💡 15 THINGS YOU MUST KNOW TO MASTER STOCK PICKING

We all know the quantitative measures used to know if a stock is a buy or not. But what about the measures that can’t always be defined in numbers? When someone asks, “ How do I know if a company is a good investment?” someone usually throws ratios at them, ignoring many important factors that determine the investment quality of a business.

In his book, Common Stocks and Uncommon Profits, Philip Fisher discussed many of these factors. This list provides a comprehensive checklist that investors should run through when deciding if a company has long-term growth potential. I summarized these points below. ⬇️

1. Does the Company Have Products or Services with Sufficient Market Potential to Make Possible a Large Increase in Sales for at Least Several Years?

   Fisher emphasizes the importance of investing in companies with products or services that can significantly grow their market share. This potential for growth often hinges on the company’s ability to innovate and expand into new markets, ultimately driving sales for many years. Identifying companies with a promising pipeline of offerings and a growing customer base is crucial for long-term investment success.

2. Does the Management Have a Determination to Continue to Develop Products or Processes that Will Still Further Increase Total Sales Potential When the Growth Potentials of Currently Attractive Product Lines Have Largely Been Exploited?

   This point stresses the necessity of continuous innovation and adaptation. Fisher suggests that successful companies are those whose management teams are proactive in developing new products and processes to replace or augment existing offerings. The focus should be on companies that don't just rely on their current successful products but are always on the lookout for future growth opportunities.

3. How Effective Are the Company’s Research and Development Efforts in Relation to Its Size?

   Fisher argues that a company's ability to innovate is often tied to the effectiveness of its R&D efforts. It’s not merely about the amount spent but how efficiently resources are utilized to yield tangible results. Investors should seek companies with a strong R&D track record relative to their industry size, as this often indicates a sustainable competitive advantage.

4. Does the Company Have an Above-Average Sales Organization?

   A robust sales organization is crucial for a company’s success. Fisher highlights that companies with exceptional sales teams tend to outperform their peers. Such organizations are effective at expanding market share, entering new markets, and maintaining customer loyalty, which ultimately drives revenue growth.

5. Does the Company Have a Worthwhile Profit Margin?

   Profit margins are a key indicator of a company’s financial health and pricing power. Fisher suggests that investors should look for companies with profit margins that are above the industry average, as this indicates efficient cost management and strong competitive positioning. Sustainable margins often translate to better profitability over the long term.

6. What is the Company Doing to Maintain or Improve Profit Margins?

   Fisher emphasizes that it’s not enough for a company to have good profit margins; it must also have strategies in place to maintain or improve them. This involves controlling costs, optimizing operations, and enhancing pricing strategies. Companies that actively work to protect and increase their profit margins are typically better positioned for enduring success.

7. Does the Company Have Outstanding Labor and Personnel Relations?

   Employee relations play a critical role in a company's performance. Fisher notes that companies with strong labor and personnel relations tend to have higher productivity, lower turnover rates, and a more motivated workforce. This environment often fosters innovation and can be a significant competitive advantage.

8. Does the Company Have Outstanding Executive Relations

   Leadership quality is a cornerstone of a company's success. Fisher argues that effective executives drive a company's strategic direction and operational excellence. Investors should assess the management team’s vision, decision-making abilities, and track record to gauge their capability to steer the company toward long-term growth.

9. Does the Company Have Depth to Its Management?

   A strong management team with depth ensures continuity and resilience. Fisher highlights that companies should not rely on a few key individuals but instead have a well-rounded management structure that can sustain operations even if top executives leave. Depth in management allows for diverse perspectives and robust succession planning.

10. How Good are the Company’s Cost Analysis and Accounting Controls?

    Effective cost management and accurate financial reporting are essential for business stability. Fisher points out that companies with strong accounting controls and cost analysis capabilities are better equipped to manage financial risks and make informed strategic decisions. This transparency and control are crucial for investor confidence.

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 unique characteristics that can affect a company’s competitive standing. Fisher advises investors to identify specific factors—such as brand strength, customer loyalty, or proprietary technology—that set a company apart in its industry. Understanding these unique elements can provide insights into a company's potential for outperforming competitors.

12. Does the Company Have a Short-Range or Long-Range Outlook in Regard to Profits?

    Fisher encourages investors to favor companies with a long-term focus on profit growth rather than those seeking short-term gains. A company with a strategic vision for sustainable development often invests in innovation, customer relationships, and market expansion, which leads to enduring profitability and shareholder value.

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?

    This point highlights the potential dilution risk associated with equity financing. Fisher cautions investors to be wary of companies that may issue excessive shares to finance growth, as this can dilute existing shareholders’ ownership and reduce the per-share benefits of future growth. Companies that can grow without resorting to heavy equity financing are generally more attractive.

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 and honest communication are vital for building trust with investors. Fisher values companies that maintain open communication with shareholders, especially during challenging times. A management team that is transparent about both successes and setbacks is likely more trustworthy and reliable in the long run.

15. Does the Company Have a Management of Unquestionable Integrity?

    Integrity in management is non-negotiable for Fisher. He stresses the importance of ethical leadership and governance. Companies led by individuals with strong moral principles are more likely to make decisions that align with shareholder interests and avoid unethical practices that could harm the company’s reputation and financial standing.

These fifteen points provide a framework for evaluating the quality and potential of a company before making investment decisions. Fisher's approach emphasizes qualitative factors that often predict a company’s long-term success, highlighting the importance of understanding both the business and its management thoroughly.

Check out this update to my Nvidia stock analysis‼️🚀🚀

Check out my IG profile where I posts summaries of my stock analysis!