor cannot pinpoint just how much per share a particular company will earn two years from now…As a matter of fact, the company’s top management cannot come a great deal closer to this .. Under these circumstances, how can anyone say with even moderate precision just what is overpriced for an outstanding company with an unusually rapid growth rate?

I found this discussion particularly interesting and revealing. Valuing growth stocks, especially the ones that are early in their growth trajectories, is incredibly hard. Even top-investors like Warren Buffet, Mohnish Pabrai and the likes in various interviews have stated how they have tossed such opportunities in the “too hard” basket.

Dont’s for investors

Fisher goes into several dont’s for investors. I will cover some of the ones that I thought were interesting:

  1. Don’t buy into promotional companies.
  2. Don’t overstress diversification.
  3. Don’t be afraid of buying on a war scare.
  4. Don’t fail to consider time as well as price when buying a true growth stock.
  5. Don’t follow the crowd.

Again, several of these dont’s are just as applicable today as they were when this book first came out. I wanted to expand on the second point regarding diversification here. Fisher states the following:

The horrors of what can happen to those who “put all their eggs in one basket” are too constantly being expounded. Too few people, however, give sufficient thought to the evils of the other extreme. This is the disadvantage of having eggs in so many baskets that a lot of eggs do not end up in really attractive baskets, and it is impossible to keep watching all the baskets after all eggs get put into them.

So clearly, Fisher believed in having a concentrated portfolio rather than diversifying among several sectors/industries. I have previously written about this subject stating why I disagree with this philosophy. There is a sea difference between the business acumen that the likes of Fischer, Buffet and Munger possess in comparison to an average retail investor such as myself. Diversification is a protection against this shortcoming and if performed as a part of a specific strategy, also provides a great defense in a various economic environments. A risk-averse investor would want to safeguard his invested capital and diversification is one way to achieve this.

Other writings

Part 1 of this book covers the subject of Common Stocks and Uncommon Profits. Parts 2 and 3 cover some of Philip Fisher’s other writings dealing with subjects regarding “Conservative Investment” and details on how Fisher went about developing his investment philosophy over the course of his life. I will cover the other two parts in greater detail in a future post on this blog as they are very important topics by themselves.

Overall thoughts regarding this book

Peter Lynch, another investing legend, once stated that investing needs to be a fine mix between science and art and that an astute investor will ensure that there is a proper balance maintained between both facets. If this balance is lop-sided in either direction, it could lead to a bad decision. I get a sense that while Buffet relies on Graham’s teachings for the “science” side of his investment philosophy, he chooses to rely on Fisher’s teaching for the “art” aspect of his investments.

In comparison to Graham’s books, I found the writing style in this book was very easy to follow. In that regard, I found the book to be more amenable to a beginner investor. Although the subject is mostly focused around picking growth stocks, I could see the same principles being used for evaluating dividend growth stocks and/or value stocks as well.

Some of the techniques mentioned in the book are just as well applicable to this day and age. I use an “indirect scuttlebutt” strategy in my analysis, where I look at the interviews of the CEOs (or other members of the board/management) for companies that I am interested in. If I can see consistency in responses and clarity of thought, that is usually a good sign. But if I detect BS in the responses, that is a massive red flag. I also read through forums, talk to technicians/consumers to see what they think of the products coming from a company which I am considering to invest in.

My only critic is that the writing at times appeared to be very dry. I could see some interesting parallels with the ideas discussed in Peter Lynch’s books, but in comparison Peter Lynch has a knack of keeping the reader engaged with his humor. I would have also liked to see more examples, potentially with graphs to accompany the discussion surrounding profit margins, cost of research vs size of the company etc. But some of these are very minor critics.

Overall, this is a great book and something I will re-read in the future.

Have you read this book? What were your takeaways? Please drop a comment below.

Update – 7/28/2022

Dear Readers,

I hope you are all doing well, staying safe and healthy and making progress on your individual journeys towards financial independence. As I write this, we are in the midst of a hectic earnings season. We are seeing record high inflation numbers and this is having a telling effect on the earnings reports from several companies, many of whom have slashed their forward guidance.

I am yet to fully digest the quarterly earnings report from several of these companies as work has been very busy as well. But I do plan to do so in my free time over the next few weeks.

In order to keep myself occupied, I am reading an investment classic and I should be posting a book review for this shortly. Stay tuned for that.

One thought that was circling in my head is that THIS is a fantastic opportunity to learn as an investor as we have all kinds of trends influencing the macro economic environment: War situation in Eastern Europe, Record high inflation, Pandemic that does not seem to be going away anytime soon and also supply-chain issues a result of one or more of these earlier reasons. Let me state that everyone appears to be a “genius” in bull-market situations, but real learnings are when you get to invest in a bear market scenario.

I wish you all the very best! See you in the next post.

