Common Stocks and Uncommon Profits by Philip Fisher

One of the best investment books to read. The Intelligent Investor by Ben Graham is Warren Buffett's number 1 book recommendation for stock investing but this one is number 2 for him. This book really nails down how to identify the qualitative characteristics of an investment. Phil Fisher came up with the idea of researching companies by using the scuttlebutt approach. This approach involves doing a lot of due diligence by identifying how good or bad the company is by talking to competitors, employees, vendors and other groups involved with the company. This book was written in the middle of the 20th century but the principles are still very much helpful today. There are some outdated ideas due to new regulations such as the interaction an analyst can have with management is a lot less than it was back then. Also, some of the industries have changed but this could be a great learning exercise because investing isn't a static game. The principles mostly remain the same but the companies and industries are constantly changing. 

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Reasons why the stock market now is better than the stock market between the 1950's to 1970's according to Fisher

1) managers weren't as competent as they were in the past because the companies were mostly family owned businesses so the sons would take over.

2) Not a lot of money was spent on research and development.  Research and development increased by about 100% from the years of 1956 to 1960.

3) The government will save businesses.  80% of Federal Revenue is from corporate and personal income taxes.  A sharp decline in business will hurt the government. 

 

"The greatest investment reward comes to those who by good luck or good sense find the occasional company that over the years can grow in sales and profit far more than the industry as a whole.  It also shows that when we believe we have found such a company we had better stick with it off a long period of time.  What really counts is a management having both a determination to attain further important growth and an ability to bring its plans to completion"

 

Fisher believes that you need to really understand the inside operations of a business...he refers to finding out inside information about a company's business as scuttlebutt.  He says that getting information from a customer of the business, executive, trade association will help you gain knowledge of the operations.  Gaining information on the business that will help you understand it is called scuttlebutt.  He also says that former employees are very good sources as well as vendors.  He says not to disclose your information and that all the information you receive from different sources should essentially match up. 

 

The 15 points to look for in a common stock:

 

Point 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?

 

An upward sales curve is essential to what would be considered by Fisher an outstanding investment

 

There are two types of spectacular growth companies: 1) the fortunate and able and 2) the fortunate because they are able.

 

Alcoa is fortunate and able because they had a product (Aluminum) that was successful but as the economy grew the product got so successful it exceeded even the growth expectations of the managers of Alcoa. 

 

Du Pont is an example of a fortunate because they are able. 

 

Point 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?

 

  • If the company doesn't have plans to increase production or innovation on their products, they will have a ONE-time profit and not a continue span of profits over 20 years. 

 

  • The business should be expanding their research and development on products that are related to their existing business and branches. 

 

Point 3)  How effective are the company's research and development efforts in relation to its size?

 

  • Dividing the research and development costs from the income statement into the total sales of the company and comparing this percentage to the industry is a good indicator of how much of an effort the company is attempting to increase innovation or new products. remember that this number can still be misleading though

 

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

 

Point 5) Does the company have a worthwhile profit margin?

 

  • Profit margin analysis should be done for a series of years and not just one year

 

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

 

  • a way of cutting costs and increasing profit margins would be to look at the new equipment a company is getting or the research and development that is being spent on equipment to cut costs. 

 

Point 7) Does the company have outstanding labor and personnel relations?

 

Look for companies who have workers that like where they are working on.   

 

We don't want to see a company with a high labor turnover because it cost money to train new employees and this will cause a high expense.

 

  • A union for a company can be a good thing because this can lead to happier workers.  The union and the managers need to get along though.  Just because there are no strikes in a company does not mean they are happy; it may just mean they are not opening up to their conflicts.

 

  • comparing job waiting lists of one company to another can also be another indicator of how happy workers are and how much they want to work for the company.  (low employee turnover shows this also because workers aren't constantly being laid off)

 

  • a low wage gap is another indicator.  A company that pays its blue collar workers well is a good sign of labor relations (Henry Ford said, "make a good product for cheap and pay high wages is success to a good business"

 

Point 8) Does the company have outstanding executive relations?

 

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

 

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

 

Point 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? 

 

  • The degree of skill a retail business has in handling its real estate matters like the quality of its leases is very important.

 

  • Comparative leasing costs per dollar of share can be an indicator of how good a retail business is handling its real estate matters.

 

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

 

  • One company may make the sharpest possible deals with suppliers while another company may pay a premium on the contract to a supplier to make sure the supplier is dependable in delivering the raw materials or high-quality components available to make a product when the market has turned or supplies may be desperately needed.  The company that goes through excess trouble and expense to take care of the needs of their regular customers that are in an unexpected jam will show lower profits on the particular transaction but far greater profits over the years. 

 

Point 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? 

 

Point 14) Does the management talk freely to investors about its affair when things are going well but "clam up" when troubles and disappointments occur?

 

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

 

  • Phillip Fisher says the purpose of his book isn’t to point out every way such money can be made but the purpose is to point out the best way money can be made.  By the best way is the greatest total profit for the least risk. 

 

  • A successful investor is one interested in business problems

 

  • Geographic location has a strong influence on picking good stocks according to Fisher because Fisher likes to analyze operations.  For example living in Detroit helps the intelligent investor gain a sophisticated knowledge if he does the proper research on automotive companies.  

 

 

When picking a financial adviser, one should ask for a fair cross section of results that are obtained from others.  This is a good measure of how a financial adviser is doing although these same cross section results aren’t good measure of a lawyer and doctor. 

