...companies which decade by decade have consistently shown spectacular growth might be divided into two groups. For lack of better terms I will call one group those that happen to be both “fortunate and able” and the other group those that are “fortunate because they are able.” A high order of management ability is a must for both groups. No company grows for a long period of years just because it is lucky. It must have and continue to keep a high order of business skill, otherwise it will not be able to capitalize on its good fortune and to defend its competitive position from the inroads of others.

Source:   Common Stocks and Uncommon Profits

I believe that in regard to a company's future sales curve there is one point that should always be kept in mind: If a company's management is outstanding and the industry is one subject to technological change and development research, the shrewd investor should stay alert to the possibility that management might handle company affairs so as to produce in the future exactly the type of sales curve that is the first step to consider in choosing an outstanding investment.

Source:   Common Stocks and Uncommon Profits

The investor usually obtains the best results in companies whose engineering or research is to a considerable extent devoted to products having some business relationship to those already within the scope of company activities. This does not mean that a desirable company may not have a number of divisions, some of which have product lines quite different from others. It does mean that a company with research centered around each of these divisions, like a cluster of trees each growing additional branches from its own trunk, will usually do much better than a company working on a number of unrelated new products which, if successful,will land it in several new industries unrelated to its existing business.

Source:   Common Stocks and Uncommon Profits

Fisher's Research Questions: How effective are the company's research and development efforts in relation to its size?

Source:   Common Stocks and Uncommon Profits

In no other major subdivision of business activity are to be found such great variations from one company to another between what goes in as expense and what comes out in benefits as occurs in research. Even among the best-managed companies this variation seems to run in a ratio of as much as two to one. By this is meant some well-run companies will get as much as twice the ultimate gain for each research dollar spent as will others. If averagely-run companies are included, this variation between the best and the mediocre is still greater.

Source:   Common Stocks and Uncommon Profits

It is no simple task for management to bring about this close relationship between research, production, and sales. Yet unless this is done, new products as finally conceived frequently are either not designed to be manufactured as cheaply as possible, or, when designed, fail to have maximum sales appeal. Such research usually results in products vulnerable to more efficient competition.

Source:   Common Stocks and Uncommon Profits

Fisher's Research Questions: POINT 5. Does the company have a worthwhile profit margin? POINT 6. What is the company doing to maintain or improve profit margins?

Source:   Common Stocks and Uncommon Profits

Fisher's Research Questions: POINT 8. Does the company have outstanding executive relations? POINT 9. Does the company have depth to its management?

Source:   Common Stocks and Uncommon Profits

Fisher's Research Questions: POINT 10. How good are the company's cost analysis and accounting controls? No company is going to continue to have outstanding success for a long period of time if it cannot break down its over-all costs with sufficient accuracy and detail to show the cost of each small step in its operation.

Source:   Common Stocks and Uncommon Profits

Fisher's Research Questions: POINT 12. Does the company have a short-range or long-range outlook in regard to profits?

Source:   Common Stocks and Uncommon Profits

The company that will go to special trouble and expense to take care of the needs of a regular customer caught in an unexpected jam may show lower profits on the particular transaction, but far greater profits over the years. The “scuttlebutt” method usually reflects these differences in policies quite clearly.

Source:   Common Stocks and Uncommon Profits

Fisher's Research Questions: POINT 13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?

Source:   Common Stocks and Uncommon Profits

...if investment is limited to outstanding situations, what really matters is whether the company's cash plus further borrowing ability is sufficient to take care of the capital needed to exploit the prospects of the next several years. If it is, and if the company is willing to borrow to the limit of prudence, the common stock investor need have no concern as to the more distant future. If the investor has properly appraised the situation, any equity financing that might be done some years ahead will be at prices so much higher than present levels that he need not be concerned.

Source:   Common Stocks and Uncommon Profits

Fisher's Research Questions: POINT 14. Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur? POINT 15. Does the company have a management of unquestionable integrity?