Monthly Income Update – June 2002

Dear Readers,

It is that time of the month again. We have yet another month in the books, so it is time for me to write a report on how the month progressed. The stock market saw yet another tough month with a nearly 6.7% drop, including a drop of nearly 9.88% during the week ranging from Jun 7th to Jun 13th. Of course, I did not even know that any of this was transpiring. Why? Simply because I was not even looking at the stock market for most of the month! Work is pretty busy. It is summer time, with my kid not having to go to school. So there is really very little time to do anything else.

So I was actually curious about how my portfolio was faring up in this turmoil. I was mentally prepared to see a LOT of red and the portfolio having gone down in value. And I did see a LOT of red and some of my outstanding buy orders got triggered which made me super happy. What this meant for that I grabbed some very high-quality companies at some very attractive values. And when I then hovered over to the dividends tab in my portfolio, my joy knew no bounds. We will get into the numbers here shortly.

Let me reiterate: THIS is one the best times to be buying as a dividend growth investor. And quite honestly, this is a fantastic environment to be living through to promote my learnings as an investor.

Lets get into the numbers then!

Dividend Income Received

Sl. No.Company / ETF (ticker)Amount
1Aflac (AFL)14.97
2Church & Dwight (CHD)2.11
3Duke (DUK)5.02
4The Home Depot (HD)13.43
5Intel (INTC)7.30
6Johnson & Johnson (JNJ)39.64
7Lockheed Martin (LMT)47.09
83M (MMM)50.45
9Microsoft (MSFT)12.42
10NextEra Energy (NEE)2.15
11Pepsi Co (PEP)11.67
12Snap-On Inc (SNA)4.26
13Southern Co (SO)11.11
14Target (TGT)2.19
15T. Rowe Price Group (TROW)72.51
16UnitedHealth Group (UNH)3.33
17Visa (V)10.01
18Whirlpool Corp. (WHR)49.21
19Waste Management (WM)0.66
20Exxon-Mobil Corp (XOM)2.70
21Schwab US Equity Dividend ETF (SCHD)36.17
22iShares Core Dividend Growth ETF (DGRO)5.50
23Realty Income (O)14.77
24Digital Realty Trust (DLR)38.55
25STAG Industrial (STAG)3.76
26JP Morgan Equity Premium Income ETF (JEPI)2.58
Total$463.56

So a total of 26 companies/ETFs contributing to a total of $463.56 in monthly dividend income. This has been yet another record-breaking month with my monthly dividend income breaching the $400 mark for the first time since its history.

Here is what the overall chart looks like since when I started this portfolio.

So if you look at the year over year comparison compared to last year, where I earned $88.20 in June 2021, this is a massive 370% YoY increase! At a time when the stock market is plunging and in bear-market territory, my portfolio is setting record numbers in terms of earned dividend income. THIS is the power of dividend growth investing and a message to the critics of this strategy. It is the stability and power of dividends that makes this strategy so much attractive to me. And all of this is about as passive as passive can get.

For context, take a look at who is my highest dividend payer for this month. It is our beloved TROW. And while the stock is getting crushed in the current market conditions, I cannot overlook the fact that this has been one of my solid investments as far as dividend income. In good times, management has done their part by rewarding its shareholders with very attractive dividend raises and special dividends. This is yet another learning for me. Remember who your winners are and do not lose faith in them by just looking at the stock price.

Buys and Sells during this month

No sells during this month. This is time to be buying, not selling!!

As far as my big purchases, I continued buying and adding to my TROW position as the stock touched new lows. I also added some more Home Depot (HD), Texas Instruments (TXN) and JPMorgan Chase (JPM). Also added some more Intel (INTC) as it dropped into the late 30s. I did read in the news about the stress tests for banks and how most of the banks passed that. And while a dividend increase from JPM was expected, the management decided against the increase. This was an interesting decision which makes me wonder about the management’s outlook about the near-future economic environment.

I took the opportunity to add into my Target (TGT) position. Other than that, I also added some small tranches to my Apple (AAPL) and Visa (V) positions. In my tax-advantaged accounts, I continued adding to my positions for SCHD, Realty Income (O) and JEPI.

Summary

So there you go! I am pretty happy with the overall performance of my portfolio and I seem to be well on track to achieve the projected annual dividend income goal. I am more convinced than ever about the viability of the dividend income growth strategy and will be sticking with this regardless of the overall market conditions.

Which sectors will dominate the next 10 years?

I am regular listener of Dividend Talk. IMHO, it is one the best podcasts out there on the subject of dividend growth investing. Both the hosts, European DGI and Engineer my Freedom are pretty active on social media and maintain blogs/youtube channels. European DGI, in particular, has been very supportive since the early days of this blog and provides a lot of inspiration. If you are looking for good investing podcast to listen to in your free-time, ride to work, early morning run/walk, I highly recommend this podcast.

In Episode #103, the hosts discussed the subject of which of the 11 sectors will dominate the next decade in terms of performance. Listening to this episode got me pondering on the subject. Quite frankly, this was a lot harder to answer than what I originally thought. So I wanted to pend down my thoughts as a blog post.