 

Two other measure of picking a good investment adviser are how honest the adviser is and how similar their investment strategy is to your own. 

 

Fisher believes that the objective of all investment gains should be long range investments that give a good return over the long term.

 

Investing in institutional stocks or the large companies like DOW stocks are what an insurance company, professional trustee, and similar institutional buyer will buy because even if they feel that they misjudge the market prices they still won't lose so much of their money.  In other words they are limiting their risk.

 

The purpose of the first four chapters is to show that the heart of successful investing is knowing how to find the minority of stocks that in the years ahead will have spectacular growth in their per share earnings.

 

Fisher says you can try and predict when to buy stocks by predicting when the economy will be rising.  This factors in looking at lots of economic data and realistically it is impossible to predict the actual future of the economy.  Therefor timing the market is a bad idea.  Fisher explains chemistry in the mid 1500's when the subject was gaining knowledge but it was all knowledge based on mumbo jumbo. 

 

"Studying possible mistakes can be even more rewarding then reviewing past successes. 

 

Make sure the troubles that have brought a company to a lower stock price are temporary and not permanent.

 

Invest in worthwhile and capable companies when the improvement in earnings has not yet produced an upward movement yet and an upward move in the price of the company's shares.  Fisher believes that whenever this situation occurs the right sort of investment may be considered to be in a buying range.  Conversely when it doesn't occur an investor will still in the long run make money if he buys only though if he is patient.

 

Invest your funds in a stock when your suitable buying opportunity arises.

 

The 5 powerful influences (whether it is by mass psychology or economic operation) that affect the stock market are: the business cycle, inflation, interest rates, technology and other innovations that outdate companies and destroy their moats and lastly governmental attitude toward investment and private enterprises (laws, regulations etc)

 

The first reason why you sell a stock is because there is a mistake in the business and it has become increasingly clear that the factual background of the particular company is less favorable than originally believed.

 

Handling a loss in a stock or handling the situation of "when to sell a stock" has a lot to do with emotional self-control.  It also has to do with the investor being honest with himself. 

 

There is an ego in all of us and this has to do with the fact that we hate to admit when we are wrong.  It is best to just admit it and move on.

 

The most money has probably been lost by investors when they hold a stock they really didn't want; it goes down and they wait for it to break out even.  My advice of avoiding this mistake is losing your bad ego, not getting emotionally attached to stocks and sell after you realize the mistake at instant. 

 

Losses should most importantly not cause self-disgust or emotional upset and should be reviewed thoroughly in order to learn an investment lesson.  I say, "The most important lessons we learn are by our mistakes through experience"

 

The second reason an investor should sell a stock is if it goes against one of the 15 points that were outlined previously.  This explains why it is so important to keep at all times close contact with the affairs of companies whose shares are held. 

 

Sometimes new executives will come into the company and they will try and use their own management tactics but these will stray away from the 15 points.  Existing CEO's may lose sight of what they originally did that made the company successful due to cockiness or ignorance.  All these should be taken into account. These are sell signs. 

 

Also when a company loses its competitive advantage or is out of the abnormal growth state and into the normal growth state the stock should be sold as well.  This is because their moat has been penetrated and their growth is equivalent to the industry.  SELL

 

If there is another peak in the business cycle the earnings per share should be greater than the previous earnings per share the company had when they were in abnormal growth.  If they do increase hold on to the company and if they don't increase sell the company.

 

The third reason to sell a stock is if you find another investment opportunity that is of great gain.  The company that can show an average annual increase of 12 percent for a long period of years should be a source of considerable financial satisfaction to its owners.  If you can find a company that shows you 20 percent average annual gain you should invest in that company and the capital gain taxes shouldn't be that much additional trouble.  Remember that this can be extremely risky and there may be a change that you have missed a fundamental aspect in analyzation. 

 

Obviously, a stock will be selling above the average P/E ratio of the industry if it is a good stock because there is a price investors pay for a good company's earning power.  It is when the stock is selling for a P/E ratio that you the investor think is way too high of a multiple is when you sell the company. 

 

Just because a company has gone up doesn't mean it won't go up anymore.  In other words, there is no limit on stock appreciation potential for a good growth company.  Fisher says, "Outstanding companies, the only type which I believe the investor should buy, just don't function that way."  

 

Fisher analogy, "Pretend you are investing in three of your classmates at the date of graduation.  You give them a sum of 10 times what they might earn in their first 12 months of employment.  Let's say one of your classmates is very smart and capable and gets hired by a top corporation and keeps getting promoted.  One day the president believes he will be CEO.  The bottom line is people run companies and according to Fisher you can compare people to companies. 

 

As an investor I should be researching to find out exactly what management is doing with those earnings that aren't passed out as dividends and find out if the manager is investing these dividends efficiently in the business.  This is one way to check up on how good a manager is in the business (one of Fisher's 15 points)

 

Stockholders get no benefits from R/E or (not offering a dividend) when management is piling up these earnings as cash or other liquid assets to provide itself with security and confidence. 

 

Another way investors are getting no satisfaction out of management not offering a dividend is if they aren't getting a subnormal return on capital and continue to invest the money in the business to continue to make it inefficient.  Once again figuring this out requires doing research in what management is investing these earnings on. 

 

Occasionally the big stockholder loses out more than the small stockholder if XYZ Corporation were to increase their dividend after what used to take them 50% of earnings to pay a dividend now only takes 25% of earnings to pay a dividend.  This is because the big stockholder has to pay more taxes on the dividend compared to the small investor who pays less taxes.  Due to taxes it is overall better for the small investor to receive a dividend in this example. 

