Common Stocks and Extraordinary Dividends (Book Summary)
This book aims to provide the investor with all the guidance he needs to make profitable decisions. Here’s a summary of the book Common Stock and Extraordinary Dividends.
Prior to writing the book Common Stock and Extraordinary Dividends, Fisher handled large sums of money for a number of large investors. Many people, from small investors to smaller fund managers, have asked him how they can get started on the right path to thriving investing. This was the impetus that encouraged Fisher to star writing Common Stock and Extraordinary Dividends.
Preston and Steig say that when he started learning about value investing and Warren Buffett, the first books he studied were The Intelligent Investor and Security Analysis by Benjamin Graham. And although Graham’s writing provided invaluable advice on how to mitigate risk and find hidden value in company balance sheets, other great thinkers have helped clarify and simplify Buffett’s general approach. Phil Fisher was one such influential thinker. His book provides amazing guidance for investors in assessing the potential value of successful and profitable businesses. It teaches the reader how to find opportunities for growth in areas that many overlook.
This book is organized in a pleasant way and is fairly easy to read and understand for anyone with a good understanding
for financial terms. It’s not the best a book has to offer, but it’s a good book and well worth your time reading.
Summary of the book Common Stock and Extraordinary Dividends
Chapter 1: Evidence from the Past
In this chapter, Fisher says that the main reason people enter the stock market can be summed up in one thing, to make money and make profits. In general, there are two ways to accumulate wealth in the stock market. The first is to time the market and buy stocks when they are cheap and sell when they are expensive. The other way is to find and retain outstanding companies and this is the option that Fisher prefers.
In this regard, however, Fisher advises the bondholder to exercise caution. If the economy is doing well, the outstanding stock will outpace the bonds, and even if the economy turns south, this can still benefit the bondholder and it will only have a temporary effect anyway. Taking into account the complex decision of when to sell bonds and the concept of inflation, the long-term solution of staying with equities seems more profitable and prudent.
The biggest reward opportunities lie in finding companies that are outperforming the industry in terms of sales and profits. size is less important; The thing you’re looking for is growth potential and execution capacity.
Chapter 2: What the Scuttlebutt Strategy Can Do
In this short chapter (only three pages long), Fisher introduces the “Scuttlebutt Method” for the first time. This method follows the premise that the way to gather information about a company is to simply talk to those who have knowledge of the company. These may be competitors, vendors, customers, business organizations, and even former employees. Once you have this information, truly outstanding companies should stand out clearly, even to the average investor.
Chapter 3: What to Buy – The 15 Points to Look for in a Stock
In this chapter of the book Common Stocks and Extraordinary Dividends, Fisher offers fifteen points he encourages an investor to look out for before buying a stock. Although an investor can’t always expect to find stocks that meet all 15 points, and many stocks will still be profitable, even if they don’t score a high rating for some points, there is one point that an investor should always make sure of. If a company’s management does not demonstrate unquestionable integrity, a stock investor should never consider buying into this company.
Fisher points out that the premise of this book is not a list of quantitative criteria, as is the case with many other books on equity. He wants to avoid that, because he is keen that the decision to buy a particular share is not based mostly on the price, but rather on the potential gain from buying and holding this share. For this reason, a stock investor may sometimes lack quantitative criteria to measure the fifteen points.
The most practical approach for a stock investor is to use the “Scuttlebutt method”, simply because the most valuable information about a business cannot always be quantified. In fact, in many cases, a stock investor will need to find, calculate, and compare key ratios that his research has indicated are most relevant.
Some of the general guidelines in Fisher’s Fifteen Points include investing in companies that:
Prefer the long term horizon rather than the short term.
It possesses qualified management which shows unquestioned integrity.
It has better performance than its industry in terms of sales, research and production.
Chapter 4: What do you buy? Apply this to your own needs
In this chapter, Fisher argues that many investors do not devote the time and effort necessary to ensure that they make good investments. The result is misunderstandings and half-truths about investing.