For context, the 11 sectors of the stock market, as per the Global Industry Classification Standard (GICS), as are follows:

  • Energy
  • Materials
  • Industrials
  • Utilities
  • Healthcare
  • Financials
  • Consumer Discretionary
  • Consumer Staples
  • Information Technology
  • Communication Services
  • Real Estate

I wanted to list out some of the challenges I faced when trying to think about this subject.

Which sector?

The first approach that anyone takes while answering this question is to think of companies that belong in this sector and think about the future of these companies. Surely, if we think that these companies would outperform the broader market, we have a reason to believe that the corresponding sector would also dominate the next decade. However, it is not always straightforward to classify a company into a given sector.

To illustrate my point, take Amazon (ticker: AMZN) for example. This is such a giant of a company that it is hard to classify it one sector alone. Is it purely a Consumer Discretionary business? Is it also a tech company? What about its Whole Foods business? Does that also make it it a consumer staples? Not convinced? Take Visa (ticker: V) for another example. It is easy to see this as a company that belongs in the Finance sector. However, they are classified in the “Information Technology” sector, and rightly so, because they are heavily into technology that facilitates digital payments.

The interplay between sectors

It would be hard to argue against the notion that Information Technology would be one of the top performers (if not the top performer) in the next decade. The industry is abuzz with new advancements/research in Artificial Intelligence, augmented reality, self-driving cars etc. A lot of this is going to require enormous amounts of data crunching, which ultimately means that data storage and retrieval in an organized fashion is going to be of paramount importance.

If you stick with this thought alone, you could see a potential bull case for real estate ventures that will lease out space for data centers (eg. Digital Realty Trust (ticker: DLR)). For certain applications, data availability is going to be highly critical, which would mean the load on power grid lines around the world to provide stable power at all times would be crucial. This could also bring companies from Utilities into play.

If you could look at self-driving electrical vehicles, apart from the aspect of artificial intelligence here, there would also need to advancements in battery technology. This would mean companies from the Materials sector, involved in mining Lithium (eg. Albemarle Corp. (ticker: ALB)) could be potential winners. Here again, if the world gradually moves to electrical vehicles, the load on electrical power lines to support charging stations to consumers all throughout the world would be a non-trivial business venture, which could bring Utilities into play again.

Who are the Losers?

Pondering over which sectors are going to underperform is even more harder. Lets pick one. Lets assume that we will make significant advances in the EV technology such that owning an affordable EV for an average middle-class family would become a reality. So would this be a death knell for the Energy sector? But what about all those other modes of travel that continue to rely on fossil fuels? Do we think that our advancements in technology are going to progress fast enough that we can completely avoid relying on these sources for our transportation needs?

Thanks to cryptocurrency, the Financial sector has been in the news a lot over the last couple of years. I have seen and heard several commentaries about how the banking industry is “waiting to be disrupted” and that “it is a matter of time”. Yet, somehow, none of the major central banks around the world have given that much importance to cryptocurrency, and continue to prefer fiat currency. Is that going to change in the next decade? IMHO, no. But I could be wrong.

Ok Enough…So what do I think?

You get it. This is not a straightforward question to address. But if I had to venture a guess, my top performers would be: Information Technology, Healthcare and Communication Services.

Information Technology being on the list is self-explanatory. As an engineer, I am hopeful that the major tech giants use their engineering prowess to solve some really hard technical problems that could impact future generations in a positive manner. If I were to be very honest, over the last decade, most of our collective engineering talent around the world is focusing on solving problems that are rather useless. As an example, trying to grab people’s attention through algorithms, serving them ads and curated content are not worthwhile endeavors. If we could instead focus on problems such as managing global pollution (low-cost self-driving electric cars), countering global terrorism, space exploration, preventing natural disasters etc. this is far better use of everyone’s time. I am hopeful that research and development in fields like Artificial Intelligence, augmented reality etc. are directed towards such pursuits. However, I do realize that I am being an idealist here.

We are still living in the times of a pandemic and coming to some sense of normalcy, so it would be hard to argue against Healthcare being on the top-performers list. Due to the very nature of this sector, there will be no shortage of research work in new drugs to fight various diseases. I cannot see how this field will suddenly lose relevance in the coming decade.

Communication Services as a sector is somewhat of an interesting pick. My thesis here is that Internet communication, as it stands, would need to improve manifold in order to support all the advancements in online gaming, streaming media and overall network traffic in general. I presume that the WFH/remote work dynamic is not going to go away in a hurry.

As far as the losers, this is a hard one to guess. But my picks would be: Industrials, Materials and Real Estate.

The Industrials sector is highly cyclical as-is. I think the supply chain issues we have right now will take a few years to resurrect and this is going to hurt the Industrials sector the most. With Materials, who knows how the geo-political scenario in Eastern Europe is going to evolve in the next few years. I think this will impact the Materials sector. With Real Estate booming right now, it is getting to a point where I could foresee a “reversion to the mean” like scenario playing out sometime in the next 10 years.

Again, these are just random guesses and I could be completely wrong about this. This is perhaps yet another reason why I choose to diversify among sectors and ensure that I am not overweight in one sector.

So, what are your picks?