 

Another factor that affects whether or not the stockholder wants a dividend or not is whether he is using this dividend for additional investments. 

 

Dividends should only be raised if it is certain that the company can still effectively pay the dividend out with no distress. 

 

Dividend consistency is most important so that investors can play with some assurance how they want to invest based on the company's actions. 

 

Dividend consideration is over rated.  A much-discussed subject of dividends is that the investor who pays least attention to dividends ends up getting a higher return on his money than the investor who pays lots of attention to dividend policy.  "Worthy of repetition here is that over a span of five to ten years, the best dividend results will come not from the high yield stocks but from those with the relatively low yield. 

 

10 Don'ts for Investors

 

1)  Don’t buy into promotional companies.

 

There are established companies out there and it is easier to analyze their operations, sales, cost accounting, management teamwork and production because they have been around for at least 2-3 years.  A promotional company has one or two employees are extremely skilled in a couple of management aspects but lack all the others. An example would be two managers may be great at selling a product at a low cost but most likely lack the essential marketing or logistic qualities a good company needs and an established company already has. 

 

If the company doesn't have at least a million dollar in sales it is certainly not an established company and can be a gamble. 

 

2) Don't ignore a good stock just because it is traded "over the counter"

 

Stock Brokers work on an auction basis. It is their job to match the sellers' shares of stock with a buy who desires to buy those shares of stock the seller wants to get rid of.  This isn't a hard process at all and if there are a lot of shares in this process the stock broker can make a handsome profit just by charging a small fee (or commission) per share. 

 

Investing in securities over the counter and on wide known stock exchanges such as the NYSE essentially have the same rule.  If you find a stock on an over the counter market that you like it shouldn't concern you if it is traded over the counter.  First make sure you have a good stock, then make sure you have a conscientious (careful or done by conscious) broker and you will be fine. 

 

3) Don't buy a stock just because you like the "tone" of its annual report.

 

The annual reports can be written out just to reflect an impression about the company in public mind.  In other words, they may be trying to create an image of the company that isn't there. 

 

There is no way of telling whether the president has actually written the remarks in an annual report, or whether a public relations officer has written them for his signature. 

 

A good analogy is "Allowing the general wording and tone of an annual report to influence a decision to purchase a common stock is much like buying a product because of an appealing advertisement on a billboard."

 

When a company doesn't give proper significance relating a company issue or conflict don't invest in this company because they are obviously beating around the bush. 

 

4)  Don't assume that the high price at which a stock may be selling in relations to earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price. 

 

5)  Don't quibble over eights and quarters.

 

Fisher's real-life example, "There was once a man who wanted to buy a stock that closed at 35 and a half that day.  The stock stayed steady around 35 and a half but the investor put a limit order in at 35.  He kept his bad at 35 and wouldn't change it to the market price of about 35 and a half.  Eventually the stock rose to about 500 after factoring in dividends, and splits so this investor lost 46,500 on his investment. 

 

For the small investor: if the stock seems like the right one and the price seems reasonably attractive then buy at the market level.  If you have done your homework (checking with Fisher's 15 points) then the stock will have good long-term growth prospects and the quarter of a point won't matter.  If the stock doesn't have such long-term growth prospects and you are looking for a hard and risky earned quick buck, well then you shouldn't be investing. 

 

For a large institutional investor, you should find a broker whom you have strong trust in and disclose to him how many shares you want to buy and at what price range. The broker should have full authority to execute the transaction under a certain and agreed upon range above the sale price.  Special factors such as the size of the block desired, the normal activity of the shares, and how eager the institutional investor's desire for the holding as well as other factors should be accounted for. 

 

6) Don't over stress diversification

 

Never over diversify yourself where you have too many eggs in too many baskets where some of the baskets are really unattractive or aren't going to grow or don't have too many eggs into too many baskets where you don't have sufficient time to do your homework on each stock. 

 

 

There are some companies that make you more diversified than you think because they own subsidiaries in other areas of business.  Dow chemical may make chemicals but they may make chemicals for differ industries such as minerals, pharmaceutical, or plastics. 

 

It is very difficult to come up with a real perfect rule for diversification so diversify the way you want but remember Fisher's rules.  "Recognizing, therefore, that each case is different and that no precise rules can be laid down, the following is suggested as a rough guide to what might be considered minimum diversification needs for all but the very smallest type of investor. 

 

Fisher classifies stocks based on size (market cap) into three classes:

 

Class A- your really big companies.  Companies that are in the DOW Jones Industrial and may also be in the S&P 500.  These are your Dow chemicals and Du Pont’s.  These stocks are deemed safer in a portfolio because their business is a lot more predictable and there is a lot of information available to the public.  (more reliable information). These should be a larger percentage of your portfolio to decrease risk.  pg 110

 

Class B-These are the stocks that are midway between the young growth companies with their high degree of risk and the institutional type of investment like Dow or Du Pont (class A).  Fisher says at least two of such companies should be considered as necessary to balance each single company of the type A class.  In the 2 class B examples provided by Fisher, these companies have sales of 80 million (P.R. Mallory) and 16 million (Beryllium Corporation). 

 

Class C-These are the smaller companies with staggering possibilities of gain for the successful investor but complete or almost complete loss of investment for the unsuccessful.  NEVER put any funds into this class of stock investment that you can't afford to lose and if you are a large investor, never put over 5% of available funds into any such company. 

