Author: Philip Fisher

Part One:Common Stocks and Uncommon Profits

The fifteen points

1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years.
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited
3. How effective are the company's research and development efforts in relation to its size?
4. Does the company have an above-average sales organization?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personal relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company's cost analysis and accounting controls
11. Are there other aspect of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition.
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future will the growth of the company requires sufficient equity financing so that the larger number of share then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth.
14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur
15. Does the company have a management of unquestionable integrity?

Buying Point

• People should care most about the Earning Power of the company and what the mangers have done to improve Earning Power.
• All buying points do not arise out of corporate troubles. With patience and endurance, the investment will make profits in the long term, notwithstanding some decline up to 40-50 percent.
• Recommend buying point is just during the time which new factory is about to function. (Which means the shareholders' equity in balance sheet is increasing)
• Investment is a dynamic process, the fluctuation of market can be cancelled by stagger the timing of further buying.
• Five powerful forces influence the market: 1. Business cycle; 2. Interest rate; 3. Government attitude; 4. Inflation; 5. New inventions and techniques.

When to Sell

If the job has been correctly done when a common stock is purchased, the time to sell it is - almost never. as long as job has been done correctly.

• Ego is Evil, the cost of self-indulgence and counter-error-recognizing become truly tremendous.
• Sales should always be made because of changes resulting from no longer qualifies in regard to the 15 Points.
• The selling of stock should not be influenced by fear of ordinary bear market
• It is hard to define over-price, to measure the Earning Power is something about precision rather than evaluation.
• Stock which is already strong enough would be more stronger as long as the basic conditions remain improving.

The Hullabaloo about Dividends

We are buying stocks because they are outstanding (ability to handle opportunities) and not just because they are cheap.(ROCE is a good indicator to show how management act)
Actually dividend considerations should be given the last , not the most, weight by those desiring to select outstanding stocks.

• The most important thing is how to exploit all the attractive opportunities available, whether it's wise to return dividend or plough back into the growth. (The richer, the smarter)
• Management which sacrifices the worthwhile opportunities for reinvesting increased earnings in the business, is like the manager of a farm who rushes his magnificent livestock to market the minute he can sell them rather than raising them to the point where he can get the maximum price above his costs. ( cash is a valuable asset)
• Some company which have no prospect of anything but have done well for their owners do exist.

Five Don'ts for Investors

1. Don't buy into promotional companies
   Promotional companies need time to adjust to the circumstance. Investors can just look at blueprint and guess what the problems may be
2. Don't ignore a good stock just because it is traded "over the counter"
   Really good stock should not worry about the marketability, plus the "stock salesman" is like a censorship to classify sub-class stock out.
   Maybe the theory about the primary market. (一级市场）
3. Don't buy a stock just because you like the "tone" of its annual report
   Is much like buying a product because of an appealing advertisement on a billboard.
   What should really cares is real problems and difficulties of the business.
4. Don't assume that the high price at which a stock may be selling in relation to earning is necessarily an indication that further growth in those earnings has largely been already discounted in the price.
   PE is an indication which shows the future growth of the company, company which mains 15-points can be sold at high price even price is above the average. (Slightly doubted, market capacity and ability of diversifying is restriction to move on)
   Stocks of this type will frequently be found to be discounting the future much less than many investors
5. Don't quibble over eights and quarters.

