Wyandanch Library

Overview

Philip Fisher's Common Stocks and Uncommon Profits (1958) is one of the most influential books on growth investing ever written. Fisher introduced the concept of "scuttlebutt" -- a systematic method of gathering qualitative intelligence about a company by interviewing its customers, suppliers, competitors, and former employees. His approach was revolutionary at a time when most security analysis focused narrowly on financial statements and quantitative ratios.

At the heart of the book are Fisher's famous "Fifteen Points to Look for in a Common Stock," a checklist covering everything from a company's growth potential and profit margins to its management depth, R&D spending, and labor relations. Fisher argued that truly outstanding companies -- those capable of compounding earnings for decades -- are rare, and that investors should concentrate their portfolios in a small number of such businesses rather than diversifying broadly. His philosophy of buying wonderful companies and holding them for the long term profoundly influenced Warren Buffett and an entire generation of growth-oriented investors.

The Scuttlebutt Method

Fisher's greatest methodological contribution is what he called "scuttlebutt" -- a term borrowed from the Navy, where sailors would gather around the ship's drinking fountain (scuttlebutt) to exchange gossip. In Fisher's hands, it became a rigorous research technique.

The idea is simple: before you invest in a company, talk to the people who know it best. Not the management giving polished presentations to analysts, but the people in the trenches:

Customers: Are they satisfied? Would they switch to a competitor? Is the product genuinely better, or are they locked in by contracts and switching costs?
Suppliers: Does the company pay on time? Is it growing its orders? Is it a fair partner, or does it squeeze suppliers until they cut corners?
Competitors: What do they say about the company? Competitors will rarely praise a rival -- but when they do, pay close attention. Grudging respect from competitors is one of the strongest signals of competitive advantage.
Former employees: Why did they leave? What's the culture really like? Is the company investing in its people, or burning through talent?
Industry experts: Academics, trade journalists, industry consultants -- anyone who studies the competitive landscape professionally.

Fisher emphasized that no single source tells the whole story. The power of scuttlebutt is in the mosaic: each conversation adds a piece, and after enough conversations, a clear picture of the company's competitive position, management quality, and growth trajectory emerges. This is exactly what modern buy-side analysts call "channel checks" and "expert network calls" -- Fisher invented the methodology sixty years before it became standard practice.

The Key Insight Behind Scuttlebutt

The financial statements tell you what happened. Scuttlebutt tells you why it happened and whether it will continue. A company can report excellent numbers for years while its competitive position is quietly deteriorating -- customers becoming dissatisfied, key employees leaving, competitors closing the technology gap. The income statement is a lagging indicator. The scuttlebutt is a leading indicator.

Fisher also recognized that scuttlebutt protects you from management deception. Executives have every incentive to paint a rosy picture. Their customers and competitors have no such incentive. When the mosaic from outside sources contradicts what management is saying, that's a red flag worth more than any financial ratio.

Fisher's Fifteen Points

The core of the book is a fifteen-point checklist for evaluating whether a company has the characteristics of a long-term compounder. These are not quantitative screens -- they are qualitative judgments that require deep research. Here are the fifteen points, grouped by theme:

Growth and Market Potential (Points 1-3)

1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years? Fisher is looking for companies with a long runway. A great business in a stagnant market cannot compound. The ideal investment has both an excellent product and an expanding addressable market.

2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited? One-product companies are fragile. Fisher wants management teams that are already developing the next generation of products before the current ones mature.

3. How effective are the company's research and development efforts in relation to its size? R&D spending is not enough -- it has to be productive R&D. Fisher looks at the ratio of successful new products to R&D dollars spent, and whether research efforts are strategically directed or scattered.

Profitability and Operations (Points 4-6)

4. Does the company have an above-average sales organization? Even the best product fails without effective distribution. Fisher pays close attention to how products reach customers and whether the sales force is a genuine competitive advantage.

5. Does the company have a worthwhile profit margin? Fisher is less interested in current margins than in the trajectory of margins. Are margins expanding as the company scales? Or are they compressing under competitive pressure?

6. What is the company doing to maintain or improve profit margins? This is about management's awareness of cost discipline and pricing strategy. Companies that grow revenue while letting costs grow faster will eventually hit a wall.

Management Quality (Points 7-11)

7. Does the company have outstanding labor and personnel relations? High turnover, frequent strikes, and low morale are symptoms of deeper problems. Fisher found that the best companies consistently treat employees well -- not out of charity, but because they understand that human capital is their most important asset.

8. Does the company have outstanding executive relations? Fisher looks at how senior executives work together. Is there a culture of collaboration and open communication, or is the company a political battlefield? Companies where talented executives routinely leave are waving a red flag.

9. Does the company have depth to its management? A company dependent on a single brilliant CEO is fragile. Fisher wants management depth -- a bench of talented leaders who can succeed the founder and sustain the company's culture and strategy.

10. How good are the company's cost analysis and accounting controls? Management cannot make good decisions without accurate, timely information about where money is being made and lost. Fisher considers this a hygiene factor -- its absence is disqualifying.

11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition? Every industry has specific factors that separate the best operators from the rest. In retail, it might be inventory turns. In pharma, it might be pipeline depth. Fisher wants investors to identify and evaluate the industry-specific metrics that matter.

Shareholder Orientation (Points 12-15)

12. Does the company have a short-range or long-range outlook on profits? Fisher avoids companies that sacrifice long-term competitive position for short-term earnings. He wants management teams willing to invest in the future even when it temporarily depresses reported earnings.

