We Study Billionaires - The Investor’s Podcast Network - TIP 102 : Common Stocks & Uncommon Profits - A Discussion of Philip Fisher's Classic Book (Business Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 102 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Stig Broderson. Hey, how's everybody doing out there?

Starting point is 00:00:30 This is Preston Pish, and I'm your host for The Investors podcast. And as usual, I'm accompanied by my co-host, Stig Broderson, out in Seoul, South Korea. And today we've got a book that I think a lot of people are pretty familiar with, for the most part, in the investing community. The name of the title is Common Stock and Uncommon Profits by Phil Fisher. And the reason that we're reading this book is because Warren Buffett, has a quote out there that his investing philosophy is 15% Phil Fisher. And that 15% comes from this book, Common Stock, and Uncommon Profits. So that's why we decided to pull this one up and discuss that on today's show. So as Stig and I kind of dive into this, we're going to just kind of

Starting point is 00:01:14 really go chapter by chapter and kind of hit kind of the high points of what we learned from the book. And what I wanted to do just to give everybody kind of an idea of some of the topics that we'll be discussing is I'm just going to kind of name a couple of the chapters here so you can kind of get an idea of what the show is going to be about today. So the first chapter is clues from the past. The next chapter is called What Scuttle Butt can do. And the next chapter is the 15 points to look for in common stock, what to buy, when to sell, all about dividends, five don'ts for investors, another five don'ts for investors, and how to go about finding a growth stock. So these are some of the ideas that we're going to be discussing on the show. And those are the titles of

Starting point is 00:02:00 each of the chapters in this book. So we'll just start right from the top here with chapter one. And the title for chapter one is clues from the past. And there's really kind of two main highlights that Fisher has from the first chapter. And the first one that he has is to make money in the market, there's really kind of two ways that you can go about it. The first way is that you can time the market, meaning you could say like right now, the valuation's really high, so you're not a buyer,

Starting point is 00:02:28 you're going to wait until valuations get really reasonable, and then you buy. And then the other approach that he says is out there is that you find outstanding companies that are at decent prices and have really good qualitative factors to them, and you hold them forever. Now, of those two approaches,

Starting point is 00:02:47 Fisher implies from the reading that the first approach of timing is very difficult to do. And not something that he recommends between the two different approaches. He actually recommends the latter approach, which is how you see Warren Buffett operate and how he actually conducts his traits, is very much based on Fisher's guidance. And that also kind of goes to the way Graham's thinking as well. So it's kind of hard to delineate which one he kind of buys into more, but they kind of really accommodate each other with the way that they think.

Starting point is 00:03:18 So that's really the main thing that I captured out of the first chapter. I'm kind of curious if Stig has anything else that he wants to add to the first chapter. I actually have the same two things here, Preston, but the first thing about looking back in time, and he's talking about how it looks really easy. And I think looking back, it's somewhat easy to say, well, back in 2007, clearly it was overvalued. And then March 2009 clearly was undervalued.

Starting point is 00:03:44 valued. But living through that period, I don't know if you remember it present, but that was just so chaotic. I mean, it was really hard to stand back and just say, yeah, I'm definitely going to short my stocks now, or I'm definitely going to pull in like 100% now that I lost 80% or whatnot of my portfolio. I mean, that's just now how it works. The second thing I want to highlight from the book was that he's talking about growth and he's talking about how people have a misperception about growth. And I'm pretty sure he didn't say Silicon Valley, but I'm pretty sure that when I hear grow stocks, that's probably what popped into my mind. But he's saying it's really not so much about it should be a tech company, anything like that. But he's saying that as long as it has

Starting point is 00:04:28 great potential, it doesn't matter the size of the market. The market cap doesn't matter. And I think a good example of that and where you can really see Warren Buffett used the teachings from the common stock and non-competit. That was his purchase of Coca-Cola back in 1989. in 1990. And back then, Coca-Cola was in a slump, and what Warren Buffett saw that even so, it has prospect in terms of sales and profit, it was still doing better than the industry, or at least the potential was huge. Even though it was a big company in the U.S., he saw the potential abroad, and he also

Starting point is 00:05:01 saw he actually penetrate the American market even more. So it doesn't have to be like a hundred million-dollar my cap. Like, you can talk about billions and billions of dollars, and it would still meet his criteria. So I just want to highlight that point here from chapter one. All right. So going on to the second chapter, this one's titled, What Scuttlebutt can do. And what he's really getting at with this chapter is really kind of a basic idea. But it's something that you see with the Peter Lynch book as well, which is go out there. And if you're looking to invest in call it a shoe company or you're looking at to invest in some type of oil

Starting point is 00:05:37 company or whatever it is, go out and talk to people that work in that industry. Talk to customers of the industry, talk to employees of the industry, talk to people who were in management or anything that you can do to just ask intelligent questions and get to know the industry. And, you know, his opinion in the book is that once you do that, you're going to uncover things that you just wouldn't necessarily think about as just an outsider investor that's looking at the numbers and looking at the financials when you're reviewing the company. Yeah, he's actually saying Phil Fisher here that perhaps the number one.

