Security Analysis Book Introduction

Hello friends, in today’s article we see the introduction of the Security analysis book written by Benjamin Graham and David Dodd. This book also called as Bible of Value Investing. If you want to do an analysis of stocks individually then read this book. According to warren buffet, this is the best ever written on value investing, this line is written by Warren Buffett on the book cover. If you want to buy this book then click on the below image.

Security Analysis Book Introduction
Security Analysis Book Introduction:

The author gives advice about this book while you are reading this book

About this book(security analysis):-

  • This book is intended for those who have a serious interest in Security Analysis.
  • Not Addressed to complete Novice you should know about basic financial terms to understand this book.
  • So that those are nothing know about financial terms, then this is a book not for you.
  • In this book, we learn, how to analyze stock individually and general principles and standards to select companies.

In the introduction, part author talks about three timelines i.e. 1911-1913, 1923-25, and 1936-38.

Authors say about 1911-1913, this time is normal but market time also changes and shows volatility.

In 1911-13, this timeline the market very less fluctuates.

In 1923-25, this timeline the market is less fluctuated.

In 1936-38, in this timeline, the market is more fluctuation

So in this book whatever we talk about is in the past in 1940, so imagine yourself in 1940.

so let’s start,

The author says, ” Whenever the time is changing, with that market also changing and bring the new problem to the investors.”

This all discussion we see in the introduction part, let’s start with step-by-step which type of problem actually we face in different securities. (Security Analysis Book Introduction)

  1. High-Grade bonds and preferred stocks
  2. Speculative bonds and preferred stocks
  3. Common Stocks

so let’s start with first

1) high-Grade bonds and Preferred stocks:

The author says, ” in past people is buying the securities blindly and keep them in a safe place and forget about that securities and after some(year) time they see that securities are doing well, and this strategy is working good.”

But in today’s ( means 1940) Investors have to face three major problems.

A) Safety of principal and interest

B) Future of Interest rates and bond price

C) Value of a dollar

let’s start with the first problem

A) Safety of principal and Interest:

in these we see, in past old idea is to buy securities and say this is the permanent investment and nothing happen this security we buy and keep this safe and then also strategy is working, but these things do not happen yet now.

Now time, nothing is a permanent investment, no one a single thing in which you can put money and forget about that things. (Security Analysis Book Introduction)

Principal and interest safety, if you apply very strict standard to buy this security. so this mistake does not happen. (Security Analysis Book Introduction)

B) Future of interest rates and Bond prices:

In the past, bond yield is very high, but before 1940, the yield of bonds is going low.

So the author is now in two situations, is that yield is permanent or temporary.

If yield is temporary, then the yield is going to increase so 20-25 bond prices are falling, then we have to be ready for this.

If yield is permanent then this investment is in high-grade bonds and preferred stocks, then this investment is not good enough, Because you get very low on that investment.

The authors say, to be safe from this then you can buy medium-term bonds, those that have 15 years maturity, so those not more longer or not shorter in the year. so the investment is also going in cash as compared to longer periods bonds. (Security Analysis Book Introduction)

let’s see the third problem,

C) Value of a Dollar:

If the value of a dollar is down then people buy the common stocks.

this is because, for example, if you buy bonds for five years and you get the time to time got payment.

Let’s suppose you get $20 each after 6 months for long five years

so you get 10 time $2o if the value of the dollar is minimum (means that earning power is going less)

So you earn $20 earnings from bonds, but you can not buy some value of things, before $20 then after $20 means

In the future, you get $20 dollars then work less than past $20 and buy the minimum things as compare to the past $20.

So this is because of dollar price is going down, so this investment is not benefited because your payment is fixed.

When the dollar price goes down, your earning power has to increase to buy some amount of the same things in past and future also.

For this, there is only one solution, which is that put your surplus money in both, bonds as well as stocks.

2) Speculative Bonds and Preferred stocks

In this, we see some problems, lets stats

A) Risk of principal loss, not offset by a higher yield done:

This author says, Losing of principal is not offset by a higher yield, because this type of bond is very risky.

In this bond, we can lose our principal so, that’s why they give maximum yield than before we discussed ( High-grade bonds)

Because High-grade bonds have minimum yield and this has a maximum yield.

So in this bond, only a high yield is not benefited because we required the chance to profit our principal means then we have the advantage of invest in this bond. (Security Analysis Book Introduction)

B) Approach them as common stocks with limited claims:

Think like this, this is not senior security of inferior type.

 

3) Common Stocks:

The author defines firstly, which are the good stocks? the good stocks who called those are leading company in their industry and those have good records and in future also have good prospects, and thinking is doing good in future also as like in past. and they are in a leading company.

The author gives for this an example of General Electrics

Other good stocks of those company which is rightly financed and there is future prospects very attractive means past record is not good but future is bright and does a better performance in future. e.g. Abert Laboratories

the author says, ” people are neglecting the quantitative standards nowadays and mostly depends on future and future and says future earning is going high.

if suddenly earning increases then people don’t take average earning, they take high earning points and forget about the past earning and they find out the P/E ratio. (Security Analysis Book Introduction)

suppose companies earning is same as first not big much change, then you can take previous year earnings, and take the P/E ratio.

But earning first is very less and suddenly increases, then and you take the same previous ratio this is not the right way.

