Sunday, January 10, 2010

Common Stocks And Uncommon Profits: Chapter 5

Warren Buffett has called himself "85% Graham and 15% Fisher". While the works of Graham are often cited, Fisher's book "Common Stocks and Uncommon Profits" is not. Here follows a summary of this work by Philip Fisher, known as one of the greatest investors of all time.

This chapter is titled "When To Buy" as, having established that a stock is a winner (using the criteria from Chapter 3), the investor must now decide when to buy. Fisher notes that even purchases of extraordinary companies at the market heights of 1929 would have yielded handsome returns 25 years later, however, the largest returns are only possible when some thought is put into purchasing at the right time.

While many in the industry determine when to purchase stocks by studying economic conditions and trends and deriving forecasts from this data, Fisher does not believe this actually works. Economist opinions vary wildly from year to year, and even the most convincing of arguments often turn out to be wrong. As such, Fisher advises that investors should not time their purchases based on the economic outlook.

Instead, Fisher advises that investors tailor their timing to oppose market sentiment of the individual securities under consideration. For companies on the cutting edge, it is inevitable that there will be some failures: a new product may not produce strong sales, a new plant may be more expensive than expected or behind schedule. Often, the market will produce pullbacks in the price of the security. When the problem a company is encountering will take months to overcome (as opposed to years), the market price will often drop. It is at these points that Fisher advises the investor to jump in.

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