Common sstocks and uncommon profits

Philip Fisher is the author of "Common stock and uncommon profits" and he is considered to be a father of growth investing. Warren buffet once mentioned he is 15 % Fisher and 85 % Graham. One of the simple but strong argument that Fisher makes is that investors should buy stocks/businesses that have been growing in sales and net income. Preferably, the sales and net income must be growing over a period of years and at rates greater than industry average. This means investor should buy a new shinning star of the industry. In here, you are looking at both absolute and relative value of a company. The growth of sales and net income is one measure to look at absolute value of a company. This way, you see how fast the company is growing at xyz rate. On the other hand, you also need to pay attention its competitors and evaluate the company in relation to other players in the industry.
Fisher puts a great emphasis on sales. After all, research & development would be fruitless if a company has greatest tech product ever made but can't sell it to customers. One of the prime example companies would be Microsoft. Microsoft is well known sales machine. Some industry experts argue that Microsoft does not develop superior products than its competitors to the extend, where market is dominated by a single company. In fact, some argue that Microsoft merely copies competitors' product and muscle out the market with its capital. However, that does not change the fact that MS is the most dominant player in the market and has been performing excellent.
The other factor that must be considered is profit. As mentioned in the previous post, sales and profits are not mutually exclusive. More than often, they go along together. To analyze relationship between sales and profit, you need to look at margin. A huge sales is obsolete to investors unless company can retain its sales after expenses and hand it down to investors' pockets. One other thing Fisher discusses is a positive cash flow. This mean profits must be realized soon enough to be useful. Opportunity or risk sometime arises without showing any of it. If it ever happens a company with positive cash flow who realizes its profits sooner than its competitors, is more likely to seize the opportunity or prevent the risk from occurring because all it can simply use the reserved cash to expand or pay unexpected expenses. In addition, Fisher mentions an importance of low cost operation. If management can cut down cost of sales, it will have lower break-even point and a higher profit margin. This corresponds to Graham's margin of safety.
In order to be a successful investor, Fisher advises people to concentrate on industries that they already know. This is also known as "circle of competence." For instance, if your interest is in automobile and have much knowledge regarding car and related products, your starting point in investment would be evaluation of auto companies like Ford, GM, Chevy, etc. The best source of information is individual who are related to the company such as customers, suppliers, employees, competitors and industry associations.

Research and analysis are time consuming. Especially for individual investors who have limited resources face difficulty digesting millions of information and trying use them in analysis. Fisher recommends a focused portfolio, where you put most of your capital into a few strong companies. Note that this can be quite risky though. Later on, we will discuss diversification and how risks can be spread among various stocks while keeping desirable returns. The point Fisher makes is that a few superior companies are better than a bunch of mediocre ones.