And some people buy stocks on the only basis of P/E and they think the P/E ratio is standard.

So the authors say, ” P/E ratio is not any standard.”

The P/E ratio is not controlled by your investment. your investment and other people’s investment control the P/E RATIO.

The authors say, ” those are investment trust, they make the speculation in strong company, and by the strong and leading company shares.

You can see nowadays also many famous mutual funds, everyone is doing same and everyone has the same leading company shares.

you can go to any industry that company is leading company, then this investment trust has that company shares.

So those people don’t do any analysis and some people almost forget about analysis they only do speculation in a good and leading company.

the author then gives examples of General Electrics. In 1937 the General Electrics value is about 1.87 billion dollars and after one year in 1938, this company value going to is about 0.78 billion dollar

Means in one year this company lose their value almost 50 %.

So the author says, what happened in 12 months this big company value go down up to 50% destroyed.

The author says, ” This is only happening because in 1937 people are optimistic about the company and those people also pessimistic in 1938 on the company. (Security Analysis Book Introduction)

So the company is doing the same as the previous year and now also doing the same, so the company doesn’t to any better in the year and not any do badly in this year to say the reason for that in the year 1938.

Then the author says, “people speak like in 1937, whatever the price of that company is really the price and in 1938 whatever the price of the company is as real like in 1937 of our investment. So this value is going down and people say this is the reality of this company.

If you speak like this, its means, you understand the language or you are stupid.

you don’t have the common sense

In common stocks, there will be four major problems, let’s see one by one

A) General future of Corporate Profits:

the author says, ” No one predicts the future, and people say, ‘ railway stocks are safe and sometime after automobiles company come and compete with daily company and perform well than daily stocks.

so nothing is sure about the future.

So about this, The author says, ” You can pay for only past and current earning and don’t pay for the future earning, try to get future earning in free.”

 

B) Quality differential between companies:

In this problem, Those are good stocks ( leading company stocks) these stocks trade very high multiple in the marketplace, then the secondary companies stocks. (that company is smaller than the leading company)

People think that companies are big, they are going bigger and those companies are small they go vanish or disappear in the coming future.

the author says, ” this company has two problems, the first problem is that their size is big so growth is not increased by the company and another second problem is this return on invested capital they get a minimum return.

Those companies are big, so there are so many companies that try to compete, and get the advantage from that come of leading company if any competitor doesn’t do anything to collapse them then the government does with that leading company. ( understand with examples of Apple and Microsoft, Microsoft company know that government is a mess with us when apple company goes bankrupt, that why Bill gates, buy the non-voting shares of the company and save the apple company while dealing with the Steve jobs. This is the most time happen with the company, so those are leading company that has to be competitive or government will mesh with them.)

C) Interest Rates:

We firstly talk about the bond yield, in the above point in the past there is a high yield, but now the day yield is low.

If this is permanent then the stocks yield average go also minimum. (Security Analysis Book Introduction)

Because, people also invest in stocks, instead of a bond, and then crowd increase and common stocks yield also come.

 

D) Factor of Timing:

The author says, according to him, time the market with successfully is the impossible thing.

Until that right time has come, and when we get the attractive price, the author says, this Is a good time to market.

If this is not happening, then there is no right time to buying the stocks.

The author says, ” timing principles is when the market shows the uptrend means, from now market goes high and they decide now the uptrend, like people to do technical analysis.”

this philosophy of timing is opposite to the investment nature.

This philosophy says, that, ” investor has to be patient until the market is encouraging himself too says, now I am going high and you now do investment in me.

The author says in the conclusion part of the Introduction of security analysis.

Investors should wait for periods of depressed business and market levels to buy representative common stocks. otherwise, he will have to acquire them at prices that the future may cause him to regret.

and Secondary companies offer great opportunities except in the overall bull market. then the leading company in the industry.

Common Stocks and Uncommon Profits book review

Hello friends, In today’s article we see chapter 11 of the common stocks and uncommon profits book review. chapter 11 is about the summary and conclusion of common stocks and uncommon profits book review. So let’s start summaries the whole book in simple words.

Previous Chapter 10

Common Stocks and Uncommon Profits: Chapter 11- Summary and Conclusion
Summary and conclusion:-common stocks and uncommon profits book review

In chapter 11 The author explains the whole book in a simple format or we say summary and conclusion. so let’s start with them.

This book has attempted to show

  • What are the basic principles of Common Stocks investment: In this author explain which point we have to consider while coming to common stocks and also explain how people make money while using the two techniques in past, and we know in the stocks market we can make a tonne of money just finding the outstanding company.
  • What type of stock to buy: In this point, the author explains the outstanding company stocks. How to find them, while using the Scuttlebutt method and applying the 15 points of principles of outstanding company. So this type of stocks we have to buy. (common stocks and uncommon profits book review)
  • When to buy it: When you find out the outstanding company, then there is some time we have to buy while seeing the scenario of buying principles, this point explains in the whole format, you can see it by click here.
  • When to Sell it (Never): In this point, the author explains the philosophy of selling stocks, and why you have to sell stocks when you required very much emergency, but if there is no emergency then don’t sell stocks. The author explains the Never sell stocks ever philosophy and behind that reason. you can see in detail click here.