 

It is possible for a C stock to become a B stock which will make your C stock a lot safer now than it was before.  Be aware that this stock may take up a large percentage of your portfolio now due to the rise in stock price.  Fisher believes that as long as this investment isn't too great of a percentage of your portfolio, it can still be a hold in your portfolio although the percentage it contains compared to the overall portfolio will rise.

 

"Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself.  If the investor owns stock in so many companies that he can't keep in touch with their managements directly or indirectly, he is rather sure to end up in worse shape than if he had owned stock in too few companies.  An investor should always realize that some mistakes are going to be made and that he should have sufficient diversification so that an occasional mistake will not prove crippling.  However, beyond this point he should take extreme care to own not the most, but the best.  In the field of common stocks, a little bit of a great many can never be more than a poor substitute for a few of the outstanding." 

 

7) Don't be afraid of buying on a war scare.

 

Every time through the twentieth century a war has broken out stocks have dropped except for one time.  This one time was during World War I when the large pre-savings of France and England were pouring into the United States and this increased stocks more than if there were peace during this period.  This is the only circumstance stocks rose higher during war as opposed to if there were no war or peace during this time. 

 

Modern war always causes governments to spend far more than they can possibly collect from their taxpayers while the war is being waged.  This causes a vast increase in the amount of money so that each individual unit of money, such as a dollar, becomes worth less than it was before.  It takes lots more dollars to buy the same number of shares of stock.  This causes inflation.  WAR=Inflation

 

How fast should an investor invest during war and how far down will the stock go?  As long as downward influence is a war scare and not an actual war there is no way of knowing.  If actual hostilities break out the stock price would undoubtedly go lower.  Therefor the thing to do is to buy but buy slowly and at a scale down on just a threat of war.  Just be sure to buy into companies either with products or services the demand for will continue in wartime or which can convert their facilities to wartime operations. 

 

If the United States were to be defeated in war our money and stocks would be valueless. 

8) Don't forget your Gilbert and Sullivan

 

Looking at a stock chart and noticing the lowest price and the highest price over a period of time in this chart and coming up with an intrinsic value of the stock is very illogical and financially dangerous.  This is a rookie move. 

 

pg 121 is how Fisher explains the pricing of a stock.

 

The price is based on the current appraisal of the situation.  This shows why stocks are better in the long term.  "In the short run the market is a voting machine, but in the long run it is a weighing machine."  Investors react badly to current news articles and investors bad reactions cause panic and sell. 

 

A price at which the stock sold four years ago may have little or no real relationship to the price at which it sells today.  That is why you avoid coming up with an intrinsic value off of charts. 

 

Nothing could be further from the truth than a stock that has gone up a lot cannot go up anymore and the stock that has gone up a little is "due" for something.

 

"To look at the per share earnings by themselves and give the earnings of four or five years ago any significance is like trying to get useful work from an engine which is connected to any device to which the engine's power is supposed to be applied."  The per share earnings 4 or 5 years ago have little or no relation to the stock price today.  What is very important today is what will probably happen over the next several years like product development, fixing up weak points in the business, or new management. 

 

Past earnings and price ranges are helpful as long as it is realized that they are only auxiliary tools to be used for specialized purposes and not major factors in deciding the attractiveness of a common stock. 

 

Overall, "Don't forget your Gilbert and Sullivan" is the same thing as saying, "Don't be influenced by what doesn't matter."  Statistics of former year earnings and particularly per share price ranges of these former years quite frequently have nothing to do with the pricing of a stock. 

 

9) Don't fail to consider time as well as price in buying a true growth stock.

 

Fisher believes we should not so much watch the quotations slowly but since the stock meets its 15 points and in the example he gives us about the company opening up a plant in the future, we should instead buy the stock not at a certain price but at a certain TIME.

 

"Buy the shares not at a certain price, but at a certain date.”

 

Some things that cause a stock to go up or down are: a change in net income, a change in a company’s management, appearance of a new invention, or a new discovery, a change in interest rates or tax laws.  These are real occurrences in the real world

 

Not following the crowd is a little more difficult because it is a psychological phenomenon and nothing has changed in the outside or economic world at all. 

 

There are fads and styles in the stock market just as there are in women's clothes.  These can, for as much as several years at a time, produce distortions in the relationship of existing prices to real values almost as great as those faced by the merchant who can hardly give away a rack full of the highest quality knee-length dresses in a year when fashion decrees that they can be worn to the ankle. 

 

Fisher gives an example of a smart man who was president of the Security Analysts of New York and how they both looked at the Dow Chemical company with the same facts but developed different opinions based on these facts.  "His reasoning, unfortunately, completely ignored all the potential further increase in value to this stock promised by the many new and interesting products that the company was developing"  Rather than looking at the future products this company was going to put out he was basing his thoughts that company wouldn't appreciate in price because historically at the time companies after a world war didn't go up in price because there was a post war recession.  This guy was wrong. 

 

Also relating to my last point Fisher writes, "In 1948, the investment community gave little value to the earnings of any common stock because of the widespread conviction that nothing could prevent the near future bringing the same type of bitter depression and major stock market crash that happened about the same number of years after each of the two preceding major wars. 

When you buy into a company that is favorable by the financial community you need to be extra careful that you are not buying into the current fad.  Buying into this fad can cause you to pay too high of a price and subsequently watch it decline.  You can get extra benefits by investing in an industry that is not so favorable by the financial community as long as the company or industry has been properly analyzed. 

 

"If [the investor] is thinking of participating in the affected companies, the wise investor must determine which are fundamental trends that will go further, and which are fads of the moment. 

