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How Phil Fisher’s “Common Stocks and Uncommon Profits” Changed Warren Buffett’s View Of Investing

Warren Buffett was taught how to invest by Benjamin Graham, who is considered to be the Godfather of value investing.

In the early years of his career, Buffett followed Graham’s style of investing closely. He concentrated his efforts on finding so-called “cigar-butts,” stocks trading at bargain-basement valuations due to structural issues. 

Here’s Buffett explaining the approach in his 1989 letter to Berkshire Hathaway shareholders: 

“If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the ‘cigar butt’ approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the ‘bargain purchase’ will make that puff all profit.”

But in 1960, Buffett read a book that changed his investment strategy forever. 

The book was called “Common Stocks and Uncommon Profits,” and it was written by Phil Fisher in 1958. 

Common Stocks and Uncommon Profits

While Buffett’s investment style is based on the lessons Graham taught him all those years ago, Fisher’s ideas helped him move away from deep value investing to buying quality at a reasonable price. 

Warren Buffett has repeatedly said that his investment style is 85% Benjamin Graham and 15% Philip Fisher. 

Fisher’s investment style was utterly different to Graham’s. The latter’s Investment strategy was based on his experience in the great recession. Graham wanted to avoid a substantial capital impairment at all costs, which meant staying away from what he perceived to be high-risk growth stocks. 

Fisher, on the other hand, was a growth investor, and he employed a strategy called the scuttlebutt method to find investments. 

The scuttlebutt method is the process of discovering as much about a company and its products as possible. To do this, Fisher recommended interviewing competitors as well as listening to rumours on the business “grapevine.” As Fisher explained in his book:

“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.”

“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 and will talk rather freely about their competitors. Go to five companies in an industry, ask each of them intelligent questions about the points of strength and weakness of the other four, and nine times out of ten a surprisingly detailed and accurate picture of all five will emerge.”

Fisher and Graham’s methods for finding investments couldn’t be more different. 

Graham used company balance sheets to find stocks trading at a deep discount to intrinsic value. He didn’t like speaking to management and didn’t particularly care about the quality of the company’s products, as long as it was cheap enough. The value investor would buy a basket of these companies (30 or more) and let the market do the rest. 

Fisher only ever owned a handful of stocks at any one time. He believed that you only needed to hold three or four high-quality companies to make a lot of money. 

Buffett summed up this way of thinking at the 2004 Berkshire Hathaway annual meeting of shareholders:

“The basic idea of that it was hard to find good stocks, and it was hard to find good investments, at that you wanted to be in good investments. And therefore, you just have to find a few of them that you knew a lot about, and concentrate on those. It seemed to be such an obviously good idea.”

In October 1987, Forbes magazine published an interview with Fisher in which he described his strategy further. Here’s Fisher’s strategy in his own words:

“There are two fundamental approaches to investment. There’s the approach Ben Graham pioneered, which is to find something intrinsically so cheap that there is little chance of it having a big decline. He’s got financial safeguards to that. It isn’t going to go down much, and sooner or later value will come into it.

Then there is my approach, which is to find something so good–if you don’t pay too much for it–that it will have very, very large growth. The advantage is that a bigger percentage of my stocks is apt to perform in a smaller period of time–although it has taken several years for some of these to even start, and you’re bound to make some mistakes at it. {But} when a stock is really unusual, it makes the bulk of its moves in a relatively short period of time.”

Speaking about his holding period, he said:

“These efforts were necessary to weed out the 14, where I have made the real gains. I’ve held those 14 from a minimum of 8 or 9 years to a maximum of 30 years. I don’t want to spend my time trying to earn a lot of little profits. I want very, very big profits that I’m ready to wait for.”

Fisher’s strategy for finding investments was time-consuming and required a lot of effort, as well as patience. But his efforts paid off handsomely. 

It is easy to see why Buffett decided to copy his methodology. 

2 thoughts on “How Phil Fisher’s “Common Stocks and Uncommon Profits” Changed Warren Buffett’s View Of Investing

  1. Fisher and Graham are both great investors with different investing methods. Fisher prefers the ‘minimalism’ (less, good, long term) approach to investing which is classy and proven to be extremely profitable even in today’s ever-changing economy.

    Thanks for sharing,
    Jeremiah

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