Source:   Common Stocks and Uncommon Profits

One of the most widespread and least accurate of such ideas is the popular conception of what traits are needed to be an investment wizard. If a public opinion poll were taken on this subject, I suspect John Q. Public's composite picture of such an 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-range benefit from common stocks.

Source:   Common Stocks and Uncommon Profits

There are not as yet the barriers to weed out the ignorant and the incompetent in the financial field that exist, for example, in the fields of law or medicine. Even among some of the so-called authorities on investment, there is still enough lack of agreement on the basic principles involved that it is as yet impossible to have schools for training investment experts comparable to the recognized schools for teaching law or medicine.

Source:   Common Stocks and Uncommon Profits

Most small investors cannot live on the return on their investment no matter how high a yield is obtained, since the total value of their holdings is not great enough. Therefore for the small investor the matter of current dividend return usually comes down to a choice between a few hundred dollars a year starting right now, or the chance of obtaining an income many times this few hundred dollars a year at a later date.

Source:   Common Stocks and Uncommon Profits

My objection to [macro forecasting] is not that it is unreasonable in theory. It is that in the current state of human knowledge about the economics which deal with forecasting future business trends, it is impossible to apply this method in practice. The chances of being right are not good enough to warrant such methods being used as a basis for risking the investment of savings. This may not always be the case. It might not even be the case five or ten years from now. At present, able men are attempting to harness electronic computers to establish “input-output” series of sufficient intricacy that perhaps at some future date it may be possible to know with a fair degree of precision what the coming business trends will be. When, if ever, such developments occur, the art of common stock investment may have to be radically revised. Until they occur, however, I believe that the economics which deal with forecasting business trends may be considered to be about as far along as was the science of chemistry during the days of alchemy in the Middle Ages. In chemistry then, as in business forecasting now, basic principles were just beginning to emerge from a mysterious mass of mumbo-jumbo. However, chemistry had not reached a point where such principles could be safely used as a basis for choosing a course of action.

Source:   Common Stocks and Uncommon Profits

The amount of mental effort the financial community puts into this constant attempt to guess the economic future from a random and probably incomplete series of facts makes one wonder what might have been accomplished if only a fraction of such mental effort had been applied to something with a better chance of proving useful.

Source:   Common Stocks and Uncommon Profits

More money has probably been lost by investors holding a stock they really did not want until they could “at least come out even” than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous. Furthermore this dislike of taking a loss, even a small loss, is just as illogical as it is natural. If the real object of common stock investment is the making of a gain of a great many hundreds per cent over a period of years, the difference between, say, a 20 per cent loss or a 5 per cent profit becomes a comparatively insignificant matter. What matters is not whether a loss occasionally occurs. What does matter is whether worthwhile profits so often fail to materialize that the skill of the investor or his advisor in handling investments must be questioned.

Source:   Common Stocks and Uncommon Profits

...postponing an attractive purchase because of fear of what the general market might do will, over the years, prove very costly. This is because the investor is ignoring a powerful influence about which he has positive knowledge through fear of a less powerful force about which, in the present state of human knowledge, he and everyone else is largely guessing.

Source:   Common Stocks and Uncommon Profits

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

Source:   Common Stocks and Uncommon Profits

Actually dividend considerations should be given the least, not the most, weight by those desiring to select outstanding stocks. Perhaps the most peculiar aspect of this much-discussed subject of dividends is that those giving them the least consideration usually end up getting the best dividend return. Worthy of repetition here is that over a span of five to ten years, the best dividend results will come not from the high-yield stocks but from those with the relatively low yield.

Source:   Common Stocks and Uncommon Profits

Don't overstress diversification...there is very little chance of the average investor being influenced to practice insufficient diversification. The horrors of what can happen to those who “put all their eggs in one basket” are too constantly being expounded. Too few people, however, give sufficient thought to the evils of the other extreme. This is the disadvantage of having eggs in so many baskets that a lot of the eggs do not end up in really attractive baskets, and it is impossible to keep watching all the baskets after the eggs get put into them. Investors have been so oversold on diversification that fear of having too many eggs in one basket has caused them to put far too little into companies they thoroughly know and far too much in others about which they know nothing at all. It never seems to occur to them, much less to their advisors, that buying a company without having sufficient knowledge of it may be even more dangerous than having inadequate diversification.