The author says, ” if you don’t have patience and self-disciple, so you can not do anything good in the stock market while knowing all this above method strategy.

In the stocks market, having the mind or cleaver ness is not sufficient to do good in the stocks market, you have to right mindset then you do better than those people who say themselves professional.

Shakespeare unintentionally summarized the process of successful common stocks investment: ” There’s a tide in the affairs of men, which taken at the flood, leads on to fortune.”

It means, to grab opportunities whenever they arise before you lose them by delaying.

Doing this can make you a fortune.

This is all about chapter 11: summary and Conclusion.

I hope you love this book summary of all chapters that explain.

How to find growth stocks

Hello friends, in today’s article we see how to find growth stocks from chapter 10 how I go about finding growth stock of book common stocks and uncommon profits. In chapter 10 Philip A. Fisher explains, how they find the growth stocks. so let’s see step by step

Previous Chapter 9

How to find growth stocks
The step-by-step process for find a growth stock:

Philip A. Fisher says finding growth stocks and doing these things take a great deal of Time, Skill, and Alertness.

Philip A. Fisher says, ” This is what it is, there is no easy way to find growth stocks.”

So there are thousands, of stocks in dozens of industries that could qualify as worthy of more intensive study.

How do decide which stocks to investigate further? given these question answers, Philip A. Fisher gives the following points:

a) you can decide stock to investigate further by talking to business executives and scientists. Philip A. Fisher says, ” 20% of ideas and 16% of purchases come from this source of people.

b) You can also decide stock investigate further by talking to able investment men across the country with impressive records. Philip A. Fisher says, ” 80% ideas and 84% purchases come from this source of peoples.

 

The Authors( Philip A. Fisher) looks for some key matters while talking to these people in order to decide whether to investigate further or not.

for example any company

  • Is this company being steered towards the line of business having opportunities for unusual growth in sales?
  • would it be easy for newcomers to enter these business lines and displace leading units?

If sales growth easily growing and new companies easily not enter this business line.

Then the author ( Philip A. Fisher) investigate further this company. If this company is not true on the above question then the author rejects that company. (How to find growth stocks)

When Mohnish Pabrai meets charlie Munger then charlie says, to successful investing you have to see what able investor doing and what to buy and then you can investigate further of that stocks. the same author also does before this great investor.

from this your work is simple and then you can not have to investigate 1000 of the company for one idea and this is not easy to investigate 1000 of the company. so use this method.

The Author decides by talking about these two types of people, which the company has to investigate. after this  author gives

What to Do Next:-How to find growth stocks

After deciding which companies to investigate further, the next step is following:

A) What The author doesn’t do this:

  1. The author doesn’t approach management at this stage.
  2. He doesn’t go over part annual reports for hours and hours and making minute studies of minor year-by-year changes in the balance sheet of the compnay.
  3. The author doesn’t ask every broker about the broker’s opinion on the stock of the company.

So what to do author give below:

B) What The author does do this:

  1. The author does a Glance over the balance sheet to determine the general nature of capitalization structure and financial position.
  2. And they also Read SEC prospects for the breakdown of sales by product lines, competition degree of promoter ownership, profits margins, the extent of research activity, the abnormal or non-recurring cost in prior year operations. (How to find growth stocks)

Then the author uses the scuttlebutt method as best as he can use this method.

In this, The author meets every key customer and supplier, competitors, ex-employee, and scientists to find answers to the 15 points.

the author meets him with common friends and if they can’t meet them, then they reject the company.

If you want to meet these key people so don’t meet general call or direct meeting, for this purpose you have to call them officially and assure them their name never come anywhere, then you get 15 points solutions.

Some people think, how management meet me, so for author says,” Management doesn’t see how much you can invest in a company, they only see the how much confidence you have about this stocks.”

after meetings key peoples then the author gives what to do next as following:

What Next:

Then author approaches the management to fill the gaps in 15 points they get information from the key peoples.

The author says, ” Scuttlebutt method helps to you know the strengths and weakness of a company, so you can ask to meet specific officers of the company.”

For example, if Scuttlebutt’s method tells you there is some trouble in the marketing division, you can ask to meet people from the marketing division to find out whether they are doing something to improve the situation or not.

the author gives advice to us, say ” never meet the management of any company until you have first gathered together at least 50% of all the knowledge you need to make the investment.

The amount of time management will give you depends on the company is an estimate of your competence than the size of your financial interest. (How to find growth stocks)

It is wise to be introduced to management by the right people.

  1. The companies considered as idea bought from 250 ideas, then choose one
  2. Those companies investigated actually bought from 40 to 50 ideas, then choose one.
  3. the companies visited  to meet management actually bought from 2 to 2.5 idea, then choose one

This is because the Scuttlebutt method gives a completely accurate picture of a company on 15 points. If the author decides to meet the mangement. so there is a high chance is to buy that stocks.

 

from the above deep process, the author choose the company or find the growth stocks

In the shot above process, I make the summary process format of finding growth stocks

Summary of Process:-

  1. 20% of ideas come from friends who are business executives and scientists, and 80% of ideas come from a small number of able investment men.
  2. Brief scrutiny of few point in SEC prospectus, scuttlebutt method aggressively for 15 points.
  3. Contact the management only in occasional cases when 15 points are qualified by the company reasonably.
  4. If hopes confirmed as fear cases after meetings with the management, then buy that stocks. (How to find growth stocks)

Now people ask others and say’,” How can someone be expected to spend so much time finding just one investment.”

