Over the past 10 years, I have probably read about a hundred books or so on investing. However, I have found it hard to retain much of the content in most of the books. That’s because after I had gone through 10 books on investing, I realised that most investing books seem to be repeating the same concepts and ideas. However, there is one book that is embedded in my mind like how a sticky chewing gum gets stuck to the sole of a shoe. This book is one of the first I ever read and the best investment I’ve made…
Over the past 10 years, I have probably read about a hundred books or so on investing. However, I have found it hard to retain much of the content in most of the books.
That’s because after I had gone through 10 books on investing, I realised that most investing books seem to be repeating the same concepts and ideas.
However, there is one book that is embedded in my mind like how a sticky chewing gum gets stuck to the sole of a shoe. This book is one of the first I ever read and the best investment I’ve made so far. It is Common Stocks and Uncommon Profits by Philip A. Fisher.
One of the most valuable insights I got from the book are the 15 questions that Fisher himself asked when analyzing a company. Till this day, I continue to ask the same questions about every investment I’m making. So far, the 15 questions have been very profitable for me. That is why I want to share the questions, along with my thoughts on them, in a series.
Here are the first three questions.
Question 1: Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?
This question deals with the addressable market for a company. It is important for us to think about how big a company can grow into given its current range of products and services.
Often, investors are attracted to companies with a small market capitalisation just because they feel that it has a better chance of growing into a company with a large market capitalisation. However, a company with a small addressable market will stay small regardless of its current size if it does not pursue new markets.
This question forces us to think about how the future will look like for a company we are researching.
Question 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?
A company can only have a sustainable future if it is reinvesting its profits for the future. Therefore, it is important for us to consider whether – and how – a company is developing new products or services that can give itself a new lease of life going forward.
Question 3: How effective are the company’s research and development efforts in relation to its size?
We must make sure that the resources a company is devoting to research and development is sufficient to make an impact on its bottom line in the future.
A company that is spending $300 million in research and development may seem like it is putting in a lot of effort. But, if the company is generating $300 billion in revenue, then its research and development spending is just immaterial. This is why we need to look at a company’s research and development efforts relative to its current size.
Fisher’s 15 questions are essentially a checklist for us to think about when analysing a company. The first three questions focus on a company’s future potential. As investors, we need to be clear on how a company’s business would look like going forward. Investing is about the future, and it is key that we find companies that have bright futures ahead of them, instead of gloomy ones.
Stay tuned as I explore the rest of Fisher’s questions soon!
Editor’s note: The next part of the series touching on Questions 4 to 6 has been published. It can be found here. Articles reviewing the seventh to 13th questions have also been published. They can be found here (seventh), here (eighth and ninth), here (10th and 11th), here (12th), and here (13th).
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.