Source:   Common Stocks and Uncommon Profits

The fact that a stock has or has not risen in the last several years is of no significance whatsoever in determining whether it should be bought now. 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.

Source:   Common Stocks and Uncommon Profits

...many investors will give heavy weight to the per-share earnings of the past five years in trying to decide whether a stock should be bought. To look at the per-share earnings by themselves and give the earnings of four or five years ago any significance is like trying to get useful work from an engine which is unconnected to any device to which that engine's power is supposed to be applied. Just knowing, by itself, that four or five years ago a company's per-share earnings were either four times or a quarter of this year's earnings has almost no significance in indicating whether a particular stock should be bought or sold.

Source:   Common Stocks and Uncommon Profits

The investor is constantly being fed a diet of reports and so-called analyses largely centered around these price figures for the past five years. He should keep in mind that it is the next five years' earnings, not those of the past five years, that now matter to him. One reason he is fed such a diet of back statistics is that if this type of material is put in a report it is not hard to be sure it is correct. If more important matters are gone into, subsequent events may make the report look quite silly. Therefore, there is a strong temptation to fill up as much space as possible with indisputable facts, whether or not the facts are significant. ...many people in the financial community place emphasis on this type of prior years' statistics for a different set of reasons. They seem to be unable to grasp how great can be the change in just a few years' time in the real value of certain types of modern corporations. Therefore they emphasize these past earnings records in a sincere belief that detailed accounting descriptions of what happened last year will give a true picture of what will happen next year.

Source:   Common Stocks and Uncommon Profits

Don't follow the crowd.

Source:   Common Stocks and Uncommon Profits

...investment fads and misinterpretations of facts may run for several months or several years. In the long run, however, realities not only terminate them, but frequently, for a time, cause the affected stocks to go too far in the opposite direction. The ability to see through some majority opinions to find what facts are really there is a trait that can bring rich rewards in the field of common stocks. It is not easy to develop, however, for the composite opinion of those with whom we associate is a powerful influence upon the minds of us all.

Source:   Common Stocks and Uncommon Profits

I have found that “scuttlebutt” so many times furnishes an accurate forecast of how well a company will measure up to my fifteen points, that usually by the time I am ready to visit the management there will be at least a fair chance that I will want to buy into the company.

Source:   Common Stocks and Uncommon Profits

Unfortunately, often there is so much confusion between acting conservatively and acting conventionally.

Source:   Common Stocks and Uncommon Profits

...the importance of growth will present themselves. But fundamentally it should never be forgotten that, in a world where change is occurring at a faster and faster pace, nothing long remains the same. It is impossible to stand still. A company will either grow or shrink. A strong offense is the best defense. Only by growing better can a company be sure of not growing worse.

Source:   Common Stocks and Uncommon Profits

Of one thing the investor can be certain: A large company's need to bring in a new chief executive from the outside is a damning sign of something basically wrong with the existing management—no matter how good the surface signs may have been as indicated by the most recent earnings statement.

Source:   Common Stocks and Uncommon Profits

A worthwhile clue is available to all investors as to whether a management is predominantly one man or a smoothly working team (this clue throws no light, however, on how good that team may be). The annual salaries of top management of all publicly owned companies are made public in the proxy statements. If the salary of the number-one man is very much larger than that of the next two or three, a warning flag is flying. If the compensation scale goes down rather gradually, it isn't.

Source:   Common Stocks and Uncommon Profits

There must always be a conscious and continuous 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 levels of management, feel that their company is a good place to work.

Source:   Common Stocks and Uncommon Profits

Many companies seem to have an irresistible urge to show the greatest possible profits at the end of each accounting period— to bring every possible cent down to the bottom line. This a true growth-oriented company can never do. Its focus must be on earning sufficient current profits to finance the costs of expanding the business.