What the investor should focus on is finding the stocks that have the highest return compared to the risk that needs to be taken. The public often misinterprets this to mean undervalued stocks, rather than those with the highest growth potential. High growth over just a few years quickly outweighs the advantages of an undervalued stock with no growth potential due to compound returns.
If an investor does not have the time, inclination or skill to manage his investment portfolio, he can choose to hire the services of an investment advisor to guide him. In this case, the investor should take care to hire an expert with a proven track record of making good investment choices, not an “expert” who has taken higher or lower risks in the stock market and was lucky with the timing. He must also ensure that the advisor has a good reputation for being honest and honest at all times, and has the same basic approach to stock selection.
Fisher contends that growth stocks can vary widely in size and that, provided they are chosen wisely, the largest and most conservative growth stocks will result in temporary losses for the investor, but will reward them handsomely over time. Usually, these companies also enjoy good dividend returns. Smaller growth companies can be more profitable, but they also usually present a higher risk in terms of potentially huge losses. Characteristically, these companies reinvest their entire capital into the business, and therefore do not pay dividends or pay minimum dividends.
The small investor faces a critical decision when choosing between these two types of growth stocks. Fisher personally prefers companies that pay little or no dividend payout, as opposed to higher yields somewhere down the line — but he also acknowledges that a small investor may need immediate dividend income.
Chapter 5: When do you buy?
In this chapter of the book Common Stocks and Extraordinary Dividends, Fisher looks at how to time the market. Finding the best stocks is important, but if an investor wants to improve his earnings, he must also pay close attention to the timing of stock purchases, even in already established companies. The traditional approach to timing is to base your decision on expected interest rates and business activities. Fisher has no objection to the idea behind this approach, but he believes that it is not really possible.
What Fisher suggests instead is that the investor should look out for suspended companies that are in temporary trouble. A common example is a factory that falls behind schedule instead of producing at full capacity. According to Fisher, many investors fail to see that exorbitant short-term profit-eating expenses are inevitable, even for outstanding companies that produce high-quality, profitable products.
Being mindful of the timing of the purchase, so that you can buy at a time when many of the expenses have already been paid and when the company is beginning to increase profits, has proven to be a very profitable method for many equity investors. Fisher encourages the investor to investigate thoroughly to make sure that the problems are indeed temporary, but permanent problems will not reward the investor in the stock market.
Not all good buying opportunities eliminate problems. Fisher illustrates this with the example of efficiency upgrades for capital-intensive industries such as the chemical industry. Since most of the expenses have already been incurred, upgrading equipment can greatly improve profitability. Buying shares in these companies before the increase in profitability is reflected in the financial statements is another opportunity to improve timing.
Fisher addresses the question of whether a stock investor should pay attention to the general level of the stock market, or focus solely on his or her individual stock selection. Unless a very rare event such as the Great Depression is imminent, the investor should focus on the latter for two reasons: first, it is better to invest based on your knowledge of an outstanding company rather than guessing about the general level of the stock market; And secondly, because even in the event of a sharp decline, if stock selection is made wisely, the decline in share price will usually be less severe.
Fisher acknowledges that an investor may be vulnerable to the general level of the stock market if he chooses to invest all of his money, even in outstanding companies. This is especially true if he or his advisors do not have a proven track record of making a decent return in the stock market. Instead, Fisher recommends caution and encourages the investor to develop a plan whereby the money is invested gradually over several years. This way the investor will not lose everything in the event of a sharp downturn or their advisors turn less capable.
Uncertainty about the myriad complex factors that can affect the overall share price level leads Fisher to offer a concluding recommendation on when to buy shares: “Base your investment decision on solid knowledge about the individual company. Ignore fears and hopes about guesses, or conclusions based on assumptions.”
Chapter 6: When to sell and when not to sell?
In this chapter, Fisher discusses his belief that there are only three reasons why a stock investor might sell his stock. The first is that buying stocks has become a lot less attractive than originally expected. As a stock investor, you may have made the mistake of investing in the wrong company. The sooner you correct that mistake—invest your stock in that company—the better.