Five More Don'ts for Investors

1. Don't overstress diversification
   Diversification is a protection with some poisonous impact, Investor should check whether over-protect is imposed.
   Imperfection exist everywhere, take proportion-adjust actions to handle.
   Plus: market is hard to grasp, some logic do not run smoothly.
   Minimum diversification fall into 3 categories:

• Fantastic Stock
  Strategy: Mainly Focus 20%
• Midway between the young growth companies with their high degree of risk and the institutional type of investment
  Strategy: Invest 10%
  -Small company with staggering possibilities of gain for the success
  Strategy: Pay close attention 0% - 5%
  A basket of C-type stocks is needed to evaluate the possibility of transfer from B-type to C-type.
  Like drive a car, drive above the limit need extra alertness and vigilance. Forget this, he may not only fail to arrive at his destination, but also he may never get there at all.
  A little bit of a great many can never be more than a poor substitute for a few new outstanding

2. Don't be afraid of buying on a war scare
   Some big events like war is the prediction of inflation, after inflation the asset price will go up.
   the downward of price in short time is the good chance to buy stocks when inflation is very sure.
   The defect of wartime event is the resources is used to narrow-margin product rather than wide-margin product. If research work channelled to normal product, profit will be far greater.
3. Don't forget you Gilbert and Sullivan
   The judge to buy or sell based on past statistic is rather illogical and financially dangerous.
   It is dangerous because it puts attention from what does matter, and diverts attention from what does matter.
   what does matter is whether enough improvement has taken place or is likely to take place in the future to justify importantly higher prices than those now prevailing.
   The faith is much more important than anything else
   It is very true that the report full of past data could never be wrong
   To give emphasis to this kind of past earning record, rather than to the background
4. Don't fail to consider time as well as price in buying a true growth stock
   For There is always the chance that these new developments might not turn out to be as good as we think. There is also the possibility that this stock might sink back to what we consider its real value very low.
   To buy the shares not at a certain price, but at a certain date.
   Be Cautious! Not Be Hurry!!
5. Don't follow the crowd
   The same thing has different impact on different people, this is a change which is purely psychological. (people has different views upon the same thing)
   there is also fashion and fads in stock market just as there are in women's clothes.
   sometimes the whole financial community was indulging in a mass delusion. Fear from nonsense, like seaman worried about falling off the ends of earth.
   one may reap himself an extra harvest by not following the crowd, should be extra careful of the financial community. avoid darling stock

How I go about finding a growth stock

if there were some easy, quick way of selecting bonanza stocks, I strongly doubt that such a way exist.
if you have done enough work to have adequate background for your decisions, you will have already spent so much time on each situation that you will have made this vital first decision on a snap basis anyway.
the source of target stock come from the business executive-scientist and small group of able man good at selecting common stocks for growth. but just rely on able man.
brokerage bulletin is not a fertile source, only repeat what is already common knowledge in the financial community.
Three steps:

• glance over balance sheet to determine the general nature of the capitalization and financial position
• breakdown of total sales by product lines, competition, degree of officer
• all earning statement figures throwing light on depreciation,profit margin, research activities, abnormal or non-recurring costs.
  nothing is worth doing unless it is worth doing right. The penalty for poor judgement is so great that it is hard to see why anyone would want to select a growth stock on the basis of superficial knowledge.(don't be speculative)
  Select stocks are great effort combined with ability and enriched by both judgement and vision.

Summary and Conclusion

Economical Pushing Power

• modern corporate management
• economic harnessing of scientific research and developmental engineer
  That knowing the rules and understanding these common mistakes will do nothing to help those who do not have some degree of patience and self-discipline.
  a good nervous system is even more important than a good head.

Part Two:Conservative Investors Sleep Well

Introduction

Definition:

• A conservative investment is one most likely to conserve purchasing power at a minimum of risk
• Following the procedural course of action needed properly to determine whether specific investment vehicle are conservative investment.

Four parts:

• Anatomy of a conservative stock investment
• Mistakes made by financial community
• Course of actions
• Doubts about common stocks investment
  Bear market has created a magnificent opportunity for those with the ability and self-discipline to think for themselves and to act independently of the popular emotions of the moment.

