‘Common Stocks and Uncommon Profits’ by Philip Fisher

Scuttlebutt!

I have slogged my way through some of the seminal investing books. I have tried to finish ‘Margin of Safety’ by Seth Klarman. No luck. Maybe it is because the concept of margin of safety, i.e. that investors should determine the ‘liquidation value or intrinsic value’ as the value of the company and trade around this value, is so out of favour with modern investors. When multiples are at high levels, it is difficult to find companies that are trading lower than intrinsic value. Just look at the chart below!

Growth outperformed value investing by almost double. So much for intrinsic value. But maybe we are going into a new era…

Anyway, I had less trouble getting through Philip Fisher’s classic ‘Common Stock and Uncommon Profits’. The book outlines 15 points for investing.

The book goes into more detail about each of the 15 points but what excited me the most was how many of these points would be considered ‘ESG’.

The first six are the standard analyst questions ‘how big is your current market, how big can it get, what is your proprietary stuff, how do you sell things, what is the profit and how will you maintain this profit?’

Aside from a financing and outlook question, seven (!!) are governance, incentives, employee relations, integrity, engagement with investors and non-traditional indicators of competitive advantage (e.g. community relations in mining or employee satisfaction in retail). Fisher says that the best way to discover information in these areas is by finding ‘scuttlebutt’. He suggest a process of interviews with traditional groups (suppliers, customers and competitors) but I would add a careful review of sustainability reports and engagement with other stakeholders (scientific groups, universities, advocacy groups, not-for-profits). The idea being that ‘scuttlebutt’ is also temporal and other stakeholders may see issues much earlier or in a different light than people within the target industry. Industry people can have blind spots about ‘how things are done’.

The sustainability report review is part of what I think that the most overlooked point which is no.14 – ‘Does management talk freely to investors about its affairs when things are going well but ‘clam up’ when trouble or disappoint emerges?’. It matches my own view that ‘disclosure is a proxy for performance’. If a company is publicly talking about it, it means that they are thinking about it internally and are confident about their approach. So many times, I have seen analysts say that a lack of discussion is a sign that the company is confident in its approach (i.e. they don’t think that it warrants attention) but the opposite is almost always true. A lack of discussion is a sign that the company is either ignorant (willfully or not) or is currently having a very messy internal debate. Clear and sensible statements to stakeholder questions, with appropriate caveats about changing their views if new information arises, is a good sign.

Fisher outlined a very clear process for investing (particularly for long term investors) and I have never seen him referred to by the ESG community. His book ‘Common Stock and and Uncommon Profits’, with additional considerations for climate and environment, would be a good first book for a sustainability person moving into the investment world.