Starting point is 00:06:12 sources to speak to former employees, they are actually the people that can speak most freely and give you the most valuable information. And he's also saying in continuation of that what you are hearing might not be 100% consistent because, well, the truth is always subjective. But the information that you're processing should be so obvious that you don't need to be a brilliant investor to realize which stocks you should pursue and which stocks you shouldn't. I think that's really interesting. Warren Buffett has this quote that a stock should really be screaming to you. And I kind of feel that it's the same thing that Phil Fisher is talking about here. If you have to process the information you get for too long, there are so many companies

Starting point is 00:06:52 out there. Why don't you just move on to the next company? All right. So going on to the next chapter, this one's titled, What to Buy the 15 points to look for in common stock. So instead of going through all 15 points, what we're going to do is just kind of highlight a few that really kind of stood out here. And one of the main ones that I captured was to find a stock that has a long time horizon, and that's definitely preferred to something that you're looking at with a short time horizon. I completely agree with that. Traders that do these one month kind of trades or like a two-week kind of trade is not something that I really understand. I don't really understand how you can do anything other than something that has a time horizon in excess of a year, I would think would be at a

Starting point is 00:07:37 minimum. Yeah, and one way that Phil Fisher is actually looking at this is he's investigating in companies' relationship with suppliers. And he's saying, so how do they treat them? Is it like a long-term negotiation strategy or is it short-term? Are they consistently pressuring their suppliers or are they also willing to give a little something to build goodwill? And I think that's a really interesting approach to it. And another thing I would like to stress is one of the points are that how effective other companies research and development efforts in relationship to its size. And he comes up with a lot of different metrics that you can look at and basically you need to speak to the company, but you can also look at how much money they're spending compared to

Starting point is 00:08:21 the sales. A lot of neat tricks here. But I kind of think that this point about R&D really highlights one of Warren Buffett's main things. Don't invest in companies that have too much R&D. I don't know if he's been quoted to say that, but he's really looking at various simple products. Actually, the books, even though it tries to simplify the whole technology process, but also think that it really illustrates that if you were too caught up in too much of the technology

Starting point is 00:08:49 and trying to figure out what's happening, you probably shouldn't invest in that company in the first place. You know, I understand that argument, and I've read that in all the Warren Buffett stuff. But at the same time, I just want to kind of throw out a contrarian point of view for people, just to consider. I mean, I'm not saying that this is right or anything. I'm just trying to give people maybe a different perspective and something to think about. So whenever you talk about R&D from an accounting standpoint, R&D is something that is turned directly into an expense. Okay. And then whenever you're looking at how R&D carries over, and I'm strictly talking from accounting in the United States, when you talk about how once that company makes that investment,

Starting point is 00:09:33 Let's say it's a Google would be a great example. Let's say Google invests $10 million in an idea and an R&D research effort. And they're dropping all that money into whatever. Let's say it's driverless car technology. As they're spending that money, that is immediately being expense on their income statement. None of that is being carried over into an asset unless it's just for the patent application. That's really kind of the only thing that they can carry over as an asset onto their balance sheet. So as an investor is looking at that, and if an investor is looking at just the balance sheet,

Starting point is 00:10:08 and this is more of a caution for people that would look at that, just from a book value or a balance sheet standpoint, you're not necessarily going to see the value of some of those intangible and tangible assets that have been test articles or whatever that are created inside of that R&D veil. So a perfect example is what I said there as far as the driverless technology. that might be a huge asset for Google moving forward into the future in the next 10 or 20 years. And when you're thinking about future cash flows that that might generate, if they are able to move into this massively huge car market and the technology and able to license the software for this to some of the other car companies, you think about all of that and how that's showing up anywhere in the company's financials. I don't think that you're really seeing it anywhere other than being expensed on the income statement.

Starting point is 00:11:03 So, you know, you read a book like this and you know these guys are super smart. You know, Warren Buffett buys into this. But then there's other things that I feel like I do know from my own experience and things that I've studied that add kind of a wrench into all of this. And that's where it's really hard. And I think it's really important for people that are just starting off to let them know how insanely difficult some of this qualitative stuff becomes. And that's really, you know, Phil Fisher's book, this is really the qualitative piece of Warren Buffett's investing approach.

Starting point is 00:11:33 The quantitative side, the number side of figuring out the value of things, that's really all Benjamin Graham type stuff. So when you read this book, it's very qualitative. It's talking about these things that are intangible and it's hard to put a value on it. But I think when you get into his discussion of R&T, I think that you've got to also understand some of these rules of accounting and understand how it could, you know, maybe not. necessarily be 100% true. And I hate to confuse the audience, but I think it's important to, you know, grow that knowledge base as well as we're having these discussions. I love the approach you have to this press in terms of looking at the accounting, because the first thing that put up to my mind, whenever I read this was, yeah, you said that sales to R&D is a good indicator. It depends on how you measure R&D and how the accounting rules

Starting point is 00:12:20 has changed since I think it was written in the late 50s. I don't know if it's still valuable. Well, and here's another thing to think about is like, let's say you're doing R&D work and you have insanely talented and smart people working for your company versus the R&D of, you know, a company that's not doing revolutionary kind of stuff and they're just basically burning money because maybe they don't have the most talented people working for the company. You know, you take the R&D of some mediocre company and you compare it to the R&D efforts of a Google. I think that for every dollar spent, you're probably getting 10 times the performance. So you always got to ask yourself why. And then you've got to try to understand the second, third, fourth order effects of maybe why your opinion might be wrong. I think to conclude here on chapter three, I think all the 15 parts are extremely relevant. I would definitely encourage everyone to go in and read our second to summaries where we have a brief explanation of all.