The second reason for the investor to sell his stock is that that particular stock no longer meets the investment goals set in the second and third quarters; In other words, your stocks are no longer attractive. There are many reasons why this could happen, but often it is either because management starts to deteriorate, or simply because the company’s future prospects are no longer so interesting.
The third reason to sell is if the investor finds a better investment. Considering how difficult it is to find really attractive companies, and the potential capital gains tax, an investor should be absolutely certain before making any shift in their portfolio.
Fisher goes on to say that he often hears three arguments from investors who sell their stock — and he dismisses all of them. The first argument is that the stock market will soon go down. Just as it is difficult to determine when to buy based solely on the overall stock level, it should be equally difficult to base your decision to sell on the same argument.
The second frequently used argument is that an individual stock is overvalued — usually based on a higher dividend price. Fisher does not accept this argument, pointing out that superior works should be valued at a higher multiplier given the expected high growth. Rapid growth would make valuation of current earnings less relevant.
Finally, Fisher disagrees with the argument that stocks should be sold based solely on a significant price appreciation. The stock should be based on its current value, not whether or not the current price is significantly higher than the initial investment.
Chapter 7: Dividends
In this chapter, Fisher begins by arguing that higher dividend payments are not always preferential, as many people think. At the end of the day, the important factor is where the capital can be deployed in order to provide maximum shareholder value. Profits retained can be used for new plant construction, major long-term cost saving initiatives, or product development. Whether or not maximum shareholder value will be achieved through dividends or through management’s retained earnings is a matter to be examined from time to time.
The decision on a dividend is complicated by the investor’s individual circumstances. He may have a personal need for capital, living expenses, or additional investment in other assets. When it comes to optimizing every dollar’s investment, Fisher says it’s not easy to find truly outstanding companies.
Dividends received that are invested in companies other than the existing company chosen by the investor carry the risk of a lower return – and if the investor wishes to reinvest in the existing company, he will have less money to do so, because he will not have been taxed when he received the dividend in the start.
Fisher further argues that the investor should take into account the regularity and dependability of dividends. Well-run companies have formal dividend policies, and the investor should scrutinize them. One suggestion is to look at the payout ratio (a measure of how much net income is paid out in dividends); However, this would leave the investor vulnerable to fluctuations in the company’s new income.
Instead, the stock investor should pay attention to the dividend rate (the absolute value of the dividend). He should prefer fixed dividends which are paid regularly. The company’s management should only reduce payments in the event of a crisis, and increase the rate only if it can be maintained and not sacrifice a profitable growth option.
Chapter -8: Five things an investor should not do
In this chapter of the book Common Stocks and Extraordinary Dividends, Fisher warns the investor about what not to do, in five powerful points. The first of which is that an investor should not buy a promotional company. A promotional company is a new company with little or no sales. The right company to invest in is one that has a few years to prove itself, as it will have more data available – allowing you, as an investor, to do a solid analysis of the company.
An investor should also not ignore stocks that are traded “over the counter”. This means that if he finds the right stock, he should not be discouraged by the fact that it is not publicly listed. Finding an ethical broker will ensure the desired liquidity and marketability of unlisted shares. An investor should also not buy stocks based on the positive tone of the annual report. He should bear in mind that the annual report is geared towards creating a good image in the eyes of the shareholder, and that a positive tone does not guarantee that management is competent and can implement an ambitious strategy.
Investors make another mistake that Fisher draws special attention to. He cites the example of a prominent public company that is trading at a high price-to-earnings ratio — typically a multiple of the Dow Jones average. If that company has a positive view of the future – say, doubling profits in five years – many investors make the mistake of looking at the current valuation as overvalued. Common stock investors should recognize that the outstanding company is likely to be valued at a high price-to-earnings ratio now as well as in the future.