The First Dimension of a Conservative investment

Superiority in Production, Marketing, Research, and Financial Skills

• Low cost Production
  Low-cost increase the possibility of surviving in competition, greater profit margin is bonus plus (but if dairy product Yili is the fixed profit margin)
  Great profit margin is guarantee to future asset security(stock being diluted or increase the debt burden)
  Also decrease its speculative appeal.
• Strong Marketing Organization
  Marketing pilot the company to different direction, but whether the transformation be successful depends on the action power.
  It is vital to make the potential customer aware of the advantage of a product or service, not the company itself.
• Outstanding Research and Technical Effort
  Technological efforts are now channeled in two directions: to produce new and better product and to perform services in a better way.
  The research requires the efficient liaison between research and both marketing and production
• Financial Skill
  Company knowing accurately how much they make on each product, they can make their greatest efforts where these will produce maximum gains, can create an early-warning system whereby unfavorable influences that threaten the profit plan can be quickly detected.

Summarize:The company that qualifies well in this first dimension of a conservative investment is a very low-cost producer or operator in its field, has outstanding marketing and financial ability and a demonstrated above-average skill on the complex managerial problem of attaining worthwhile results from its research or technological organization， only by growing better can a company be sure of not growing worse.

The Second Dimension The People Factor

Indication of the heart of the second dimension: a corporate chief executive dedicated to long-range growth who has surrounded himself with and delegated considerable authority to an extremely competent team in charge of various divisions and functions of the company.
Attention should be paid to whether those at this level are doing the same thing for those one level below them.
Rebuilding the company can be so long and risky process.
The rapid rate of growth anticipated in the years ahead would inevitably require expansion in the upper layers of the management.
Personnel management can maintain competitive superiority without running the high risk of friction and failure.

1. The company must recognize that the world in which it is operating is changing at an ever-increasing rate
   No matter how comfortable it may seem to do so, ways of doing things cannot be maintained just because they worked well in the past and are hallowed by tradition.
   Top management, plant management, highly skilled engineer are behind success company.
2. There must always be a conscious and continuous effort, based on effort , based on fact, not propaganda, to have employees at every level, from the most newly hired blue-collar or white-collar worker to the highest level of management, feel that their company is a good place to work
   People-effectiveness index (sales/payroll) is useful to evaluate the human resources management level.
3. Management must be willing to submit itself to the disciplines required for sound growth
   The true investment objective of growth is not just to make gains but to avoid loss.
   True growth company focus on earning sufficient current profits to finance the costs of expanding the business.
   For the conservative investor, the test of all such actions is whether the management is truely building up the long-range profits of the business rather than just seeming to.

The Third Dimension Investment characteristic of some business

These characteristic is not only as a source of further gain but as a protection for what he already has.

• Return on assets
• Profit margin
  High-profit margin can not last long except by monopoly or much more efficient operation
• Economies of scale
  No. 1 is easy to keep superior because of economies of scale
• Selling Network
  Summarize: The ultimate question: what can the particular company do that others would not be able to do about as well

The Fourth Dimension price of a conservative investment

The success of big profit is just refusal to sell certain unusual high-quality stocks simply because each has had such a sharp fast rise that its price-earning ratio suddenly looks high in relation to that to which the investment community had became accustomed.
Every significant price move of any individual common stock in relation to stocks as a whole occurs because of a changed appraisal of that stock by the financial community.
In the other word, any individual stock does not rise or fall at any particular moment in time because of what is actually happening or will happen to that company.
Time is the key factor distinguish speculation from investment.
It should be more productive for us to spend our time examining further the characteristic of these financial-community appraisal.