Starting point is 00:13:16 of them. But I think there is one thing I would like to pinpoint here, and that is that none of the 15 points are important if the management doesn't have integrity. I mean, that is really the one point ruling all of them. And the way that Fisher measures that, I'm really cautious about using the word measuring because the whole book is about you can't really measure all these quantitativeity stuff. But he's saying one of the best measures, if you have to, is to look at how the management handles a crisis. And he's saying that he just sees so many managements just clam up

Starting point is 00:13:50 if something goes wrong. And he's saying that is an amazing indicator of the integrity of the business. If they have hardship and they're shared with the investors with the owners of the company, then they have integrity. So the next chapter is what to buy applying

Starting point is 00:14:08 this to your own needs. So in this chapter, Fisher argues that many investors do not spend the time an effort required to make good investments. The results of this is the misunderstanding and half-truth about investing. And so I completely agree with his opinion on this and where he's going. And I think that I am so a victim of this as well, where sometimes I'll go and I'll buy a company and I just, I know I could have done more research on it. But I think it's important to highlight that the amount of your portfolio that you're putting into the position should be

Starting point is 00:14:42 somewhat correlated to the amount of time and research that you put into it. So if you're going to take a very large position, it takes up 10% or more of your portfolio, you probably need to spend a ridiculous amount of time, especially if it's an individual pick, to really know what in the world you're talking about and understanding that array of risk versus reward that could potentially come your way. So we completely agree with Fisher on his main thesis for this chapter. I think it's really interesting in this chapter how he's talking about about how to pick a good person to manage your portfolio because he's also acknowledging that not all private investors really like to manage their own portfolio. So he's saying how do you actually

Starting point is 00:15:22 figure out who is good and who is bad? Because he's talking about track records using that, all the pitfalls on that. I mean, just an example, one person might be outperforming the market, but he might take on additional risks. So is that really a good performance or a bad performance? and he's saying that there's really no objective way to measure which portfolio manager you should trust and in comparison to a lawyer. How do you figure out if a lawyer is good? Is it how many cases he has won? Well, that might only tell half the truth because he might only take on winning cases. I think this discussion itself is really interesting, but he comes up with two things you could do. The first one is to test the integrity and honesty of the person. And the second thing is that his investment

Starting point is 00:16:08 philosophy should be like your own, which again is the 15 points he talked about before. So if you understand the 15 points and you can have a good discussion with a portfolio manager about those 15 points and you believe that he has integrity and honest, he's saying that might be a good manager to go with. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th

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Starting point is 00:20:42 different investment bankers and things like that, you talk to people that you have with your brokerage. And my experience is that people that are handling it are usually more on a sales kind of position and they're just trying to push a product or push a certain, you know, fund that they kind of get a higher fee on. And so if you're out there and you are having other people manage your stuff and you feel fairly comfortable asking some of the hard questions of things and topics that we discuss on the show, I would highly encourage you to do that with that person who's helping you manage your portfolio. I think the further that you dig into those questions, I think you might be surprised that some of the answers that you actually

Starting point is 00:21:23 get back. And the surprise might not be in a good way. So for example, you'd say, hey, so what do you think the general yield or return I would get by being invested in the S&P 500 and then see how they respond to that. And then based on their answers, just ask them a follow-on question that digs even deeper into that area, you know. And I think when you do that and you kind of just sit back and listen to the way that they respond and ask them intelligent questions and maybe even write them down before you'd call so that you can make sure that you can test their level of expertise and what it is

Starting point is 00:21:57 that they know and don't know, that I think would be a really good decision to filter some of these people so you can find somebody who really does know what they're talking about. I think it was one of the first questions I've ran on the show and there was this young guy and he was talking about how he was with his parents and how they had a financial planner visiting them. And he was doing the good thing for him in Paris and he'd ask, okay, so you suggest those like eight stock picks, what's the PE of them? And the financial planner was like, what's the P.E? That was a great question, by the way. And his question was also in terms of bars I remember in terms of how to find the right person to take care of his family's money. And

Starting point is 00:22:37 well, if they don't know what P.E. is, that's probably a good indicator that you shouldn't trust that person. Good indicator you should run. Okay. So the next chapter is chapter five. And in this one, we talk about when to buy. And so Fisher starts off talking about really this market timing idea. and just how difficult it is for an investor to time the market. And so instead, what he suggests is that a person should look for outstanding companies that have temporary problems or setbacks for some reason that the market's not pricing them favorably. And that's where you are able to, quote, unquote, time the position better.

