Saturday, January 9, 2010

Common Stocks And Uncommon Profits: Chapter 4

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.

In this chapter, Fisher discusses tailoring one's investment strategy to one's individual financial situation. There should be no doubt, however, that Fisher recommends growth stocks for all types of investors. While one can make good money investing in "bargains" rather than growth stocks, the relatively small upside of 50% does not give investors the triple-digit returns he enjoys from some of his growth stock investments.

Therefore, the decision the investor has to make has to do with the type of growth stock that should be bought. In this regard, Fisher comes up with two categories of growth companies. Those that are large and continue to grow (at the time of writing, these included stocks such as IBM, Dow and DuPont), and those that are as yet undiscovered by the institutional investors. Fisher notes that the undiscovered stocks have the most potential for excellent returns (on the order of thousands of percent), but at the same time he acknowledges that any one of them could turn out to be a dud and cost the investor his entire investment. Therefore, for those that have a stronger requirement to maintain their capital base, Fisher suggests the larger companies for their safety, and the fact that their upside should continue to be strong relative to the market. For those that can take more risks, Fisher advises a small-cap portfolio of the type of growth stocks that pass the tests of Chapter 3.

Fisher also recommends that investors who do not have the time to go through the steps outlined in Chapter 3 use a money manager. However, it is still important for such investors to understand the issues involved, so that they may ask the right questions of their manager. Noting that there are many incompetent managers, Fisher discusses some important aspects in choosing a strong manager, including a good track record, a comparison of this track record to the market, and a discussion of the manager's investing philosophy.

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