Finance · 07
Paths to Wealth through Common Stocks
Philip A. Fisher
Wealth comes from companies that keep outgrowing their imitators, owned patiently and never blindly.
Five questions this book answers, each in a short piece. Read them, or listen as every word lights up.
Fisher's picture
A balloon on a broad line
Philip Fisher pictured a share's price as a balloon tethered to a broad line that moves through space. The line is the company's underlying value, and it moves as the company's earning power and prospects change.
Enthusiasm lifts the balloon above the line, and pessimism pulls it below. Business results bring it back in time, though how far it strays and how long the wait lasts are uncertain.
Even the line is broad. Value is a range, estimated from growth, management, competition and comparable companies.
What lifts the line
Work competitors struggle to copy
A company can sell more every year and still become a worse investment. Fisher follows growth all the way to the existing shareholder.
His Pioneer Metals, a fictional composite, starts as a sheet-metal shop with cheap equipment and little to set its work apart. It learns to work difficult, heat-resistant metals, and competitors find the equipment easier to buy than the experience.
When a mistake ruins a job halfway, Robinson finishes eight weeks of work in the four that remain and delivers on time. Other customers start seeking out a supplier whose skill comes with a promise they can trust.
Above the line
Two reasons a price moves
A company earns two dollars a share, and buyers pay twelve times that. Five years later it earns four. If buyers now pay twenty-four times earnings, the price goes from twenty-four dollars to ninety-six.
Earnings times multiple is price: two times twelve is twenty-four; four times twenty-four is ninety-six.
Earnings doubled and the price quadrupled, because buyers also doubled what they would pay for those earnings.
Below the line
When confidence goes
In 1957 the Beryllium Corporation put new equipment into a former locomotive roundhouse in Hazleton, Pennsylvania, and investors bid up the shares. In 1958 startup losses almost consumed the older business's profits, and demand disappointed.
Later that year the production problems began to yield, and distrust lasted after the evidence improved. Unpopularity becomes interesting when the facts improve before confidence does.
Fisher treats it as a case to investigate. Discouraged shareholders do not always sell too cheaply.
Never blindly
Patience needs a reason
Fisher's case for owning a company for years depends on continued confidence in the people running it. Capable managers deserve time and discretion, including room for ordinary mistakes.
Loyalty becomes dangerous when that confidence survives evidence that their judgment or integrity has deteriorated. A shareholder can win a vote and still own the wrong business.
The five questions
One line, five questions
In the order the book argues them.
- If cash feels safe but loses buying power, how should money needed soon change the risks you take to build long-term wealth?When safe money fails its ownerA bill has a deadline. A business needs time. Philip Fisher explains why safety depends on which job your money must do.
- Why can a booming industry leave shareholders poorer, and what lets a company keep growing when competitors copy its success?The boom your shares can missA growing market attracts competitors. Shareholders benefit when a company can keep doing profitable work that others struggle to copy.
- With limited time to investigate, how can you trust investment advice when the person giving it may earn more if you trade more?Who investigates the adviser?Fisher's five tests turn trust in an adviser into questions about incentives, research, honesty, and results.
- When you plan to hold for years, how can the crowd make a great company a bad investment and an unpopular one a bargain?A good company can cost too muchBusiness quality, institutional demand, and disappointed expectations can move the same share price for different reasons.
- After buying for the long term, how do you tell patient ownership from blind loyalty when managers expand, disappoint, or ask for your vote?The limits of patient ownershipFisher tests long ownership against what managers do with retained profits, acquisitions, and shareholder confidence.
Earning its place
A line that keeps climbing
A growing market supplies room. The company has to keep earning its place in it.
Money meant to support years of future spending needs earning power that can grow, at a risk its owner can bear.
Start with question oneBuy the book
Published by Wiley. Cover shown to identify the book. Philip A. Fisher drawn as an editorial caricature.