Starting point is 00:23:19 And so I agree with this. I think that I kind of look at it more by sector is kind of my personal approach. I try to look for sectors that are severely depressed that are having very difficult times. And then I really try to go find the business or a couple of businesses that are performing best in that sector. So for example, oil has really had just a brutal time for the last two years, last year to halfish. And if you take that approach with the oil industry and you're lining up, okay, this company

Starting point is 00:23:51 has the fattest margins, this company has the best. brand, they have, you know, you start lining up all those reasons why you think company X, Y, and Z might be the best in that industry. That's when you really want to kind of start taking a position, whether it's slow, whether it's faster, or however your approach is to getting into the pick. But this is how Fisher suggests that a person does it, is they look more in that way for their timing than to time an entire market. Yeah, and I think it's interesting that he's saying that on one hand, you would take a company that has temporary problems. But then he continues talking about, well, if you think problems in terms of taking a hit on the earnings, well, why is that so?

Starting point is 00:24:36 Is it really because the customers are running away or is it because the increased expenses are from developing new products? He's saying that if you know a company really well, pay close attention to their expenses on, again, you might call it R&D or however, it's counted for, what are they doing right now? And he's saying he's just, he's so often that a big investment is made. Investors are running away screaming because the earnings take a small dip. But then in the long run, whatever they start monetizing these products, that's really when you see the spike in their earnings. So don't look only at the bottom line. Look at why has the bottom light changed for these companies? And just as kind of a final note for this chapter is really this idea

Starting point is 00:25:20 that his overall recommendation about when the buy is base your investment decisions on solid knowledge about the individual company and disregard the fears and hope about conjecture and conclusions that are based on assumptions. So he's really getting into this. You've got to have some quantifiable facts of why you're maybe changing your opinion opposed to just maybe an article you read about some journalist's opinion or whatnot. That's what kind of causes the market to go in these swings in a weekly or monthly or monthly time frame.

Starting point is 00:25:51 But when you actually look at what Stig was discussing was like, hey, they just created a brand new asset that's going to add more to their top and bottom line. But it's just being delayed because of maybe an assembly line was delayed or whatever. That's when you really are seeing big opportunity in the price. Okay. So this next one, chapter six is something that I think a lot of people are interested in. This is a really common question that we hear from people when we're talking to them. and that's when to sell and when not to.

Starting point is 00:26:21 So Fisher has an entire chapter dedicated to this. And Stig briefly mentioned, you know, if we're not going through these chapters in enough detail, please sign up for our email list. You'll get the entire executive summary that we wrote on this, which is fairly detailed. And you'll get it completely for free if you sign up and we don't send out any advertising.

Starting point is 00:26:38 So it's a great deal. So just sign up and you can get all of our detailed notes on this. So Stig, go ahead and talk to the audience here a little bit about the one to sell. Yeah, so what Phil Fisher does here is that he outlines three reasons why a stock investor should sell his stock. And the first reason is read a symbol. He says that if it's less attractive than original anticipated, you should just go ahead and sell that stock. And I think that point is really interesting because there was also something that we discussed with Guy Speer whenever we had him on. And he was talking about how he had started to give himself like a two-year period

Starting point is 00:27:15 where he couldn't sell a stock because he knew that, assuming that he was making a mistake, of course. But the reason for that was that if he knew that he could just sell a stock, wherever he regretted that, he might be overtrating. He might not do his research well enough. And if he was forced to hold on to a stock for as much as two years if he was mistaken, he would work really, really hard on not being mistaken. So I just think that I would like to put that out there. I think I can definitely see why Phil Fisher is saying, if you made a mistake, mistake, just correct that mistake. That makes a lot of sense. But I also think Guy Spears argument carries a lot of weight. Yeah, that's an interesting idea that you brought up. And I think

Starting point is 00:27:55 that you do. It's really hard to, I mean, just turn around the next day and be like, oh, I didn't account for this one thing, so I'm going to sell the position. Like, how do you really, I think maybe it's experience, you know, after you've done it enough and you've learned, you know, from just doing it enough times that you're about to make that mistake. But that's something that you really got to think about. And I think it's a very strong point is you do have to be in the position that if you recognize you've made a mistake and you didn't account for all the risk that was there, man, you got to get out of the position. You absolutely got to get out of the position. So that's something that I think is going to be very difficult for new investors,

Starting point is 00:28:31 but it's something that experienced investors, I think, have a knack for just from their own personal experience in doing this enough times. Before I said, there were three reasons. So the first one, that is, you should sell it if it turned out to be less attractive. The second reason is really related to this. He's saying that you have your 15 criteria. Now, he's also saying in chapter three, we've discussed the 15 criteria that it might be okay if you have like 13 or 14 of them. But he's saying that if you see the company fail on too many of the criteria, you should probably also sell your stocks, especially if you see the integrity of the management starts to deteriorate. So in that case, no matter the products, the company's future prospects are no longer interesting.