 

The financial community is usually slow to recognize a fundamentally change condition, unless a big name or a colorful single event is publicly associated with that change. 

 

Think for yourself, be a leader, don't follow the crowd.

 

There is no easy and quick way to select stocks.  It takes dedication and time.  The time that should be spent on stocks is purely up to the investor based on his time available for investments, his interests and his capabilities. 

 

"There are literally thousands of stocks in dozens of industries that could conceivably qualify as worthy of the most intensive study but you can't be sure which ones until considerable research has been done." 

 

Essentially deciding on what you must make decisions on what to or what not to spend your time on is the first step and you don’t really notice making this step. 

 

Fisher was friends with a sizable number of quite able business executives and scientists.  Fisher would get stock ideas from these people and he would research these companies based off their information. 

 

These businessmen would give Fisher their opinion on the key matters that arise to Fisher.  After Fisher would get their opinions on the key matters that would arise, Fisher would measure up the company to his 15 points.  Some of the questions he might ask himself when looking at the 15 points are, Is the company in, or being steered toward, lines of business affording opportunities of unusual growth in sales?  Are these lines where, as the industry grows, it would be relatively simple for newcomers to start up and displace the leading units?

 

Overall Fisher starts stock research by getting leads or ideas on stocks from other investment professionals. 

 

After Fisher makes a decision that a particular company may be exciting based off of a few hours conversation with an outstanding investment man (occasionally a business executive or scientist) he has completed step one.  He will now start his investigation. 

 

After Fisher has found a company, he believes is worthy to investigate he DOES NOT approach anyone in the management stage (because you need to have facts and do thorough research on the company's weak and strong points, otherwise management would give an efficient and sophisticated answer to your questions).  Fisher also doesn't spend hours and hours going over old annual reports and making minute studies of minor year by year changes in the balance sheet.  Fisher will however glance over the balance sheet to determine the general nature of the capitalization and financial position.  If there is an SEC prospectus Fisher will read with care those parts covering the breakdown of total sales by product lines, competition, degree of officer or other major ownership of common stock (this can also usually be obtained from the proxy statement) and all earnings statement figures throwing light on depreciation (and depletion, if any), profit margins, extent of research activity and abnormal or non-recurring costs in prior years' operations. 

 

Step 2 is scuttlebutt.  "I will try to see (or reach on the telephone) every key customer, supplier, competitor, ex-employee, or scientist in a related field that I know or whom I can approach through mutual friends.  If no information is available that Fisher needs for his research than he will give up on the investigation of the company.

 

"What is necessary is to get the right answer a large proportion of the very small number of times actual purchases are made.  For this reason, if way too little background is forthcoming and the prospects for a great deal more is bleak, I believe the intelligent thing to do is to put the matter aside and go on to something else." 

If you already know your 15 points (marketing weaknesses, operation weaknesses, etc.)  the remark of management may be diplomatically worded, but with the right type of management and if they have confidence in your judgement, you will be furnished with a realistic answer as to whether anything is or is not being done to fix any weaknesses that you have asked about.

"An investor or financial man should never visit the management of any company he is considering for investment until he has first gathered together at least 50 percent of all the knowledge he would need to make the investment.  If he contacts the management without having done this first, he is in the highly dangerous position of knowing so little of what he should seek that his chance of coming up with the right answer is largely a matter of luck. 

 

One fifth of Fisher's investigation starts from the ideas gleaned from friends in industry and four fifths from culling what I believe are the more attractive selections of a small number of able investment men. 

 

Then after a brief scrutiny of a few key points in an SEC prospectus, I will seek "scuttlebutt" aggressively, constantly working toward how close to our 15-point standard the company comes.  Investments will be eliminated along the way for reasons such as they don't qualify the 15 points or the information available to Fisher isn't sufficient enough to give him a proper conclusion on the company. 

 

The last step is getting in touch with management and asking them questions. 

 

One of the ablest investment men who Fisher knows said, "a good nervous system is even more important than a good head" 

 

From past experience in owning his own business, Fisher has learned that the success of any business depends on integrity, ingenuity, and hard work. 

 

A conservative investment is one most likely to conserve purchasing power at a minimum risk.  

 

Conservative investing is understanding of what a conservative investment consists and then, in regard to specific investments, following a procedural course of action needed properly to determine whether specific investment vehicles are, in fact, conservative investments. 

 

The remainder of this book is divided into four sections.  They are:

 

1)  The anatomy of a conservative stock investment as delineated in the first definition above.

 

2)  Analyzing the part played by the financial community - the mistakes, if you will-that helped produce the current bear market.

 

3)  The course of action that must be taken to qualify as conservative investing as lineated in the second definition above. 

 

4)  The final section deals with some of the influences rampant in today's world that have caused grave doubts in the minds of many as to whether any common stock is a suitable means for preserving assets-in other words, whether for anything other than as gambling vehicles common stocks should be considered at all.  

 

 The first dimension of a conservative investment

 

In order to be a conservative investment, the company must have superiority in production, marketing, research and financial skills… A company must be the lowest cost producer or about as low a cost producer as any competitor.  It must also give promise of continuing to be so in the future.  Low cost producers remain in the industry during bad times while high cost producers don't. 

