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Text Summary –
The book “Common Stocks and Uncommon Profits” offers timeless advice on investing in the stock market. The key characteristics to look for when investing in a company are explained, and readers can determine their risk tolerance as an investor. It is important to do thorough research before investing in a company, as stock prices do not necessarily indicate a company’s value. The book offers tips on determining if company stock is overvalued, and how to overcome doubt when making investment decisions.
This text discusses the characteristics of companies that offer growth potential for investors. It emphasizes that smart investing involves planning and a focus on the long term, rather than seeking quick profits. Smart investors look for undervalued companies with growth potential and recognize that companies with good growth potential offer products and services that could sustain high sales volumes for at least a few years, invest in research and development, and have a solid management team and good employee relations. The text also provides an example of how companies can adapt to changing markets to continue growing.
The author emphasizes the importance of thoroughly researching a potential investment before investing in a company. They suggest using the scuttlebutt method to gather information from various sources such as vendors, customers, former employees, and competitors. After collecting information, investors should ask informed questions of the company’s management. It is important to choose companies with growth potential and avoid wasting time researching companies that are not promising.
Once you’ve identified a company with good long-term growth potential, is it time to buy?
stocks are often over or undervalued, so how can you ensure that you get the most bang for your buck?
Stock prices mirror the financial community’s perception of a stock’s value at the current moment, and these ratings create a vicious cycle. If the community values a stock too high, for example, then people rush to buy, based on its perceived value. The stock price then continues to climb, resulting in a price “bubble.”
People don’t buy and sell with an eye toward the future. For instance, if a successful company encounters an unexpected expense, even something as benign as a research project, this can cause the investment community to downgrade future projections for the company.
As a result, the company’s stock price will fall, even if the research project would drive profitability down the road.
This simple realization about the stock market’s irrationality can help you earn extraordinary profits!
Companies with the potential to grow are often innovators, and they’ll inevitably run into bumps along the road. Consequently, the financial community will undervalue the stocks of these companies.
To illustrate this, imagine you’ve found a widget-manufacturing company with huge growth potential. At first, the hype surrounding the company causes the stock price to rise.
However, a problem soon appears: the casting mold for the company’s widgets was improperly sized. Now everyone thinks the product is a flop, and the stock price falls.
This presents the perfect time for you to buy in cheaply, to profit when the company ultimately fixes its problems.
If you miss an opportunity like this, don’t worry, as there may be another chance to get in during the next dip. For example, the company’s stock rises after it fixes its casting mold problems, yet it announces that its sales staff has racked up unexpected costs in rolling out the product.
Exasperated, the financial community bails out, thinking the company will never make it. Yet for you, it’s an opportunity to get the stock cheaply again!
While it’s natural to feel doubt and hesitation when investing in stocks, it’s important to remember that a successful investor has no room for doubt. The financial community is often wrong about a stock’s value, and buying when everyone else is selling can be a great opportunity.
Additionally, waiting for a stock’s price to fall further to get a better deal could cause you to miss a golden opportunity. It’s important to resist the urge to do this and instead make a decision based on the stock’s potential.
Once you’ve found a good investment, it’s important to hold on to it. Only sell if you misjudged the company’s growth potential, if company conditions have changed, or if you’ve invested in a middling stock as a short-term measure while searching for a better investment. Any other reasons for selling can harm your investment. A company with huge growth potential can never be overvalued!
As a conservative investor, it’s important to be patient and not get carried away with short-term market fluctuations. Focus on the company’s long-term growth potential, and don’t be afraid to hold on to a stock for years.
Furthermore, conservative investors should diversify their portfolios. While investing in a single strong company is a good start, it’s important to spread your investments across multiple sectors and industries. This mitigates risk and ensures that you’re not too heavily invested in any one area.
In summary, conservative investors should seek out solid, established companies with growth potential, and should focus on the company’s long-term potential rather than short-term market fluctuations. Diversification is also key for mitigating risk.
Additionally, a conservative investor should look for companies with strong brand and customer loyalty. A company with a recognizable brand and a loyal customer base has a higher chance of maintaining its market position over time, even when faced with competition.
Furthermore, a conservative investor should evaluate a company’s management team. A strong and experienced management team can make smart decisions that ensure long-term profitability and growth.
It’s also important for a conservative investor to assess a company’s financial position. The company should have a strong balance sheet, with low debt levels and a healthy amount of cash on hand.
Finally, a conservative investor should consider the company’s dividend history. A company that consistently pays dividends to shareholders is a good sign of financial stability and long-term profitability.
Overall, a conservative investor should look for companies with a strong market position, long-term growth potential, profitability, strong brand and customer loyalty, experienced management, strong financial position, and a history of paying dividends.
The price-earnings ratio is just one tool that a conservative investor can use to determine a company’s value. Other factors, such as the company’s debt levels, cash flow, and dividend history, can also provide valuable insights into the company’s financial health and future prospects.
Ultimately, a conservative investor should take a long-term view when evaluating a company’s value. Rather than getting caught up in short-term fluctuations in stock prices, a conservative investor should focus on identifying solid, well-managed companies with a history of steady growth and profitability.
By focusing on the underlying fundamentals of a company, rather than its current market price, a conservative investor can make informed investment decisions that will help build wealth over time.
Final Summary –
Successful investing requires research, analysis, and a thorough understanding of a company’s fundamentals, industry trends, and economic conditions. By doing your due diligence and looking beyond the surface level of a company’s stock price, you can identify undervalued or overvalued opportunities, and make informed investment decisions that align with your financial goals and risk tolerance. In the end, the key to successful investing is to stay disciplined, stay patient, and stick to a well-thought-out strategy that fits your unique investment style and objectives.
About the Author –
Philip A. Fisher is one of the original fathers of investment theory and the founder of the renowned money management company, Fisher & Company. His book, Common Stocks and Uncommon Profits, originally published in 1956, has remained in print ever since.