Starting point is 00:29:15 So the third reason for selling is if the investor finds a better investment. And again, this is like really, really tricky. I definitely understand when he's saying, well, if you find a better investment, why don't you just go ahead and sell what you have and buy into that company? The problem about being a stock investor and I guess being a human being is that there was always a new shiny item out there. There's always something you might be finding more attractive. Perhaps you just read an article about the stock you just bought and you feel, well, perhaps it wasn't that interesting in the first place. So I think what I really enjoy about his discussion here is that how

Starting point is 00:29:54 he would factor in the capital gains tax. And he's saying, basically, well, the future returns, they are uncertain. But if you have to pay taxes now, you know you have to pay taxes now. There are no way around it. So I think that's a really great example. He's very cautious about that. Another thing in terms of sales is that he's saying, well, what if the stock is priced too high? Shouldn't he just sell it and take my profit and go on to the next stock? What he's saying, and this is super interesting, is that even if a stock might be trading at 35 times earnings, well, if you have found the right company and if it's really growing, if you really, really see the profits going to spike, why take the capital gains tax loss now? Why not just holding on to it? Because that was

Starting point is 00:30:44 your investment in the first place. I think that this is a common mistake that people make is they have a company that they buy. It just does extremely well. They're getting tons of movement on the stock market price. Maybe they've seen a 50% gain. And they're like, well, I made so much money. I've got to get out of this and just take my win and walk out of the casino, quote, unquote. And I think that's a person who's demonstrating just a total lack of business knowledge that would be thinking like that. Where I think that you get a really smart, savvy investor is whenever they see a company that's growing like crazy and they know how to really recognize the signs that demonstrate that it's real growth and fundamental growth that's driving that price

Starting point is 00:31:28 action and there's a lot more room for the price action to continue even going higher. And I don't see that as a form of greed at all. I think that one of the key factors to look for in determining whether that's a fundamental growth or not is really in the top line revenue or sales or whatever you want to call it. But when you look at the top line of the income statement and that thing is growing by 20, 30 percent, and you're seeing the stock price move with it, that is something you want to hang on to. Okay, that is absolutely something you want to hang on to, even if you've seen an enormous jump in the price because then you'd obviously have to know the direction and what the product is that's driving that and all those kind of things. But if you've got something that's growing like that and the

Starting point is 00:32:12 top line is growing with it, the perfect example would be Amazon for the last five years. Look at the sales and look at the top line on the income statement. It's growing like crazy. And you'd been crazy to sell out of that position as that thing was fluctuating and going along for the ride because fundamentally they were showing that that growth was real and that it's continuing to grow. So it really kind of comes down to, in my opinion, watching the top line. I'm real curious to see if Stig would agree with that statement. This is a great discussion that we're having because I remember the two of us sitting in Omaha and arguing this. And I think I'm more like a bottom line kind of person and you look more of the top line. And again, it's sort of like I kind of feel

Starting point is 00:32:55 we agree, but we just put different weight to it. I can definitely see why you want that top line to grow. I just want to see it materialized at the very bottom where you are, I don't want to put it worth in your mark, but you were really looking at top line. For instance, someone like Amazon, because you see a lot of future potential for that. For me, I guess I look at it this way.

Starting point is 00:33:18 For value, I'm much more bottom line kind of guy. For growth, if you're talking, is the price justified for a growth company? Is the premium that you're paying for this growth company justified? For me, I'm really looking at the top line because it's such a raw number. It hasn't been adjusted because let's get into this. So from an accounting standpoint, I can sell something off of my balance sheet and run it over to my income statement and then my net incomes higher.

Starting point is 00:33:45 Or I could do the inverse of that and then I have no bottom line at all, just based off of action that you're doing on your balance sheet. When you're talking about the top line, none of that impacts any of it. The balance sheet doesn't come into question at all. and it's such a raw and pure number that you're seeing on a company that's really kind of going through a growth spur because they have a brand new product or they have a brand new service that's being introduced to the market. The market's acting favorably towards.

Starting point is 00:34:12 That's something that if you see it, and I guess when you're looking at a company that has a larger market cap, I think that you're going to see a much more smooth curve of that top line and it's going to be a little bit more predictable than a small cap company that might just had a six-month burst in their top line. So for me, I really like looking at the top line when you're dealing with a mid-to-large-large-cap company because I think it gives you a better indicator of, hey, don't sell the position. It's got more to run. So just to give some piece of context to the discussion we're having right now,

Starting point is 00:34:45 Preston and I was back then actually discussing if there was any way one could put an equation on this and clearly the answer is no, but perhaps one could estimate it one way or the other. So how would we value top line growth if it didn't materialize on the very bottom? I think that in itself is a super interesting discussion. What I think one should be very careful about looking at a company like Amazon or perhaps Tesla is an even better example is that, yes, they are growing their top line. But how are they doing that? Well, they're taking a lot of debt because they're not making money and they're issuing a lot

Starting point is 00:35:18 of share. So I would say if you have to look at sales and clearly sales are important, also look at the sales per share because you don't want your company to grow by 1,000% if they're just issued a bunch of shares and your ownership of the company has been completely diluted. So it's a very complex discussion. I don't think there's necessarily like a right answer. I think this discussion was interesting just in terms of how we are perhaps a bit different looking at the top line of a company. All right. So the next chapter that we're going to discuss is titled The Hula Ballou about dividends. And so Fisher starts off arguing that high dividend payments not by definition should be preferred, as many people out there believe. And I completely agree with him on this. I get this topic so many times when I talk to people about investing and it's like, oh, well, they have a really fat dividend. It's paying like a 6% dividend. And whenever you're in an overvalued market situation like you are today in the U.S., if a company's paying a 6% dividend,