 

The best thing about low cost production companies are that they avoid much or even at all the need for raising additional long-term capital.  Long term capital can be raised by issuing debt (bonds) or by issuing equity.  Creating more equity means creating more shares outstanding and this dilutes the value of outstanding shares already issued to the public.  Creating more debt through for example bonds creates a lot more debt with fixed interest payments and fixed maturities which must be met (or paid) through future earnings.  This decreases future net income and greatly increases the risk of the stock for the owner. 

 

It is important to realize the fallacy of high production companies experiencing a larger increase in stock price than low cost production companies during an economic boom.  Example:

 

A strong marketer must be constantly alert to the changing desires of its customers so that the company is supplying what is desired today, not what used to be desire.   

 

Lack of significant management in marketing can result in losing a significant volume of business that would otherwise be available, having much higher costs and therefore obtaining smaller profit on what business is obtained, and because of company's having variations in the profitability of various elements of their product line, in failing to attaining the maximum possible profit mix within the line. 

 

Outstanding research and technical effort:  It used to be that science and technology companies only had advanced technology and other companies like banking didn't.  This has changed now that ever company has high technological equipment to keep up with the fast pace and growing business world.  Therefore outstanding research and technical effort as in research and development should be applied to all companies to make sure they are spending money on bringing their business up hill. 

 

Developing new products usually calls for the pooling of the efforts of a number of researchers, each skilled in a different technological specialty.  How well these individuals work together (or can be induced by a leader to work together and stimulate each other) is often as important as the individual competence of the people involved.  Make sure the company is developing a product that will have significant consumer demand and can be sold by the company's existing marketing organization.  

 

To sum up the first dimension of a conservative investor, a conservative investor is one that invests in a very low-cost producer or operator in its field, has outstanding marketing and financial ability, and a demonstrated above average skill on the complex managerial problem of attaining worthwhile results from its research or technological organization. 

 

In a world like today where there is an increasing pace of rapid change, a company capable of developing a flow of new and profitable products or product lines that will more than balance older lines that may become obsolete by the technological innovations is a conservative investment.  A company able now and in the future to make these lines at costs sufficiently low so as to generate a profit stream that will grow at least as fast as sales and that even in the worst years of general business will not diminish to a point that threatens the safety of an investment in the business is another conservative investment.  Lastly a company that is able to sell its new products and those which it may develop in the future at least as profitably as those with which it sells and is involved with today make up a conservative investment. 

 

It should never be forgotten that the world is an ever-changing place that is changing faster and faster as times goes on.  Nothing long remains the same and no company can afford to stay still or not come up with new innovations.  A company will either grow (if they come up with new innovations and accept rapid change) or shrink (if they stand still and fail to come up with new innovations and don't accept rapid change).  A strong offence is the best defense. 

 

In addition to an ever-increasing pace of technological innovation, changing social customs and buying habits and new demands of government are altering at an ever-increasing pace the rate at which even the dull or uninteresting industries are changing. 

 

To sum up the first dimension a conservative investor is one that invests in companies with competent management in research and technological advances, marketing, financial skill, and a low-cost producer. 

 

Remember that the people are the ones that make the company.  Whether the company is mediocre, bad, good, or outstanding it is always the people that make it what it is. 

 

Edward H Heller is a pioneer venture capitalist who said, "Behind every unusually successful corporation was this kind of determined entrepreneurial personality with the drive, the original ideas, and the skill to make such a company a truly worthwhile investment. 

 

The above quote by Heller refers to one man having the drive, original ideas, etc.  This is true referring to a small company but once this small company grows into a bigger company it isn't one man that can make it successful with his own original ideas, drive etc.  It is the men in the company or more than one person that need the drive, original ideas, and the skill to make such a company a truly worthwhile investment. 

 

A company hiring from the outside has one advantage: it can bring a new viewpoint into corporate councils, an injection of fresh ideas to challenge the accepted way as the best way. 

 

In general, though the company that has real investment merit is the one who usually promotes within.  This is because all companies of the highest investment order (these do not necessarily have to be the biggest and best-known companies) have developed a set of policies and ways of doing things peculiar to their own needs. 

 

There is not statistical or factual evidence that states this but it is Fisher's observation that when new comers are put in to executive positions of the better run companies they tend to disappear after a few years. 

 

I need to check to see if a big company is a one man show or a team.  No big company can survive by a one man show.  It needs to be a team these days.  A way of checking this is by looking at the proxy statement and look for gaps in the annual salaries of the public companies.  If the salary of the number one man is very much larger than that of the next two or three, a warning flag is flying that it may be a one man show.  If the compensation gap goes down in smaller increments there is no red flag and it appears that the company functions as a team and not a one man show. 

 

There should be what Ed Heller calls "vivid spirits" in a company.  These "vivid spirits" refer to people in the company with the ingenuity and determination not to leave things just at their present, possibly quite satisfactory, state but to build significant further improvements upon them. 

 

A company should always be challenging itself to do better.  It doesn't matter how comfortable it is and whether things done in the past are tradition. 

 

The three elements that must be present for a company’s shares to be worthy of holding for a conservative investment: The company must recognize that the world in which it is operating is changing at an ever increasing rate, there must always be a conscious and continuous effort, based on fact, not propaganda, to have employees at every level, from the most newly hired blue-collar or white-collar to the highest levels of management, feel that their company is a good place to work, and management must be willing to submit itself to the disciplines required for sound growth. 

 

Every employee should be treated with reasonable dignity and consideration in a company.  Besides just treating employees with dignity and decency the routes to obtaining genuine employee loyalty are many and varied.  Pension and profit-sharing plans can play a significant part.  So can good communication to and from all levels of employees.  Concerning matters of general interest, letting everyone know not only exactly what is being done but why frequently eliminates friction that might otherwise occur. 