More about the Fourth Dimension

The evaluation of a company go into 3 parts:

• the current financial-community appraisal of the attractive of common stocks as a whole
• the industry of which the particular company is a part
• company itself
  All industry is under the law that the different type company come to the same because of fierce competition.
  what often shift in the financial community is emphasis , not the fact. it is wise to check whether the fact is changed.
  the conservative investor must be aware of the nature of the current-community appraisal of any industry in which he is interested. he should constantly be probing to see whether the appraisal is significantly more or less favorable than the fundamentals warrant

Still more about the fourth dimension

The mathematics ways is not enough to foresee the future growth.
It make sense that sometimes low P.E. involves some risks, but it should never be forgotten that actual variations in P.E. will not result from what actually happen but from what the financial community currently believes will happen.
It is safe to be pessimistic in investment. In the downward markets, a change for the worse in the financial community's image of a company gets accepted far more quickly than a change for the better.
Don't let price fix investor's mind, Giving in to the urge that selling stocks at high price can be very costly.
Depression period is relatively short but more severe, keep the buying power at high level.
Higher interest rates tend to lower the level of all stocks and lower the rates to raise that level.
The price of any particular stock at any particular moment is determined by the current financial-community appraisal of the particular company, of the industry it is in, and to some degree of the general level of stock prices.

Part Three Developing an Investment Philosophy

Origin of a Philosophy

The good company's characteristic consists (Like Life):

• The ability to implement long-range policy with superior day-to-day performance
• When significant mistake occurs, these mistakes are recognized clearly and remedial action is taken.
  Different industry has different invest philosophy, can not use unified method.
  It's superficial that just to look up the data on a particular company in statistic data. Reading the printed financial records about a company is never enough to justify an investment. One of the major steps in prudent investment must be find out about a company'a affairs from those who have some direct familiarity with them.
  The successful investman often go through the edge of bankruptcy.
  Low P.E. is a warning indicator of a degree of weakness.
  all the correct reasoning about an investment policy or about the desirability or purchase or sale of any particular stock did not have the least bit of value until it was translated into action through the completion of specific transaction
  From disaster, opportunity Spring.

Learning form the experience

Highly manipulation is a question art.

• Fundation: Positive aspect: Advantage of scale, Marketing position, Locking up market position, creative engineering and research, quality of people involved, Long-range plan.
• Zigging and Zagging: Training oneself not to go with the crowd but to be able to zig when the crowd zags is one of the most important fundamentals of investment success.
• Contrary but Correct:When you do go contrary to the general trend of investment thinking, you must be very, very sure that you are right
• Patience & Performance: 3-year rule as long as you confirm you are right.
• Exceptions: In majority of such cases, further insights about the company opened up as i continued to investigate additional aspects of the situation, and these insights caused me to change my views about it.
• Market timing: They took a great deal of time and effort that could well have been devoted to other things, yet the total rewards in dollars in relation to the sums at risk were insignificant in comparison to the profits i have made by buying for long-range gains and held over a considerable period of years.
• Reaching for price, foregoing opportunity: Don't be bothered by cents, just reach the price as long as being right.

The Philosophy Matures

• Slow is good, Fast is dangerous
• If you can't do a thing better than others are doing it , Don't do it at all
• Credit level is a indicator of economy restoration.
• You must often examine stocks , and with scientific money allocation.
• Mistake often made by pay much attention in the promise.
• Do few things well, concentration.
• Stay in anticipation of possible market downturns, don't play with possibility.
• In-and-out is waste of money.
• Dividend shadows.

Is market Efficient

History is always the same. The more things change, the more they remain the same.
Forget the quotations, just focus on stocks
Conclusion:

1. Inherent qualities making it difficult for newcomers to share in that growth
2. Focus on company that out of favor
3. Hold the stocks unless a. fundamentals changed, b. no longer growing
4. de-emphasize the importance of dividend.
5. Mistakes is inevitable. a profit should never be taken just for the satisfaction of taking it
6. 10-12 companies for diversification is proper.
7. Never accept blindly whatever may be the dominant opinion in the financial community. Don't be contrary for the sake of being contrary
8. Success greatly depend on a combination of hard work, intelligence, and honesty.
   I believe all of us can "grow" our capability in each of these area if we discipline ourselves and make the effort. sustained success requires skill and consistent application of sound principles. within the framework of my eight guidelines, i believe that the future will largely belong to those who, through self-discipline, make the effort to achieve it.