"I am an eager reader of whatever Phil has to say, and I recommend him to you." – Warren Buffett
Phil Fisher, investing dean of the 1950s, comes well-recommended. I revisited his book, Common Stocks and Uncommon Profits, over the weekend with an eye to sharing its lessons with readers.
(You can find previous book reviews here, here, here, and here.)
First let me say that Common Stocks is the complete package. It contains everything you need to know to get started in investing and is full of useful advice on analysing companies, valuing them, and an investing mindset. Here are 3 tips from it that could prove useful for beginner and advanced investors alike:
- Include options as part of your calculations of shares on issue
Fisher was all about finding growing companies that would become many times larger over a 20 to 30 year timeframe. With that logic in mind, he asserted that the company's share price would increase many times over, and all of the options on issue would convert into stock and dilute earnings.
Fortunately most companies today also report 'diluted earnings per share' which takes these options into account, but it remains a useful technique for investors to keep in mind. Here's an example:
Baby formula business A2 Milk Company Ltd (Australia) (ASX: A2M) is a popular growth company, and according to the 2016 annual report, the company has 723,300,065 (723.3 million) shares on issue. However, there are a further 18.3 million options outstanding, as well as 1.3 million performance rights issued to executives. This is relatively insignificant compared to some other early-stage growth companies, which tend to spend their options freely.
- Anybody can make good investments
"I suspect John Q. Public's composite picture of such an (stock picking) expert would be an introverted, bookish individual with an accounting-type mind. This scholastic-like investment expert would sit all day in undisturbed isolation poring over vast quantities of balance sheets, corporate earning statements, and trade statistics. From these, his superior intellect and deep understanding of figures would glean information not available to the ordinary mortal. This type of cloistered study would yield invaluable knowledge about the location of magnificent investments.
Like so many other widespread misconceptions, this mental picture has just enough accuracy to make it highly dangerous for anyone wanting to get the greatest long-term benefit from common stocks." (Emphasis mine).
Fisher advocated a more engaging style of research, looking for 'scuttlebutt' and speaking to all kinds of employees of both the company you are interested in, and its competitors. Alternatively, he suggested that investors learn enough about investing in order to let them find a qualified advisor who would manage and grow their investments for them.
- Don't quibble over eighths and quarters
"In other words, in an attempt to save fifty dollars, this investor failed to make at least $46,500."
Written in the days where stocks sold in increments of $0.125 instead of every cent like they do today, the basic point is unchanged. If you are buying a quality business that could become many times larger over the next 10 to 20 years, it matters little if you buy it at $10, $11, or even $15.
If you've identified a company, there's nothing wrong with putting an order in at a price you think is suitable. Still, if the order is not filled, don't quibble over eighths and quarters – adjust your price as necessary. While Woolworths Limited (ASX: WOW) doesn't meet Fisher's investment criteria today, at one point it did, and choosing not to buy shares at $7 because you wanted to pay $6 would have been quite the mistake.