Source:   Common Stocks and Uncommon Profits

Fisher's Research Questions: “What can the particular company do that others would not be able to do about as well?”

Source:   Common Stocks and Uncommon Profits

If the huge price changes that occur in individual stocks are made solely because of changed appraisals by the financial community, with these appraisals sometimes completely at variance with what is going on in the real world of a company's affairs, what significance have the other three dimensions? Why bother with the expertise of business management, scientific technology, or accounting at all? Why not just depend on psychologists? The answer involves timing. Because of a financial-community appraisal that is at variance with the facts, a stock may sell for a considerable period for much more or much less than it is intrinsically worth. Furthermore, many segments of the financial community have the habit of playing “follow the leader,” particularly when that leader is one of the larger New York City banks. This sometimes means that when an unrealistic appraisal of a stock is already causing it to sell well above what a proper recognition of the facts would justify, the stock may stay at this too high level for a long period of time. Actually, from this already too high a price it may go even higher.

Source:   Common Stocks and Uncommon Profits

The only true test of whether a stock is “cheap” or “high” is not its current price in relation to some former price, no matter how accustomed we may have become to that former price, but whether the company's fundamentals are significantly more or less favorable than the current financial-community appraisal of that stock.

Source:   Common Stocks and Uncommon Profits

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. Determining whether at that moment the price of a stock is attractive, unattractive or somewhere in between depends for the most part on the degree these appraisals vary from reality. However, to the extent that the general level of stock prices affects the total picture, it also depends somewhat on correctly estimating coming changes in certain purely financial factors, of which interest rates are by far the most important.

Source:   Common Stocks and Uncommon Profits

Security analysts in those pre-crash days were called statisticians. It was three successive years of sensationally falling stock prices that were to occur just a short time ahead that caused the work of Wall Street's statisticians to fall into such disrepute that the name was changed to security analysts.

Source:   Common Stocks and Uncommon Profits

...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 to find out about a company's affairs from those who have some direct familiarity with them.

Source:   Common Stocks and Uncommon Profits

The largest profits in the investment field go to those who are capable of correctly zigging when the financial community is zagging...This matter of training oneself not to go with the crowd but to be able to zig when the crowd zags, in my opinion, is one of the most important fundamentals of investment success.

Source:   Common Stocks and Uncommon Profits

One of these [popular quotes at Dow Chemicals] was “Never promote someone who hasn't made some bad mistakes, because if you do, you are promoting someone who has never done anything.”

Source:   Common Stocks and Uncommon Profits

...an analyst must learn the limits of his or her competence and tend well the sheep at hand.

Source:   Common Stocks and Uncommon Profits

It is vastly more difficult to forecast what a particular stock is going to do in the next six months. Estimates of short-term performance start with economic estimates of the coming level of general business. Yet the forecasting record of seers predicting changes in the business cycle has generally been abysmal.

Source:   Common Stocks and Uncommon Profits

I have come to believe that the most that can be said on this subject of dividends is that it is an influence that should be downgraded very sharply by those who do not need the income. In general, more attractive opportunities will be found among stocks with a low dividend payout or none at all.

Source:   Common Stocks and Uncommon Profits

In the last few years, too much attention has been paid to a concept that I believe is quite fallacious. I refer to the notion that the market is perfectly efficient. Like other false beliefs in other periods, a contrary view may open up opportunities for the discerning.

Source:   Common Stocks and Uncommon Profits

If the market is efficient in prospect, then the nexus of analysis that leads to this efficiency must be collectively poor.

Source:   Common Stocks and Uncommon Profits

Efficient market theory grew out of the academic School of Random Walkers. These people found that it was difficult to identify technical trading strategies that worked well enough after transactions costs to provide an attractive profit relative to the risks taken. I don't disagree with this. As you have seen, I believe that it is very, very tough to make money with in and out trading based on short-term market forecasts. Perhaps the market is efficient in this narrow sense of the word.

Source:   Common Stocks and Uncommon Profits