What an investor should also not do is argue about dips. In other words, when he finds the right pick for the stock and it’s reasonably priced, he should go ahead and buy it at the current price, not wait and hope the stock will go down. This way, the investor avoids the costly downside of not having the stock fall again – which is likely to happen to really outstanding companies.
Chapter -9: Five Other Things Investors Shouldn’t Do
In this chapter of the book Common Stocks and Extraordinary Dividends, Fisher identifies five other things a common stock investor should never do. The first thing is that it should not be over the top with diversification. Often, a stock investor will buy too many different shares rather than too few, motivated by the fear of losing his capital. What usually happens when you, as a stock investor, put your eggs in too many baskets is that you end up investing in companies you have very little knowledge about. This is more dangerous than insufficient diversification to balance your returns.
Fisher gives general guidelines for achieving the principle of diversification, which basically states that the larger and more stable a company is, the less stock you need to hold in order to diversify.
As an investor, you should not be afraid to buy in a war scare. In these cases, the share price falls and inflation increases. Both are good arguments for buying stocks. Another important thing to avoid, as an investor, is focusing on irrelevant financial information. The two most common examples are looking at stock prices and earnings per share for previous years, and assuming a similar development. As an investor, you are buying the company’s future cash flow, not the past, so this type of financial information should only be considered a guide, and should never be a deciding factor when considering a stock purchase. It would be useful, for example, to evaluate data on a stock’s cyclical sensitivity instead.
Also, remember to consider time and price when buying a real growth stock. A typical example of this is when there is a real prominent company with reliable growth prospects, but it is trading at a higher price than the current value. Most investors hope that the value of the stock will increase, but Fisher also suggests looking at whether the stock will trade as low as hoped. It may be best to think about the timing of buying the stock, as the majority of the gains from the stock are achieved by holding it when growth occurs.
Finally, Fisher advises the investor not to follow the crowd and the prevailing trends when it comes to determining the value of the stock market. This is a very important concept, but a difficult one to quantify, as it is a completely normal human behavior. Sometimes, the financial community decides to take an overly positive or negative view of a particular stock, even though the facts have not changed.
Looking back in history, these cycles happen to the general stock market, individual industries, as well as individual stocks. The challenge for the investor is distinguishing between current fundamental trends that will persist because something vital changes, and the fads of the moment. It is not easy to acquire the skill required to achieve this distinction.
Chapter 10: How do I start looking for a growth stock?
In this chapter, Fisher goes into more detail about how he selects the best growth stocks in practice. He begins this discussion by addressing the inevitable question of how much time and effort is required. According to Fisher, there is no other choice, when it comes to finding the best investments.
The first step is to sift through the huge number of potential companies to invest in by talking to qualified investors with a proven track record of success. The advantage of doing this is that through their day to day work, these experts already have a valid opinion on the fifteen points that must be met before buying a stock. In these discussions, Fisher likes to investigate whether the company is already operating or is being steered in the direction of unusually high sales, and whether it is difficult to enter the market in which the company operates and outpace competitors. Such discussions may take up to a few hours.
The second step comes into effect once a company has been found and is a potential investment opportunity. The investor must look at the financial statements himself, especially when it comes to analyzing sales in the income statements, and debts in the balance sheet. Then, the “Scuttlebutt Method” should be applied and as many people associated with the company as possible should be contacted. Doing this provides another insight into the achievement of the Fifteen Points.
After collecting at least 50% of the required data, the final step is to contact the administration and visit the company. Fisher concluded that an investor should not view extensive research as an unreasonable amount of work and effort. He asks, “What other line of business can you put $10,000 a year into, and after 10 years increase your assets to $40,000, to $150,000 without any additional work?”
Chapter Eleven: Summary of the Book Common Stocks and Extraordinary Dividends
In this very short chapter of just over one page, Fisher summarizes the book Common Stocks and Extraordinary Dividends. The goal was to emphasize the basic principles of investing in common stocks, including what to buy, when to buy, and when to sell. These principles have remained unchanged over time, and the same can be said of stock investing in general. In investing in stocks, a good nervous system is more important than a sound mind.
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