Reading Common Stocks And Uncommon Profits once is not enough and have already read it twice. It is a book that should be read more than once by every investor. A book that has added few more checkpoints to my fundamental analysis and investment checklist.
Let me share an example first of Thyrocare which was one of the stocks I was considering for investing because it passed all the checklist I had. After reading this book, I have few more checklist now Thyrocare isn’t on my investment list because I analyzed businesses more from a financial point of view but this book has added a new perspective of analyzing from a business point of view.
I discussed thyroid tests with my doctor friends and this is when I realized that any lab can do thyroid tests and doesn’t need to go to Thyrocare. There isn’t any entry barrier for such tests but labs don’t do it in-house and pass it to Thyrocare because it is a cheaper option for them to outsource to Thyrocare. The entry barrier is an important aspect that one should consider when investing in any business.
Growth and High PE
For me, the most important factor for investment has always been sales growth because I think if the sales is growing, over time it will reflect in the revenue and to the bottom line. I always prefer stocks with potential to grow and now I have an author confirmed the same and this is when things really got exciting for me.
Stocks that can grow in sales and revenue at much better rate than its peers will be rewarded by the market but then that high PE shouldn’t be discouraging you from getting into those stocks.
15 Points to Analyse a Business
If a company can pass the 15 points business checklist there is no chance (at least as per the author) that a company will have any issue with the growth and future prospects.
I will share the 15 points exactly as they are in the book.
- Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
- 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?
- How effective are the company’s research and development efforts in relation to its sizes?
- Does the company have an above-average sales organizations?
- Does the company have a worthwhile profit margin?
- What is the company doing to maintain or improve profit margins?
- Does the company have outstanding labour and personnel relations?
- Does the company have outstanding executive relations?
- Does the company have depth to its management?
- How good are the company’s cost analysis and accounting controls?
- Are there other aspects 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?
- Does the company have a short-range or long-range outlook in regard to profits?
- In the foreseeable future will the growth of the company require sufficient equity financing or that the larger number of shares then outstanding will largelt cancel the existing stockholders’ benefit from this anticipated growth?
- Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?
- Does the company have a management of unquestionable integrity?
Answering the above questions helps with what you should be investing in and what you should be avoiding for sure.
When To Buy and When to Sell
A chapter dedicated to when you should be buying. Doesn’t deal with technical analysis but on the basis of fundamentals. Is company expanding for growth or investing its profits into building bigger capacity expansion and so on and so forth.
When one should be selling and though the preferred time is when you need money apart from personal needs author shares only 3 points when one should be selling those good stocks because it isn’t that easy to buy right companies easily.
The 3 points when you should sell are:
- A mistake has been made in the original purchase and it is clear that company is less favourable than originally believed.
- With passage of time, the company now doesn’t qualify for the 15 points outlined.
- The growth prospects may be at a slower rate than may appear to be the case and can switch to some other better growth prospects company in the near future.
Don’ts of Investors
There are 10 don’ts for investors span over in 2 chapters. The best one that I liked on that list and I quote:
Don’t assume that the high price at which stock may be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price.
The reason I really this point more is because at times I buy those High PE stocks in my portfolio because I see sales growth in those company and the current price that you should be willing to pay for the purchase of stock should not be calculation of the previous performance but for the future growth prospects of the company.
The book talks about what is over diversification and how one shouldn’t be afraid to buy on a war scare.
The author talks about how one should extract information about a company not from wall street or Dalal street for India but from the main street by talking with the customers, distributors, competitors and so on and so forth.
Questions one should be asking to the companies management. One question that author shares is “what a company is doing that your competitors aren’t?”
Finally author has shared his story as a fund manager and how he managed to find growth stocks consistently for his clients.
The book is written with long paragraphs and you will find a 12 to 15-page chapter consisting of paragraph after paragraph without any heading or sub heading and so if you aren’t one of those continuous readers, it can become tough for you to follow in the first pass. I had issues initially but then I managed to get it competed because the content is quite interesting when you get into the details.
This book isn’t only one book of Philip A. Fisher but his son Kenneth Fisher has combined the 3 books of his father into one as three part series.