Philip Fisher: 10 Commandments That An Investor Must Not Do

The following is taken from Philip Fisher's book Common Stocks and Uncommon Profits.

In chapter 8 & 9 of Fisher's book, he has listed out 10 commandments..hehe 10 things an investor must not do...

1. Don’t buy into promotional companies.

When a company is in a promotional stage…all an investor or anyone else can do is look at a blueprint and guess what the problems and strong points may be. There are enough spectacular opportunities among established companies that ordinary individual investors should make it a rule never to buy into a promotional enterprise. Fisher wants to see a firm with at least one year of operational profit and two to the three years of business before investing.

2. Don’t ignore a good stock just because it is traded ‘over the counter.

3. Don’t buy a stock just because you like the ‘tone’ of its annual report.

The annual report may…reflect little more than the skill of the company’s public relations department in creating an impression about the company in the public mind.

4. Don’t assume that the high price at which a stock my be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been discounted already in the price. …why shouldn't this stock sell five years from now for twice the price-earnings ratio of these more ordinary stocks just as it is doing now and has done for many years past?

5. Don’t quibble over eights and quarters.

If the stock seems the right one and the price seems reasonably attractive at current levels, buy ‘at the market.

6. Don’t be afraid of buying on a war scare.

At the conclusion of all actual fighting—regardless of whether it was World War I, World War II, or Korea—most stocks were selling at levels vastly higher than prevailed before there was any thought of war at all. Furthermore, at least ten times in the last twenty-two years, news has come of other international crises which gave threat of major war. In every instance, stocks dipped sharply on the fear of war and rebounded sharply as the war scare subsided. War is always bearish on money. To sell a stock at the threatened or actual outbreak of hostilities so as to get into cash is extreme financial lunacy. Actually just the opposite should be done. If an investor has about decided to buy a particular common stock and the arrival of a full-blown war scare starts knocking down the price, he should ignore the scare psychology of the moment and definitely begin buying.

7. Don’t overstress diversification.

8. Don’t forget your Gilbert and Sullivan.

9. Don’t fail to consider time as well as price in buying a true growth stock.

10. Don’t follow the crowd.

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Some Comments:

How does one get a more accurate picture of the strength and weakness of a company?

Both Mary Buffett and P. Fisher talks about the scuttlebug approach.

Fisher : 'It is amazing what an accurate picture of the relative points of strength and weakness of each company in an industry can be obtained from a representative cross-section of the opinions of those who in one way or another are concerned with any particular company'.

This is an investigative technique in which the prospective investor calls the competition and customers of a business and asks them about the company in question.

Accordingly Buffett actually gets on the phone and calls the competition and asks them what they think of a particular company. All one would need to do is to spend some time in the library reading and make a few phone calls. Don't be shy. After all, it is your money, and if you are not willing to do at least a little work on your investment decisions, then it probably wouldn't be your money for very long. (M.Buffett, chapter 18, Buffettology)

According to Fisher, the business 'grapevine' is a remarkable thing. And most people, particularly if they feel sure there is no danger of their being quoted, like to talk about the field of work in which they are engaged in and will talk rather freely about their competitors. Go to five companies in a industry, ask each of them intelligent questions about the points of strength and weakness of the other four, and nine of ten a surprisingly detailed and accurate picture of all five will emerge.


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Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well
4. Philip Fisher Articles: Switching Stocks
5. Philip Fisher: 15 Checklist When Buying A Stock