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….
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.
Let’s move on to the 12th question in Fisher’s list.
Question 12: Does the company have a short range or long range outlook in regards to profits?
It’s easy for management to boost a company’s short-term profit – all it has to do is to cut corners, utilise unethical sales techniques, or perform outright fraud. However, all these short-term measures would eventually catch up with the company and cause huge losses.
The global financial crisis that erupted in 2008 is a clear example of this. Many banks in the West were taking unwarranted risks to earn that extra profit for the next quarter, and the next quarter, and the next… until the music stopped and everything blew up.
It is very important for investors to know if a company’s management team has a long-term view when it comes to profit-making. This can be assessed by looking at how the company treats other stakeholders in the business. For example, its treatment of its suppliers and customers is a clear sign on this matter.
A company can boost its short-term profit by short-changing its customers and/or squeezing its suppliers hard. But the company’s relationships with its customers and suppliers won’t last this way. A customer that gets a bad experience with a company is unlikely to return; meanwhile, a supplier that has been given terms that make it tough to even eke out a profit is also unlikely to continue supplying to a company.
Fisher’s 15 questions are essentially a checklist for us to think about when analysing a company.
The first six questions focus on a company’s future potential and how well a company can generate profits for its shareholders. The seventh question reminds us of the important idea that a company will only thrive if great people are working in it. Meanwhile, the eighth and ninth questions touch on the importance of the need to learn how to assess a company’s management.
Coming to the 10th and 11th, they help us find out if a company has a unique competitive advantage. Often, companies with strong competitive advantages can earn outsized profits in relation to their peers, or in relation to the value chain of the industries that they are in.
The two questions featured above remind us of the importance of finding companies that have a long-range outlook to profit-making. Just because a company is reporting growing profits every quarter does not mean it is a great company to invest in. Sometimes, management may be boosting short-term profits through unsustainable means. Looking at how a company maintains its relationships with its suppliers and customers can give us insight on the mindset that it has.
Stay tuned as I explore the rest of Fisher’s questions soon!
Editor’s note: An article reviewing the 13th question has been published. It can be found here.
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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.