So answering these questions the author give, ” In what other line of activity, you put $ 10,000 in one year and then years later it becomes $ 40,000 to $ 150,000.”

So reading this you get the mindset of following Philip A. Fisher’s method of finding growth stocks.

So this is all about chapter 10 of the common stocks and uncommon profits book.

What is the dividend?

Hello friends, in today's article we see the what is the dividend? or the hullabaloo about dividends from chapter 7 of common stocks and uncommon profits book. in chapter 7…

When to sell stocks

Hello friends, in today’s article we see when to sell stocks from chapter 6 of the common stocks and uncommon profits book. This chapter helps you to understand the selling of outstanding company stocks. The most important question is: when to sell stocks? so let’s see their merit and demerit of selling stocks.

When to sell stocks:

When to sell stocks

The author says ” if you are selling stocks, then we have an infinite reason for that for example, selling stocks for child education, starting own business and buying own house.”

This above all reason is out of this book. The author is only focusing on those reasons that have only one purpose making maximum profits by selling stocks.

If you are buying stocks on the basis of the previous chapter. Then you have only three reasons for selling stocks.

1 ) The mistake has been made in the Original purchase time: 

  • You have made the mistake while buying stocks that are known from the facts of the company. Now this time the prospect of the company is not good as before buying time. So in this situation, you have to control your emotion.
  • You have to remember this, ” big investors also do big mistakes”, so sell stocks as quickly as.
  • don’t hold that stocks for the long term, while listening to your ego. In this situation say no to that stocks and don’t run from accepting mistakes. so most of the investors lose their money while listening to their ego and holding that stocks. (When to sell stocks)
  • In this situation, you have two types of losing
  • 1) the more you hold, the more you lose: Instead of that sell these stocks and buying the better stocks then these stocks hold for the long term so this stock’s profit is more than the previous stocks we hold for the long term.
  • 2) Profits have also gone: If you hold those stocks then you lose the profit of better stocks also.
  • If you really want a 100% gain on the investment of your lifetime saving, over a period of the year, then don’t think of a 10% loss or 5% gain. don’t lose energy while thinking of that loss and gain.
  • Review your mistake carefully, learn from that mistake, and go forward.
  • In my opinion, Those investors buy the stocks, while analyzing them properly, and after some time those stocks go bad. They going bad they have the fact of that happening and show the reason for that happening.
  • But investors never believe in that fact, because they are very much attached to that stock like attached to a girlfriend. (When to sell stocks)
  • So Those are a trader, these people are not attached to stocks whatever stocks. they only put the Stop Loss option. If they had made a mistake, then they don’t lose lots of money because of the stop loss option and they play other trades. I am not saying to become a trader and put the stock loose. I am saying that taking the quality from traders is detachment from stocks. and learn this skill of detachment.

2) If the company no longer qualifies in regards to the 15 points.

  • This situation has two reasons for this cause of selling stocks

A) Determination of Management:

  • Management of the company is long after time getting success. And they are sufficient with that success and after that, they don’t work like before they do to got success.
  • The new management of the company does not believe in the old management policy. The Old management policy helped to get the success of the company. (When to sell stocks)
  • In this situation, you have to sell stocks as quickly as, whatever the general market outlook. If the market is bullish or bearish what is the capital gain TAX?

B) Company no longer has the prospects of new market and new products:

  • If the above point is taken, then that is why the growth potential of the company decreases,s and then the stock price is also decreased.
  • So in this situation, you can sell these stocks slowly, but you have to consider, the time of selling stocks comes.
  • Stocks can be sold at more leisure than management deterioration, but the time to sell has come.

3) Switching to more attractive company stocks:

  • If an investor is very much sure about other stocks are better than these stocks in growth prospects.
  • then after that, you can switch whatever capital gain tax is applicable while selling these stocks. you can handsomely switch to better stocks.
  •  So this that not mean switching each and every day and becoming a trader.

Above these three reasons from the author, the author gives another reason for selling stocks according to the financial institute, consider to sell stocks and their thought and the authors thought on their thinking.

so let’s see financial community’s reason for selling stocks is good or bad

Reasons the financial community gives for selling stocks:

1) General Market decline is on the horizon:

  • The general market forecast is only a guess, you have to find out the real problem in the company and get the knowledge that does not depend on a guess. (When to sell stocks)
  • If you sell stocks and the bear market does not come, then you got a loss and when investors buy stocks and capital gain tax is also applied. this looks like pure stupidity.