 

A striking example of the benefits that may be attained through creating a unity of purpose with employees is the "people effectiveness" program of Texas Instruments.  This program allowed even the small production workers to have a say in how they thought the operations and production of their semiconductor could be better.  They sat in some formal meetings and did some activities that are for upper management not lower production workers.  Since these lower production workers were being involved in the process they felt included, like working, and also received some financial bonuses for their hard work and commitments to semiconductor projects. 

 

Since "Texas Instrument workers started feeling that they were genuinely participating in decision, not just being told what to do, and were being rewarded both financially and in honors and recognition, the results have been spectacular. "

 

A policy program that tries attempts to copy the effects of Texas Instruments' people effectiveness program can be a very costly mistake if the outcome is executed like it is planned.  Workers can feel involved but not paid properly or they cannot feel involved at all.  A situation where workers aren't being utilized correctly can destroy a company.  After all, remember it is the people that make the success of a company. 

 

The first dimension of a conservative stock investment is the degree of excellence in the company's activities that are most important to present and future profitability.  The second dimension is the quality of the people controlling these activities and the policies they create.  The third-dimension deals with the specific characteristics that enable a certain well managed company to maintain above average profit margins more or less indefinitely. 

 

If a company has a very high return on assets and a well above average return on profits (net income/sales) then in the highly fluid and competitive markets of today a competitor will always arise.  Fisher compares high profit margins to an opened jar of honey.  This opened jar of honey will always bring insects (competitors in this analogy).  In order to protect your company or jar of honey from competitors you can either have a monopoly which is illegal and will most likely be stopped by government regulations unless the company has patent protection.  The other way is to operate so much more efficiently than the competitors that there is no incentive for present or potential competition to take action that will upset the existing operations of the high profit company. 

 

One profitability way of a company is return on invested assets.  Return on invested assets is the factor that will cause a company to decide whether to go ahead with a new product or process.

 

A company that has annual sales three times its assets can have a lower profit margin but make a lot more money than one that needs to employ a dollar of assets in order to obtain each dollar of annual sales.

 

Return on assets and profit margin are both very important and should have a high amount of emphasis while picking a stock but profit margin seems to be more important especially during a time of inflation.  If a company has operating costs increase 10% during inflation and their profit margin is 10% they won't be making a profit anymore. 

 

Economies of scale is when a business can produce more at a lower cost. 

 

Other profitability advantages are these big companies are usually big and can afford to spend necessary money on plants or factories to benefit their suppliers.  The example that Fisher uses is Campbell soup who uses excess money to build factories and plants that make cans for their soup.   

 

A reputable company with a good brand name like Campbell soup gets a nice shelf space where customers get easy access to their product.  [My note – This shelf space hasn’t been as much of an advantage today with the internet.]

 

Even during inflationary periods when Campbell can increase their prices due to less competition, they still face a problem.  The American housewife can make homemade soup for less money in bad times so Campbell's profitability isn't extremely safe.  This should be noted and taken into account that no companies profitability is safe no matter what the circumstances are.  Humans are head strong and will adapt to changes they don't agree with from a company.

 

Besides economies of scale and strong technological advances in an area that make it hard for an existing company's employees to gain the technology used another aspect of a company's activities is in its area of marketing or sales.  This has to do with a company that created such a strong brand name that its customers have the habit of almost automatically specifying the company's name with the product and it is uneconomically for any competitor to attempt to displace them.  A bad example here is when a kid says he wants a coke.  He may mean that he wants a soda but Coke has such a strong brand name that he is associating the soda products with Coke. 

 

Fisher says that a common denominator of successful investors has been their ability to hold onto stocks even after their price has risen so much and the P/E is extremely high making the security look overpriced. 

 

Fisher sums up how a stock goes up and down in price by saying, "Any individual stock does not rise or fall at any particular moment in time because of what is actually happening or will happen to that company.  It rises or falls according to the current consensus of the financial community as to what is happening and will happen regardless of how far off this consensus may be for what is really occurring or will occur. 

 

There are three separate appraisals when analyzing a company.  The three separate appraisals are what the current financial community appraisal of the attractiveness of common stocks as a whole are, of the industry of which the particular company is a part, and of the company itself. 

 

Industries may sell for an average P/E ratio in one period of time a lot higher than another time because for example an electronic industry such as television may be a high growth industry but other technology outdates this industry.  The industry's average P/E ratio then decreases over time.  An industry changes not so much on these technological advances but what really needs to be looked upon is what the financial community's image is and how the influences of this image change the industry. 

 

An example of the note above is the image of the chemical companies in the 30's, 40's and mid 50's.  There was an ad with a scientist on one end of the conveyor belt making new compounds in test tubes and on the other end of the conveyor belt were fabulous new products such as nylon, DDT, synthetic rubber, and quick drying paint.  This prestige image of the chemical industry gave the industry high p/e ratios.  By the 1970's this image of fabulous innovation was substituted and the new image of the chemical industry was that they were a commodity industry because it resembled an industry that was selling steel, or cement, or paper.  This caused the industry to have low P/E ratios.

 

Capital intensive industries usually are under major pressure to operate at high rates of capacity in order to amortize their large fixed investments.  The result is frequently intense price competition and narrowing profit margins. 

 

The conservative investor must be aware of the nature of the current financial community appraisal of any industry in which he is interested.  He should constantly be probing to see whether the appraisal is significantly more or less favorable than the fundamentals warrant.