Starting point is 00:36:22 My immediate question for that person is, okay, so what's the payout ratio? And so when you talk about the payout ratio, what you're looking at is of that money that the company made, the earnings or the cash flow that that company made, how much of that as a percentage is being paid out as a dividend to the investors? And if it's, you know, 100%, to me, that's absolutely crazy. You know, why in the world would a company take everything that they made and pay it straight to the investor without retaining any of that for a rainy day or having some type of flexibility to create a new product or any of that kind of stuff, you know? So that's where you guys need to go when you're looking at dividends is what's the payout ratio. I think a good rule of thumb is that if a company is going to pay a dividend, which we could get into a really long discussion on whether a company should even. pay a dividend. But if a company does pay a dividend, I think a good rule of thumb is only about 33% of it should be paid out to the shareholders. And the other 66% should be retained. And that obviously

Starting point is 00:37:31 is a function of how well the management can invest their retained earnings. But I think it's kind of a rule of thumb. That's kind of what most people would be looking for as a reasonable divining. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than

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Starting point is 00:41:01 All right. Back to the show. Yeah, so a few comments to that. So the first thing is that whenever I hear about payout ratios of 100 or whatever it is, that the interesting thing is. is that if you really look at it and see what are happening in these companies there, but that's high dividend payouts, very often it's a one-time thing. And very often the reason why they're doing that is because they had just been selling off assets. And then they're

Starting point is 00:41:24 paying it out in dividend. And that might be the right thing to do from a shareholder maximization viewpoint. But just think about it. If you are borrowing into a company because they have high dividend, but they're actually selling up profitable assets to give you that dividend, you could only expect to get less dividend in the future. Another kind of a business, comment about why it should be, call it 33%, is that like Preston, I like the idea of a dividend because it shows that it has steady cash flows. It's really hard for a company to manipulate cash the same way they can with other accounting. And also, it's usually a good sign, not always, but it can be a good sign of that the companies still have a lot of growth in it.

Starting point is 00:42:05 And I know that you hear us and Preston and I, we come off as value investors, and I think we are, but clearly we also like growth. You can do that. And if a company is paying out consistently almost everything it makes to its shareholders, for one thing, I know I'm going to pay a lot in tax. That's one thing. But another thing is that what's the growth potential in this company if they're paying everything out to their investors? I mean, that's a fantastic point because those assets that are creating that earnings or that profit that's being paid to you, how is that going to be sustained or how is it going to be flexible for a changing marketplace? Because as you're there collecting all these profits and then paying it to yourself,

Starting point is 00:42:45 okay, let's assume 100% payout ratio. There's a competitor out there that's trying to eat away at that margin somehow, some way. And they will do it eventually. And if you just continue to suck the blood, you know, a good example of this would be somebody buys a piece of real estate and they rent it out to somebody. But then they never improve it. They never do any kind of update.

Starting point is 00:43:06 They just continue to suck the blood out of the profit. And then at the end of the day, 10, 20 years later, they're sitting there with this building that's falling apart. The door's falling off. You know, like, you can't even rent it to anybody because no one wants to live there anymore because they didn't reinvest and they didn't do the right things as a business owner. My other comment about dividends just from, you know, kind of a reason I don't like them, is the tax, you know, from an owner's standpoint, if you own the entire business, just say you

Starting point is 00:43:36 owned every single share, and you were going to pay yourself a dividend. You're getting like double taxed on that. And so as a shareholder, I don't particularly like that. And I think that's one of the main reasons why Warren Buffett doesn't pay a dividend with Berkshire is because it pains him. So that'd be a huge tax burden to himself when you look at it from that context of owning 40% of the company. So whether you own one share, you own 40% of the entire business, you're still paying that tax. And I think that's how Buffett really looks at it. And that's why he doesn't pay it. any kind of dividend. Yeah, and the way that Phil Fisher also explains this is that he understands why people

Starting point is 00:44:12 would like to collect a dividend, especially if they need that to support their way of living. He's saying if that's not the issue, then why do you want that dividend? Because you're probably going to reinvest it. And you don't have that many different stocks to invest in in any case because you only want to buy the very best. So I think his discussion about dividends really interesting. Hopefully, Preston and I will one day do an entire episode about dividend. It's a lot of things to discuss about this.

Starting point is 00:44:37 And it's one of those things that always sparks a good discussion. So I'm actually happy that we have a chance to talk about dividends here as well. Okay, so the next chapter is five don'ts for investors. The one don't here that I read that I felt was really good one. And it kind of touches on a conversation we were having earlier. He considers a generic outstanding company that is trading at a high price to earnings ratio, a high P.E. And typically, let's just say that this company is double the P.E.