2) Outstanding stock has become overpriced:

  • Overpriced means the P/E ratio of the company is more than the investor thinks this range is a good P/E ratio. This P/E ratio is more multiple than the P/E ratio, which we are considering is good. This can get while considering with other company.
  • No one tells you the good price of the P/E ratio.
  • In any common think good stocks of the company will sell and should sell at a higher P/E multiple.
  • The author says, ” if you understand the stocks is go high as compared to its a fundamental value and 35% can fall down but have a good prospect of the company. then You have to maintain the position in that stock and not sell at all. (When to sell stocks)

3) Most ridiculous of all is that Stocks has had a huge advance:

  • This stock’s potential is gone and buying the new stocks and saying these stocks do not go high.
  • The author explains with examples, ” Suppose you have the last day of your college life. Everyone asks you to give them 10X of their first-year earnings.
  • instead of that, they give you 25% of his every year earnings for the rest of his life. so you don’t have that much money to give each and every classmate in your class.
  • You can give only three classmates. In this situation you can’t see who your friends are, you directly see which student in the class is clever and those got big earnings in the coming future year.
  • You choose three people, and after 10 years, one of your classmates, get outstanding success. He gets promotion on promotion and gets the top executive post in his company.
  • So the author says, tell me in this situation, you can sell me a contract of those friends that got great success,
  • because only one reason is that they get the 600% return on your investment and buy those classmate contract that has the same earnings before 10 years and after also.
  • You think like this, a classmate does not develop and has the ability to develop.  this is like the above third reason for the financial community. (When to sell stocks)
  • Now you say, a college classmate and company stocks are both different things.
  • the author says, yes one big difference is, our outstanding classmate gets possible death early is not but, he will die one day, definitely.
  • After his death, we don’t get 25% of his earnings.
  • But a company doesn’t have a lifespan whatever death of the founder has happened, the company is still running, generation after generation.
  • Those quality and management policy is the same and they are hiring new quality management.
  • For this the author says, this whole chapter in one is

“If the job has been correctly done when stock is purchased, the time to sell it – Almost Never..”

This is all about when to sell stocks from chapter 6 of common stocks and uncommon profits book

 

Read more: The Intelligent investor book

Read more: One up on wall street book

Common Stocks & Uncommon Profits: Chapter 4

Hello friends, In today’s article we see what to buy: applying this to your own need, from chapter 4 of Common stocks and Uncommon Profits book. Chapter 4 helps you to find which stocks we have to buy and what is the reason for that from the Common stocks and Uncommon Profits book.

Previous Chapter

Common Sense & Uncommon Profits: Chapter 4

What to buy: Applying this to your own needs:-Common Stocks & Uncommon Profits: Chapter 4

After studying the 15th point, we have some, like, This work is done by myself, or finds some expert.

There are three stocks, Large-cap, Small Cap, Mid Cap category stocks. So between that which stocks we have to choose.

Which stocks do we have to buy, those that pay the dividend and without paying the dividend stock? this all depends on your need.

People have misconceptions about successful investors. They are thinking, Investors are bookish person, that only read a balance sheet and analyze the financial statements. (Common Stocks & Uncommon Profits: Chapter 4)

If you think like that and work like that, then you get the stock at a bargain price. But after some time these stocks become the value trap.

So, friends, this is the book for making money while taking low risks.

This is only happening by buying growth stocks, and growth stocks are giving each and every decade a 100% return on investment.

So the author only talks about these growth stocks that give 100% return by staying 5 to 10 years. with it.

The authors say, Investor only gives some time to his investment, suppose you have the ability, and time also. (Common Stocks & Uncommon Profits: Chapter 4)

But maybe don’t have time to meet the customer and supplier. If you have time to talk but don’t know to talk to the customers and suppliers and do not know which type of question you have to ask.

If you have all the above things, but don’t have to develop an interest in people to talk with you, that tell you all information about the company.

If you have all this ability, then you may not have judgment power to get the meaning thought on that information or if this also has the ability. (Common Stocks & Uncommon Profits: Chapter 4)

if maybe happen, your geography is not good, for example, you stay in the village and this person is in the city so you can’t meet them.

If you face any of the problems above discussion, then take advice from experts. So don’t try to be your own doctor and lawyer.

So this principle also helps you to find good experts.

If you choose any experts, then you have to see their 5 years records,

If they have a good record then only then give them money. If not then don’t give money.

See advisor is honest and others ask him investment philosophy that studies in this book. then that better adviser then you know how they got the five years return. (Common Stocks & Uncommon Profits: Chapter 4)

by timing the market or investing in the marginal company or following this 15th principle, that is why you have to see his five-year result return.

Three types of the company by following 15 points you get the outstanding company in that.

  1. Large-caps: Those companies have good profits and better financial positions or also called institution stocks because insurance companies invest in them. For example Dow Chemical, Du Pont, and IBM from 1946 to 1956, three companies’ stocks are going 5X in 10 years and dividend returns go from 2.5X to 8 and 9 % in the original period and this is not an unusual period this is a normal period.
  2. Small and young companies: they have outstanding management and research scientist are capable for example, Amplex stock in 4 years is going 8X.
  3. Between large and small-cap companies ( mid-caps): Small companies give you 1000X gain in 10 years. if you are wrong then one dollar penny does not remain, so the skilled investor can be done a mistake.

Large companies losses are usually temporary, if you buy the right time stocks (Common Stocks & Uncommon Profits: Chapter 4)

So what is a good time we see in the next chapter?

How much money invested in large-cap companies stocks gives more profit but not that much, those give small companies.

How much money to invest in large-cap companies’ stocks or how much in a small company all depends on you.

Profits from big companies are minimum the total loss outway, that happens in a small company.

if a small company is successful then they become a large company.

* High-dividend yield vs Low-dividend yield growth stocks:

Small investors can not live on dividends, whatever amount of a dividend of high, because their overall investment is small.

