Five Don’ts & Five More Don’ts


As I continue reading one of the greatest investing books, Philip Fisher’s Common Stocks and Uncommon Profits, I thought I’d share some “Dont’s” in the book before I do a book review later on.<


As I continue reading one of the greatest investing books, Philip Fisher’s Common Stocks and Uncommon Profits, I thought I’d share some “Dont’s” in the book before I do a book review later on.

Who Is Philip Fisher?

For those that are unfamiliar with the name, Buffett tells us that

I’m 15 percent Fisher, and 85 percent Graham

but obviously, this ratio has been changed dramatically now.

During Fisher’s 70+ years of money management, he achieved an excellent record by investing in excellent, high quality growth companies. From reading his words and the words of his son, Kenneth Fisher, Philip Fisher wouldn’t have survived on Wall Street. Not just because of his unsocial, worrying, walkaholic, laid back, nature loving nature but also because his methods would have been deemed “Old School” compared to the excitement Wall Street tries to offer. He states that brokers

know the price of everything, but the value of nothing.

This is a book that should definitely be read more than once.Common Stocks and Uncommon Profits is a must read for any serious or keen investor.

Five Don’ts

1. Don’t buy into promotional companies.
Basically, don’t buy IPO’s or startups without at least two or three years of commercial operation and one year of operating profit.
IPO’s are sometimes referred to as “Illustrative Purposes Only”

2. Don’t ignore a good stock just because it is traded “over the counter”.
Not all OTC stocks are risky penny stocks. OTC stocks do go public and if you are able to find a gem, go for it.

3. Don’t buy a stock just because you like the “tone” of its annual report.
Self explanatory.

4. Don’t assume that the high price at which a 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
To put it simply, a great company will probably sell for a higher PE ratio later on. The current PE may seem too high and the future growth may seem to be factored in, but great companies will continue to grow and the price could increase just as quickly.

5. Don’t quibble over eighths and quarters
How many of us have put in a order for $0.10 or $0.05 below the current market price? Sometimes, it may never drop that extra 5c and we would pass. We would be missing out on huge potential gains just because we didnt get $50 off the initial price. Why miss out on $5000 or more just for $50? He tells us to just buy at market prices if the price is attractive.

Five More Don’ts For Investors

1. Don’t overstress diversification
Discussion is very similar to my previous diversifaction post. Wall Street tells you not to “put all your eggs in one basket.” However, Fisher states that, once you start putting your eggs in a multitude of baskets, not all of them end up in attractive places, and it becomes difficult to keep track of all your eggs.

2. Don’t be afraid of buying on a war scare
I consider this much like the recession scare we are experiencing now. Historically, after every recession, the market has been a raging bull, climbing to new heights each time. Why not buy when the market is having a fire sale and willing to give you $1 for $0.5? If the country never recovers from a recession, your money is “worth less” anyways.

3. Don’t forget your Gilbert and Sullivan
This Don’t should be titled, Don’t be influenced by what doesn’t matter. Fisher provides an example where most investors always look at the 52 week high and low price and then rate the current price as either under or overpriced compared to its 52 week high and low. This does not tell you anything about the value of the company or potential.

4. Don’t fail to consider time as well as price in buying a true growth stock
Fisher says quality growth companies are often overpriced due to its attractiveness and potential. So rather than buying and knowing the price is overvalued before the real growth occurs, buy the stock just before the growth occurs. This is a Don’t which requires a longer explanation so I encourage you to read it for yourself (book pg153-155).

5. Don’t follow the crowd
Don’t be a lemming. Don’t follow fads and styles of the stock market.

As a group, lemmings have a rotten image, but no individual lemming has ever received bad press. – Warren Buffett

  • jojo

    Hi Jae,
    I interpret the 1st #4 “Don’t assume that the high price at which a 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” as ok to buy a great coy with currently high PE given that it will probably sell for a higher PE ratio later on, as it will continue to grow and the price could increase just as quickly.

    However, the 2nd #4 “Fisher says quality growth companies are often overpriced due to its attractiveness and potential. So rather than buying and knowing the price is overvalued before the real growth occurs, buy the stock just before the growth occurs” seems to contradict the 1st #4 as it cautions against buying overpriced quality growth coys and instead advises waiting and buying at more reasonable valuation as growth catches up.

    My understanding could be wrong. Could you please clarify? Thanks.
    Like many readers, have learnt alot from you, … and still learning. While I can learn to analyse performance, valuation is still difficult for me. So really looking forward to your Ultimate Guide to Stock Valuation.
    Thanks & Regards,

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