13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth? Growth financed by endless share dilution is not real growth for shareholders. Fisher prefers companies that can fund expansion from internal cash flow or modest debt.

14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur? Transparency during bad times is the truest test of management integrity. Fisher considers selective communication a disqualifying red flag.

15. Does the company have a management of unquestionable integrity? The final and most important point. Fisher writes that management integrity is non-negotiable. No amount of business quality can compensate for dishonest leadership. If there is any doubt, move on.

When to Sell: Fisher's Three Reasons

Fisher was famous for almost never selling. He held Motorola from 1955 until his death in 2004, a position that grew over a thousandfold. His conviction was that truly great companies are so rare and so valuable that selling them for a modest profit -- or even a large profit -- is usually a mistake.

Fisher identified only three legitimate reasons to sell:

1. You Made a Mistake

Your original analysis was wrong. The company doesn't have the qualities you thought it did. The scuttlebutt doesn't support the thesis. In this case, sell immediately and don't look back. The biggest danger is clinging to a mistake because you don't want to admit you were wrong.

2. The Company No Longer Qualifies

The company has changed. Perhaps management has deteriorated, the competitive advantage has eroded, or the growth runway has been exhausted. The company that met all fifteen points five years ago no longer does. This requires ongoing monitoring -- the initial research is the beginning, not the end.

3. A Clearly Better Opportunity

You have found a significantly more attractive investment, and you need to free up capital. Fisher warns that this reason is the most dangerous because it is the most easily abused. Investors constantly convince themselves that the new opportunity is better, when in reality they are just bored with a slow-moving winner. Fisher's standard is that the new opportunity must be clearly superior, not marginally so.

Notably absent from this list: the stock price has gone up a lot. Fisher explicitly rejects selling just because a stock has doubled or tripled. If the company still meets the fifteen points and the growth runway is intact, the price gain is a reason to hold, not a reason to sell. The greatest compounders in market history are the stocks that investors sold too early because they couldn't believe the gains would continue.

The Role of R&D Spending

Fisher was ahead of his time in emphasizing research and development as a critical driver of long-term value creation. He argued that in technology-intensive industries, R&D is not a cost to be minimized -- it is the investment that determines whether a company will still be relevant in ten or twenty years.

But Fisher was sophisticated about R&D. He distinguished between:

Productive R&D: strategically focused, aimed at identifiable market opportunities, with a track record of converting research into commercially successful products.
Wasteful R&D: scattered, unfocused spending on projects with no clear commercial application, often driven by scientists' curiosity rather than market demand.

He also understood that R&D productivity varies enormously across companies. Spending 10% of revenue on R&D means nothing if the output is negligible. What matters is the conversion rate -- how many R&D dollars produce how much incremental revenue and profit. This insight anticipates modern debates about return on invested capital in technology companies, where investors must evaluate whether massive R&D budgets are building moats or burning cash.

Growth Investing vs. Value Investing: A False Dichotomy

Fisher is often placed in opposition to Benjamin Graham -- the growth investor vs. the value investor. Fisher himself pushed back on this framing. He argued that buying a genuinely outstanding company at a fair price is value investing, because the long-term compounding of earnings will produce far more value than buying a mediocre company at a cheap price.

Buffett synthesized both approaches, famously saying: "I'm 85% Ben Graham and 15% Phil Fisher." But as Buffett's practice evolved, the Fisher influence became increasingly dominant. Berkshire's greatest investments -- Coca-Cola, American Express, Apple -- are Fisher-style long-term holdings in outstanding companies, not Graham-style cigar-butt bargains.

The resolution of the apparent conflict is simple: the best investment is an outstanding company (Fisher's quality filter) bought at a price that provides a margin of safety (Graham's valuation discipline). The two frameworks are complementary, not contradictory.

Why This Matters

Fisher's qualitative framework complements the quantitative rigor of traditional value analysis. In an era of abundant financial data, his emphasis on primary research, management assessment, and competitive positioning remains highly relevant. The scuttlebutt method is essentially the predecessor of modern due diligence, and his fifteen-point framework provides a structured way to evaluate whether a company has the characteristics of a long-term compounder.

Perhaps most importantly, Fisher's work teaches investors that the highest returns come not from buying cheap stocks, but from buying outstanding businesses and holding them through compounding cycles that last decades. The psychological discipline required to hold a stock for twenty or thirty years -- through crashes, recessions, and periods of underperformance -- is the hardest part of Fisher's approach, and the most rewarding.

Key Takeaways

The scuttlebutt method: gather intelligence from a company's ecosystem (customers, suppliers, competitors, employees) to build a qualitative mosaic that leads, rather than lags, the financial statements.
Fisher's 15 points provide a comprehensive checklist for evaluating growth companies, covering markets, margins, management, R&D, and integrity.
Concentrate portfolios in a small number of outstanding companies rather than diversifying into mediocrity.
The best time to sell is almost never -- there are only three legitimate reasons: your analysis was wrong, the company has changed, or a clearly better opportunity exists.
R&D spending must be evaluated for productivity, not just magnitude -- what matters is the conversion rate from research to commercial success.
Qualitative research on management integrity, innovation culture, and competitive positioning is at least as important as quantitative analysis.
Growth investing and value investing are not opposites -- the best investments combine Fisher's quality standards with Graham's valuation discipline.
The hardest part of Fisher's approach is not the research. It is the patience to hold great companies through decades of compounding.