A small investor has to be sufficient emergency money for their circumstances. If after that some money is behind then only invest for the long term.

If investors’ circumstances are like they don’t need dividends, then the author says, they have to invest in the company and have to compound their money. (Common Stocks & Uncommon Profits: Chapter 4)

The author’s personal point of view says Small dividend income is not important as after a few increases in maximum income and the author’s sons have a chance to become wealthy in these stocks.

Every stock depends on two things

  1. How skillfully do you apply this 15th principle
  2. Matter of good luck

Good luck is best for one stock, if you have maximum stocks, then luck is an average one. luck only matters when you have only one stock or a few.

the author says previous 35 years that many studies on high dividend stock and low dividend growth stocks. Each stock outperforms in a 5 to 10 years period.

Surprisingly these stocks have increased their dividends such that they were paying greater dividend return on original investment ( though dividend yield is still the low company compared to increased stocks price) than high dividend yield stocks.

So this is all about chapter 4 of common stocks and uncommon profits.

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15 points of outstanding company

Hello friends, In today’s article we see 15 points of the outstanding company from chapter 3 of the common stocks and uncommon profits book. In 15 points of an outstanding company, you have to apply for each and every company to show the outstanding company. Philip A. Fisher gives these 15th points from his investment strategy they use for 10 years, with getting a good return.

previous chapter 2:

15 points of outstanding company
Chapter 3: What to buy: The 15 points of an outstanding company

In this chapter, we have to talk to customers, suppliers, management, and competitor about the company, by asking about these 15 points of outstanding company.

These 15 points define whether the company is outstanding or not. so let’s start with the first points

  1. Does the company have products and services with the sufficient market potential to make possible a sizable increase in sales for at least several years?

The author says, ” if sales are constant or decline, then also you make the one-time profits from that company.”

A company can minimize costs and improve profits so that is why the cost price also increases, so in this company, investors can’t make the big money. (15 points of the outstanding company)

In other situations, profit can be big while the change in the industry, for example, If one company makes the first radio as a product, but now they are making Television and sales are increasing and that’s why profits also increase, but it has limited up to the time when everyone has the T.V., then profits is stopping and growth of sales also stops. so this is a type of situation that is also a one-time profit, but better than the first situation.

The author says, ” Sales do not grow like a uniform, they grow like irregular form, so don’t see the sales of annual reports or one year, see them for several years. (15 points of the outstanding company)

We need that type of company, they have the following two characteristics

1) Fortunate and able: (example: An aluminum company in America)

2) Fortunate because they are able: (example: Du Pont )

@ Aluminium Company of America is fortunate and able, because companies founder do the commercial and show the use of aluminum in daily routine, and they got a bigger market for their product, whatever they expect, this market is bigger than their thought. And they also take the advantage of fortunate scenarios.
Company stocks of the aluminum company of America his stocks increase 6 times their continuous previous year of medium return, which goes up to 40% down, and they become the 6 times. (15 points of the outstanding company)

@ Du Pont: This company makes the blasting powder for lots of the year, but in peach time, their sales come down, and close to the mining industry level. So in making blasting powder company develops the skill and this skill is very useful for making new products, and they launch one after one, and each product sells quickly and they make themselves a fortune.

So both types of companies have one thing that is important is that the management ability is the highest order, so without them, this sale not stay for a long period of time.

If any amateur investor invests in a chemical industry company and they see the talk like, ” in the industry those company is more attractive that have, their develop good growth product.” So they say’s the wrong way

Because of that the company is developing attractive growth products, that why they become an outstanding company. (15 points of the outstanding company)

if any company management is outstanding, the industry is in a change of technology, and the company has more focus on research, so the investor has to be alert about how management take the advantage of that opportunity to increase their sales and profits.

The Author say’s, ” His friends, make a survey in  1947, of the television industry and they found the competition is going to be very competitive and in between that there is the shortage of glass bulbs for picture tubes in T.V.

So Corning Glass Works company has the technology and research ability to supply the glass bulb to the T.V. Industry, so opportunity becomes the new revenue source for the company. (15 points of the outstanding company)

So author’s friends, recommend stocks, and these stocks in increase 12 to 13 times in just 10 years.

so let’s 2nd points

2. Does the management have the determination to continue to develop products or processes that will still further increase total sales potential when the growth potential of currently attractive product lines has largely been exploited?

you see the first and second points have a difference that the 1st point says, companies have to be existing product market is large so for that in upcoming year sales is increasing.

So 2nd point says, ” what is the company realize or not when the market potential of the product ends.”

if they want to grow continuously, so they want to work on new products and new markets.

So those company has come true on the first point and 2nd point also, then we need this type of company. (15 points of the outstanding company)

if the company doesn’t have there plan and policy for developing a new product, this company gives you only on-time profits, up to that time the existing product has market potential.

Scientific research and development is the first focus of the company because they develop an old product that is good and develop new products also.

Those company tries to develop new products from the existing product line, this company is doing better than those company that develops unrelated product. If the unrelated product is successful so company occurred in a different new industry, so that has no link with its existing industry. (15 points of the outstanding company)

let’s start with 3rd point

3)How effective are the company’s R & D efforts in relation to its sizes?

If you divide R & D expenses into the annual sales, so you get how much a company spends a dollar sale of percentage on R & D, which means how much percentage they give to the R & D expense of total money.