Starting point is 00:45:06 of the Dow Industrial Jones average. And Fisher says that it's a mistake that a lot of investors make that they would sell that company because it's trading at such a high PE without really understanding what the future prospects are and without understanding the growth potential or the margins of the company, they just sell out of it because it has a high P. And this goes completely back to what Stig and I were saying earlier is if you've bought that company. And it's kind of grown in price to very high levels. And we're obviously talking about an individual pick here. We're not talking about an index because I think you've got to look at that

Starting point is 00:45:42 completely differently than an individual pick. So we're talking about an individual company that's performed extremely well with regard to price. You've got to dig into it. You've got to understand what's driving that price and understand that fundamental thing. And so that's one of the things that Fisher says here that a lot of investors, one of the top five things that investors do that they shouldn't. One don't that I really like enough. I should probably, I actually think I read this before I made the mistake. So this is the story. What he's saying is that you shouldn't quibble about quarters or eights. So in other words, if you find the right stock, you would just buy it. And if you think that the value of that stock is like $100 and perhaps it's trading around,

Starting point is 00:46:21 you know, 50, don't be so stopping that you want to buy it at call it 49. If it's training at 50, buy it at 50. So my story, that was actually because I was selling. I would like to say it's like one and a half year ago or something. I was selling my position in Wells Fargo. And so the spread on Wells Fargo was like really low. And I think it was something like 57.62 or something like that. And this is like annoying habit I have from my trader days.

Starting point is 00:46:48 Like I can't meet the buyer at his price. I need to have him lift me. In other words, I would be selling it, call it 57.63. I want that one cent more. So I was in there and I were putting in my limit order. And what happened? Clearly, the market dropped. And I was just so stubborn.

Starting point is 00:47:08 I was like, I need to have 57.63. And the market just didn't want to come back to that. And so I was just getting so frustrated and it was just one cent. And I was just, oh, my God's sick. Why do you do this to yourself? And then fortunately, and this was still lucky. This was not me being a good investor or anything. I hold on to it for another week or something, and then I got that one cent more, but I've definitely

Starting point is 00:47:31 rather be without that. How the pain I go through. I love this point because my dad and I getting like so many arguments about this point, you know, he's more like you stick where he wants to put in the limit order. He wants to say, oh, well, if it gets down to this, then it's going to buy, and then the decision's made for me. And I'm much more like Phil Fisher, where it's like, hey, if you've done the analysis, you think it's a good buy, just buy it. Don't play around and nickel and dime the entry point. Just

Starting point is 00:48:02 put in a position and take it because who knows if it's going to give you that opportunity or not. Like, we preach not to do any kind of market timing in the short term because it's impossible to predict. I find it very silly. And so, Dad, I know you're listening. But when you hear this, Phil Fisher agrees with me, not you. Perfect. And the fun thing is actually that Warren Buffett, And he's talking about how he lost billions on not buying Walmart because he was talking about one cent here and one send there. So I think it's one of those things that are really hard to, it's really hard to break your habit, even if you're Warren Buffett. But I think you need to do that this time. And I would like to say one cent more, regardless of how many stocks, it's not worth

Starting point is 00:48:48 one week of pain. Think about it like that. I didn't get much done because I was so frustrated. it. So consider the aspect as well. So I'm going to highlight one more that kind of goes without saying, but it's in the book. And this was actually in the fall in one chapter. We had another five don'ts. I don't know why he titled the chapters that way. It's a little awkward. But the one that I think is definitely worth mentioning.

Starting point is 00:49:10 And I think everyone that listens to our show knows this is don't follow the crowd. Don't just go against the crowd to go against it. But I think whenever you see the crowd going in a certain direction, that's giving you a cue, hey, there's opportunity here. Let me do my homework and find something that is going against the grain that makes sense for good fundamental reasons. And I think then you'll find good opportunity. Don't just go against the crowd because sometimes you can kind of get burnt that way too.

Starting point is 00:49:37 Like, you know, everyone's selling Deutsche Bank right now in the August of 2016 because everyone thinks it's insolvent, but it might just be insolvent. They might go down in flames. So that's where you've got to really do your homework. And we encourage you to go against the crowd, but make sure you're doing it for good fundamental reasons. So where Phil Fisher definitely goes against the crowd is his discussion about diversification. And that's another don't that he has in another chapter.

Starting point is 00:50:04 And he's talking about that there are so many stories about people not being diversified enough and losing a lot of money. But we talk very little about all that money that we're losing because we're diversifying too much. And this is just such a classic, I don't even want to say more about. But that's a classic Charlie Munger argument. Why would you diversify when you could buy more of the very best stock? And he's saying that there's so few of the best of the best of the best stocks.

Starting point is 00:50:34 Why would you go ahead and buy 50 stocks? How much can you know about stock number 50? So there was definitely an advice I took up whenever I started stock investing. I should probably have known more about stock investing before I actually decided to follow that advice because I also lost a lot of money and not being diversified enough. But I think his idea of like, if you really know what you're doing, if you have really done your

Starting point is 00:50:57 due diligence, and that's the whole essence of what Phil Fisher is talking about, do it thorough two diligence. Why would you miss out on a great return? Just because you feel you need to have 50 stocks or 100 stocks or whatnot. So I'd like to just talk a little bit about diversification. So I want to say it was about a year ago. You had this heated debate. I forget

