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Book Review by Braxton Mills: Common Stocks and Uncommon Profits

  • April 25, 2024

Braxton MillsEditor’s Note: This is the first book review we are publishing as part of our Get Paid to Read contest. Braxton Mills is a college student who is inspired by the constant learning and improvement that goes into investing. He loves studying businesses, reading books, and investing in the stock market. He has started to share his thoughts on these topics at https://investorsodyssey.substack.com/

*Review may contain spoilers of what is discussed in the book

Common Stocks and Uncommon Profits by Phillip A. Fisher is a well-hailed early investing book. He is often referred to as one of the first fundamental “growth investors,” originally publishing this book in 1957. Fisher is also credited as being one of the early influences on Buffett’s shift from balance sheet investing to quality companies (besides Charlie Munger, of course).

This is an emphasis on the qualitative intangible values a company has, rather than just a cheap stock on a price-to-book basis. The current version of this book also contains two of Fisher’s other writings, Conservative Investors Sleep Well and Developing an Investment Philosophy. While they have some great nuggets of information, the bulk of the value is in the first book.

The central tenets of Fisher’s philosophy are: a company that has significant growth prospects ahead, an honest and capable management, and a fair price based on future earnings potential and historic multiples. While these may not seem novel concepts today (they certainly were monumental in 1957 however), the book still holds valuable wisdom and numerous anecdotes to help convey his points, arguably, the two most important parts in the book are on “scuttlebutt” and his fifteen point qualitative criteria.

Scuttlebutt was a mainstay of his process, after he found a potentially promising company, he would canvas all the experts in the field that he could find. The goal of this was to build a mental picture of diverse points of view on how the company and overall industry stands. He believed this to be an essential source of information because management and their financial documents can’t always be trusted to portray the whole of the facts fairly. In today’s age of highly manicured financial documents and shareholder letters, often written by the investor relations team, this is especially applicable now. Additionally, he actually used the information he gained to help structure strong questions for management, his last step before purchasing a company. Fisher had an incredibly rigorous process of gathering information and ruling out companies, where few got past this scuttlebutt stage. This made sense considering he was a large proponent against significant diversification, he believed you should own very few companies that you know intimately.

I’d like to highlight how Fisher’s philosophy is different from many others. He puts little emphasis on the financial statements, besides a basic check of fair capitalization and profitability metrics, and doesn’t even care too much about historical earnings growth. Fisher rightfully claims that there is little to be gained from historical data, it can help show past profitability, average valuation multiples, and potential capability of management, but not much about what matters, the future potential. This is largely why he emphasizes scuttlebutt so much; to understand a company and growth dynamics you need to talk to customers, employees, and competitors, because they surely know much more than you and are an efficient source of information.

One fascinating idea that Fisher provided when talking of the fifteen points is distinguishing what type of company you’re looking at, “fortunate because they are able” or “fortunate and able”. The first type are companies that are positioned in a good industry and the management runs the company well and successfully takes advantage of opportunities. The second type are ones with particularly adept management who can successfully push the company into multiple industries and reposition when current growth lines runs out. I would say a good example of these types is TSMC versus an Amazon or Berkshire Hathaway.

Another important aspect that I feel few investors give much attention to, is the importance of a good sales team. Specifically, Fisher talks about how the various internal teams need to work together to figure out what products people actually want, and ensure the sales people know the product well so they can be great advocates for it. A fantastic product means nothing if no one knows about it. What’s important is that there are quality people in every facet of the organization, and this can be found out by talking to people in the industry. You’ll be quick to hear if a company is particularly good at sales, and even quicker to hear if theirs is all but absent.

A defining point of Fisher’s philosophy is in regard to how price plays a role, which is actually very little. He does no sort of discounted cash flow or intrinsic value calculation, as long as he thinks he’s not massively overpaying for growth, he is okay. He went so far as to say that even if a company was trading at a high P/E today, if it were to still have similar prospects and a high P/E in five years, then the price isn’t discounting future earnings at all, a fascinating take.

Unlike some investors today who believe in rebalancing their portfolio and selling stocks when they reach above “fair value”, Fisher prefers to let it be. There are many reasons for this. First and foremost, it is not only costly to sell a stock due to taxes, it is also the potential of missing out on future gains of a company you believe in. You have built up an intense understanding of a company and believe in its prospects, will you throw that all away just because it’s a little pricey right now. As long as you didn’t get in at an exorbitant price, he argues you will be okay. The risk is high to jump to a new company you found where you don’t know all the minutiae yet. He prefers to see that the stock may be ahead of itself for now and accept it. Even if it is expensive, it could keep rising, and how would you know when to buy back in, you may be waiting for “a little lower” that never happens.

All in all, Fisher provides a fascinating view into a primarily qualitative analysis of companies. He helps show you how to find fantastic companies and provides experiences of his own, the good and the bad. Although some of his ideas have been espoused and repackaged many times since then, getting it from the original source still provides unique value. The book is relatively short, and written in an understandable and straightforward manner, however, the second two are not as high of quality and have some repetitiveness. Nonetheless, even though this book is nearly 70 years old, the ideas are as applicable as ever and will surely provoke thought into your own investment process.