You can compare this figure with the other company. but it’s misleading if one of the companies is doing an existing product to take the order and customize it and they show research expense, but not many people believe that this is R & D expense. (15 points of the outstanding company)

Other companies do for new product palate plant cost as production expenses or not show R & D expenses. So both situation figure is not comparable.

A research scientist is well-skilled, and the company has that expertise, in that other expert scientists work together in a team.

Research experts and product sales are both familiar with the problem or not. we have to find out this. if they are familiar then profits increase.

The research and production department has to be in close relation, then good and quality products will be developed.

So the Top management crash program increases the research cost. crash program those, in that research people work for those workers that is more important, in this time.

Most of the time crash program is not worth all these disruptions they cause.

So in a big company, they have a maximum problem, that is why the small company is not afraid of the big company for competition.

So many times government pressurize to do research, and companies also do research on defense research.

Defense research-related product information is how much benefits the investor. let’s see three situations.

  1. The new weapon doesn’t have commercial use, but only work for military purpose and weapons write have government, in they can make a weapon from any other company by giving weapon writes and they develop the competition between the company and get from the cheaper company, that develop this product, so other company builds the product. so in this situation, investors have zero value for this crash program.
  2. second, some weapon is developed through a very critically complex process, but manufacturers have learned it and develop also more difficult than this, time other companies try to develop a weapon, they face a problem, so the government has to come to those company that develops first, so there is not a competition between the company, so in this situation, they have some value to the investor. (15 points of the outstanding company)
  3. As a like weapon, while the research team developing a weapon, they learn the new technique and principles that use in a commercial product of the company and improve it, and that is why the profits margin is increasing, then this type of crash program is most helpful to the company and in this situation investor has the great value.

so from government money, companies’ research teams learn the new principle and techniques, that apply to commercialize their business models, this is the reason for Texas Instruments and Ampex company success.

Market research is the important part, you have to see what the company is doing or not. If doing, so how big is the market, and what actually the customer need? Without doing market research, if a company develops the best product, that has zero value, they will be going zero or even cost also not make.

And also check company is spending money on research how long, you have to see for 10 years.  To make a new product to develop for the sales and profit rate increases. (15 points of the outstanding company)

let’s see the 4th point of outstanding company.

          4) Does the company have an above-average sales organization?

Making repeat sales from the old customer is the first benchmark of the success of the company. 

Most of the Investor’s focus is minimum on the sales efficiency, advertising, and distribution organization of the company. and maximum focus on product research finance etc.

Competitors and customers tell you the sales and marketing organization of the company.

Outstanding sales, product, and research three are extremely important for the company’s success.

For example, Dow Chemical Company: This company is very famous for outstanding research but people don’t know about their salesperson. The company is taking care of scientists as well as salespeople and give both special training and give some attention to salesman like research scientist. (15 points of the outstanding company)

Another example, IBM company: In this company salesman is spending 1/3 time of his job is on training. If any company’s sales organization is not strong but they have good at research and product, this like company gives you only time profits.

let’s see the 5th point of an outstanding company

         5) Does the company have a worthwhile profit margin?

From an investor’s point of view is that if sales value is when only if profit growth increases so without profit, sales growth is useless.

Industry profit margins and companies’ profit margins compare each other and we have to invest in those companies that have a maximum profit margin.

Marginal companies, those companies that have minimum margin, we don’t have to invest in that, you can only invest when companies business is changing fundamentally, and that causes profit increases and this profit is compulsory, so this company is leaving the marginal company category. (15 points of the outstanding company)

If big companies’ profit margin is minimum so maybe happen if this is temporary. so maybe happen their profit they use for research and sales promotion for some time. So this situation is more attractive.

If all industry is doing well, so all companies’ margin is maximum and in marginal companies, the profit margin is more percentage increase, and that is why profit growth is maximum compared to those companies that profit margin is maximum.

So after some time or in bad time come the marginal companies’ profit margin falls down very fast.

let’s see 6th points of outstanding companies

         6) What is the company doing to maintain or improve profit margin?

The Company’s success does not depend on how much margin at buying time they depend on, or what profit margin in the future. (15 points of the outstanding company)

Wages and salary costs increase year by year also cost increases as Raw material and supply costs. Some companies increase product prices to maintain the cost of wages and raw materials. Because they have the demand of that product or competitor increases product price more than that price, but it is the temporary company seeing the demand company increases the production capacity and demand is not like that then margin in minimum.

Some companies smartly minimize costs, like accounting and book handling, and transportation costs.

From this smartly we can minimize cost or cost-cutting, so this is not happening in one right way. So the investor has to focus on what the company does for cost-cutting and margin improvement, and this confirms by talking to the top executives.

So those companies doing good at cost-cutting they will do in the future also.

        6) Does the company have outstanding labor and personal relations?

If regular strikes happen in the company and carry on for a long time, then this affects on badly on production department.

If those companies have a Labor turnover maximum, then avoid this company because training new employees that increase the cost.

Those companies have no labor union, they usually have good relationships if the union is present but have mutual respect with management. If strikes do not happen in a company, it does not mean relation is good.

Companies’ labor turnover is relative to the company of some industry or in some area, so their relationship is how much good is important.