Starting point is 00:51:17 where this was at, but it was between Bill Ackman and Ray Dalio. And when you look at those two's approach, both billionaire, Bill Ackman's a billionaire, right, Stig? Or was, I don't know if he still is, but yeah. Yeah, he's a real high net worth. Carl Icon kind of approach guy, mixture between Carl Icon, Warren Buffett, I would say. And then you got Ray Dalio, which is a drastically different approach, computer algorithm

Starting point is 00:51:42 trading breadth that is just way, I mean, he has tons, hundreds of picks in his portfolio and it's very dynamic and constantly changing. And so Ray Dalio, I was reading in a book, I believe it was the Market Wizards series, where they were interviewing Ray Dalio, and Dalio made the comment that he felt that the holy grail of investing was this diversification across international markets that you would take the correlation between asset classes completely out of the mix. That's what he felt was the holy grail of investing because he was,

Starting point is 00:52:18 diversifying and minimizing his risk across the entire global portfolio of assets, whether it's commodities, fixed income, equities, the whole bit. Where Bill Ackman has a drastically different approach where he was very focused on like less than 10 companies. I want to say he was like down to eight companies last summer. And Bill Ackman was really kind of laying the screws to Ray Dalio and really giving him a rough time. Lo and behold, six months later, Bill Ackman,

Starting point is 00:52:48 just got crushed in the market. I mean, absolutely murdered here in 2016 as far as his performance. I think that whenever you get into such a small and focused portfolio of call it six stocks, I think you're just putting yourself in a position where you are assuming that you pretty much know every single facet of risk in those six companies. I think that that might be an overstatement. And I think it also might be a oversimplification of the array of crazy things that can just happen. You know, like, weird stuff can happen in the world. And you might think that you've accounted for every risk and then something random, some black swan comes out of nowhere and just totally shows you how you did not account for something when you have that few of picks. And so I think that a more reasonable number.

Starting point is 00:53:38 And I think that this is where I'm really going with the conversation is, what is a reasonable number of picks? at a minimum threshold. And I would really say that I think that that numbers, you know, some might argue it's 10. I would probably argue it's 15 is probably a good number to really kind of shoot for. And I would give that a plus or minus five. You know, maybe go up to 20, maybe no less than 10. But I think around that 15 mark is probably the best place to be. And I think that Phil Fisher would agree with kind of that mark as well.

Starting point is 00:54:09 And I think there's a lot of other great investors that would probably, and that's really where I'm pulling it from. It's not Preston Pish's opinion. I'm pulling it from other investors that say 15 is probably the mark. I think this discussion is really interesting because you were making yourself really vulnerable. I mean, on one hand, if your portfolio was so concentrated and then you make a mistake, clearly you come off wrong. And then you have someone like Chinatomonger and Warren Buffett when they invest. I think it was like around 30% of their portfolio in Coca-Cola and 89 and 90. So, but I think if you ask me how many, any securities I think I would like to own. I think I'm probably closer to 10. But when I say 10,

Starting point is 00:54:50 it's not necessarily 10 individual stock picks. So I think that was also what we're talking about, Preston. When I'm saying 10, it's more like for me, one stock pick could also be this ETF that's following their strategy. And then, you know, that ETF might be, you know, 300 stocks. So I think I'm probably more 10. I can definitely see that a lot of good reasons why you might do 15 or or 20, but it's probably somewhere around there. All right, guys. So we're just going to kind of conclude the review of this book. I think you guys kind of catch the drift of some of the different concepts and ideas that

Starting point is 00:55:26 are in here. It's a lot of stuff that we've talked about through the last 100 episodes or so. But I think the really important thing here is really the executive summary that we have typed up for this thing is phenomenal. So please go to our email list. We will send this out to everyone who subscribes to that. And it goes into a lot more detail about all these different points. And, you know, go out there, read this book. I think it's, I think this is a good book. It's not one of my favorite books,

Starting point is 00:55:52 to be quite honest with you. I think that it gives you some stuff to think about. But whenever people were asking me, you know, what's your favorite investing books? What's your top five books that you'd recommend? This is definitely not one that's in it. But I do think that there's some value to be had from going through some of these different ideas. Yeah, I think it's really interesting because when I'm thinking about something like security analysis of the intelligent investor, they are outdated too. It seems like the advice from those two books are just more timeless. It's probably because this book, Comstock on Comprofits, are based on growth stocks. And I kind of have the same idea that things really changed, haven't they? Not so much in the Benjamin Graham world in terms of

Starting point is 00:56:35 the balance sheet and how to analyze that, but in terms of how to evaluating the modes. I think, A lot of things has changed, and I think a book about how to value and how to cope with competitive advantage. That can only be an input by definition. Okay, guys, that was all we had for this week's episode. We'll see each other again next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit

Starting point is 00:57:03 www. www.com. Submit your questions or request a guest appearance to the Investors Podcasts. podcast by going to www. www. www. Ask the investors. If your question is answered

Starting point is 00:57:16 during the show, you will receive a free autographed copy of the Warren Buffett Accounting book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before a commercial application.

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We Study Billionaires - The Investor’s Podcast Network - TIP 102 : Common Stocks & Uncommon Profits - A Discussion of Philip Fisher's Classic Book (Business Podcast)

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