Common Stocks and Uncommon Profits

Philip Fisher began his career as an investment analyst at a time when buying stocks was still, for much of the country, little more than a casino bet after the crash of 1929. In 1931, at the bottom of the Great Depression, he opened his own investment counseling firm, a decision plenty of people back then considered crazy.

The book he published almost thirty years later, in 1958, grew out of that practical experience, not out of an academic thesis. Fisher wanted to answer a simple question: how do you pick out, from among thousands of publicly traded companies, the handful that will multiply an investor's capital over decades?

His answer breaks with what most investing books taught up to then. Instead of a calculator formula, he proposes an almost journalistic method of investigation, based on talking to people who know the company inside and out before deciding whether it's worth becoming a part owner.

The heart of the book is a list of fifteen questions an investor should answer about a company before buying its stock. It isn't a math formula with a final score. It's an investigation roadmap that covers everything from sales growth potential to the character of management.

Among the points are things like: does the company have products or services with a market big enough to grow for many years, is the research and development team strong enough not to fall behind the competition, and is the profit margin good and sustained over time.

Other points move into more human territory: is the company's relationship with its own employees healthy, does management have enough depth to keep running well if the founder leaves tomorrow, and does leadership tell shareholders the truth even when the year was bad.

Fisher doesn't ask that the company do well on all fifteen points at once. He asks that the investor know the answers before putting money in, instead of buying just because the stock price is going up this week.

A common mistake, according to the book, is buying a stock because the company grew well last year. Fisher asks for a longer look: does this company have a product or market with the staying power to keep growing sales for five or ten years, or has it already hit the ceiling of what it can sell?

That explains the weight he gives to research and development. A company that doesn't reinvest part of its profit in creating tomorrow's product tends to live off repeating yesterday's, until a bolder competitor takes its place in the market.

The counterpoint the book itself acknowledges is that R&D is expensive, and not every research bet turns into a successful product. What Fisher values is not the size of the investment in itself, but the company's discipline in channeling that money to where it has a real chance of turning into new sales.