If the company is doing mass hiring and mass firing, so this is not a good sign from the company or investor’s point of view also. (15 points of the outstanding company)

Those companies are good companies, they settle grievances quickly and make above-average profits and above-average salaries paid to the employees, and applicants have a maximum list in that company to take the job.

If companies profit is coming by paying below-average salaries, means a serious problem is coming soon in the company.

8) Does the company have outstanding executive relations?

executives give the right direction to the company and they have a big responsibility and they have maximum stress level.

top-level executives’ stay in the company is mandatory and stay gives the maximum to the company, so these types of relationships are present in the company.

The company has a like culture, in that promotion is given on an abilities basis, not favoritism or not on nepotism. (15 points of the outstanding company)

The salary industry is that much from outsider selection when inside people are not capable of the post. An investor can learn about it easily by chatting with a few executives scattered at different levels of responsibility

9) Does the company have a depth to its management?

This means the company can delight in responsibility and authority. That means not like a one-man army

A small company can do better in one-man leadership, but sometimes one turn comes like the size of a company is not small and one-man leadership can’t handle all company.

So we learn from the 8th point that is necessary to know about to develop the management dept. means have to believe in the junior also. (15 points of the outstanding company)

The senior executives have to give some adequate authority to the junior for completing work if they don’t do that, if they are absent then the company faces two many problems.

Management has to listen to employee suggestions by giving up his ego, so whatever it be that may be criticism of current management policy.

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10) How good are the company’s cost analysis and accounting controls?

If a company can not break down its overall cost with sufficient accuracy and detail, to show the cost of each small step in its operation then it won’t have outstanding success for a long period of time.

If management doesn’t figure out the how much cost of the product, they can’t decide on the right pricing. if you ask the management, they will give you detail of the balance sheet, but not have important detail, but have detail inaccuracy. (15 points of the outstanding company)

But investors don’t verify numbers on their own.

If company management understands the cost analysis and control and others they have above average, then in this field they also are above average.

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?

In short, the company has some competitive advantage. for example in a retail business, need real estate expertise important. if any company can take better leasing property than the other competition means, they have this competitive advantage.

So in this company insurance costs is an important factor, if any company has insurance costs less than 35% of other competitors so this is the competitive advantage of the company.

If any company has some process of patent and product means they have this competitive advantage, but if the company is dependent on the patent for maintaining a profit margin, so this is a weakness because patents have an expiry date and they will expire. (15 points of the outstanding company)

A durable competitive advantage needs to beat the competitor. Manufacturing knows about the sales and service organization and customer goodwill is more important.

So patents are important for small and young companies, if not then big company copy their product and sell them on the big distribution network.

Leadership in engineering is the fundamental source of protection instead of the patent.

12) Does the company have a short-range or long-range outlook in regard to profits?

Some companies do business-like, they need profits today and some companies do not focus on today’s profits instead of that they focus on goodwill, because in long term, over the year, have maximum profits.

The company has treated customers and suppliers, in a form that we know, for example, if suppliers take an unexpected expense to deliver the product, and the company pays the supplier maximum than the contract so this company thinking in the long term. (15 points of the outstanding company)

If a company works to satisfy the customer to take special effects challenge, so they fix and compulsory customer, and they sacrifice short-term profit and think in long-term get overall maximum profits.

Investors have to buy a long-term range outlook.

13) In the foreseeable future will the growth of the company require sufficient equity financing so that a large number of shares then outstanding will largely cancel the existing shareholder’s benefits from this anticipated growth?

means, In a company when growth happens in the future, that company has to issue equity, and because of this, those growth benefits have to the existing shareholder not getting in.

The author says typical investment books most of the space given to this discussion is what is the capital structure.

So these things did not deserve these points. In the author’s opinion, the intelligent investor does not buy only stocks(15 points of the outstanding company) because they are cheap. ( opposite to the benjamin graham philosophy)

The Author says, very less company is only that come true on the 14th point and that companies we need this company easily get debt and easy to raise equity.

If investors think, companies’ growth visualize in the future, and companies’ cash and debt up to a limit of prudence have happened then is good.

After that company issues the equity for further growth, At that time the profit increases and the stock price also, but not sufficient cash and borrowing for growth, as we visualize, so this dilutes the earnings of the current share and we have to find out how much is dilution or after dilution is also attractive.

If the company is true on the 14th point but not good on this point then the investor can be bought, providing companies management if not poor. (15 points of the outstanding company)

If another company is good for financial in cash position but not good on other 14th points then do not buy, just because they are easy.

14) Does the management talk freely to investors about its affairs when things are going well but calm up when troubles and disappointment occur?

Even the best-run companies face unexpected difficulties, become it is the nature of business(lose money on research and profits pause)

But management has to be read by with plan, and how they escape from this situation. if they stop talking means, they don’t have a plan, to escape from the situation

So this investor has to stay away from those who hide the bad news from the investor.

last points, let’ see

15) Does the company have a management of unquestionable integrity?

Companies management is very close to the companies asset, and this asset can have been a different method to use badly.

For personal use companies’ assets can be used and give the contract of the supplier to the relatives.

Give relatives maximum salary, for them, they can issues stocks option. (15 points of the outstanding company)

So stay away from this is only one way is, our investment gives only good management, that limit.

If a company is good on 14th points but not good on this, then don’t put money on this company.