 

Just because one stock is selling at ten times earnings and the other 20 times earnings doesn't necessarily mean the one selling for 10 times earnings is cheaper.  You have to look at the fundamentals and characteristics of both businesses.  For example the stock selling at 10 times earnings may have leveraged capitalization and the company may have to pay out interest charges and preferred dividend payments before they can truly recognize their earnings.  This leveraged capital of interest and preferred dividend payments may most likely interrupt the growth for the company selling at 10 times earnings. 

 

The further the financial community sees that future profits will grow, there will be a higher the price to earnings ratio that an investor will have to pay. 

 

It should never be forgotten that the actual variations in price to earnings ratio will result not from what will actually happen but from what the financial community currently believes will happen.

 

Be aware of times when the market is looked as very pessimistic and people fear investing their money in stocks.  This gives the patient investor very good bargain opportunities as long as he has the ability to distinguish between current market image and true facts. 

 

In a downward market a change for the worse in the financial community's image of a company gets accepted far more quickly than a change for the better.  Just the opposite is true in rising markets.  In other words, in a rising market stocks usually go up more than they should. 

 

Never base a value of a stock just off of how long a stock has been selling in certain price range for.  Just because a company has been priced at a low of 38 to a high of 43 doesn't mean that this is the actual appraisal of the stock although the financial community may think this is the actual appraisal.  Therefore if they think this is the actual appraisal and the stock goes down to 24 many investors may think it is cheap and buy it.  This isn't true at all because it may even be expensive at 24.  Stocks aren't valued by their low to high range but they are valued on their fundamentals and characteristics compared to how much more or less favorable than the current financial community appraisal of that stock is.  The real genuine worth of profits in stock investing have come from holding the surprisingly large number of stocks that have gone up many times from their original cost. 

 

The third appraisal of stocks is of the overall stock market in general.  Ridiculous as it may seem to us today, the majority of the financial community actually believed we were in a "new era" or bull market between 1927-1929 (right before the depression).  This was because the earnings of most U.S companies had been growing a lot and Herbert Hoover was a great engineer and businessman and he was just elected president.  Investors thought his competence would lead to greater prosperity in stocks but investors were wrong. 

 

There is a basic difference between the factors that affect changes in the general level of all stock prices and those that affect the relative price earnings ratio of one stock compared to another within that general level.  The factors at any given moment that affect the relative price to earnings ratio of one stock to another are solely matters of the current image in the investment community of the particular company and the particular industry to which that company belongs.  However, the level of stocks as a whole is not solely a matter of image but results partly from the financial community's current appraisal of the degree of attractiveness of common stocks and partly from a certain purely financial factor from the real world.  The real-world factor is mainly involved with interest rates. 

 

High interest rates mean stocks will decrease and low interest rates mean stocks will increase. 

 

Once again the price of any particular stock at any particular moment is determined by the current financial community appraisal of the particular company, of the industry it is in, and to some degree of the general level of stock prices.  Determining whether at that moment the price of a stock is attractive, unattractive, or somewhere in between depends for the most part on the degree these appraisals vary from reality.  However, to the extent that the general level of stock prices affects the total picture, it also depends somewhat on correctly estimating coming changes in certain purely financial factors, of which interest rates are by far the most important. 


 

For any part of Fisher's funds supervised by Fisher and Co, except for funds temporarily in cash or cash equivalents awaiting more suitable opportunities, it is the objective that they be invested in a very small number of companies that, because of the characteristics of their management, should both grow in sales and more importantly in profits at a rate significantly greater than the industry as a whole.  They should also do so at relatively small risk in relation to the growth involved. 

 

One characteristic necessary to meet Fisher standards of management having a viable policy for attaining long term profits are management's ability to implement long range policy with superior day to day performance in all the routine tasks of business operation.  The other characteristic is that when significant mistakes occur, as they are bound to happen when management strives for unique benefits through innovative concepts, new products, etc., or because management becomes too complacent through success, these mistakes are recognized clearly and remedial action is taken. 

 

Since Fisher best understands the characteristics of manufacturing companies, he has confined Fisher and Company activities largely to manufacturing enterprises that use a combination of leading-edge technology and superior business judgement to accomplish these goals. 

 

Fisher's first lesson in his basic investment philosophy was that reading the printed financial records about a company is never enough to justify an investment.  One of the major steps in prudent investment must be to find out about a company's affairs from those who have some direct familiarity with them. 

 

The next logical step in the type or reasoning stated in the note above is it is also necessary to learn as much as possible about the people who are running a company under investment considerations, either by getting to know those people yourself or by finding someone in whom you have confidence who knows them well.

 

Even though Fisher in 1929 felt the stock market was too high he still looked around to find a few stocks "that were still cheap" and were worthwhile investments because "they had not gone up yet".  This proved to be wrong and he should have went with his instinct that the market was too high.  Although a company may look like a bargain it doesn't mean it will go up and in a market that is too high it will hardly ever go up. 

 

Fisher has always believed that the chief difference between a fool and a wise man is that he wise man learns from his mistakes, while the fool never does. 

 

Fisher learned that, while a stock could be attractive when it had a low price to earnings ratio, a low-price earnings ratio by itself guaranteed nothing and was apt to be a warning indicator of a degree of weakness in the company.  Fisher began realizing that, all the then current Wall Street opinion to the contrary, what really counts in determining whether a stock is cheap or overpriced is not its ratio to the current earnings, but its ratio the earnings a few years ahead. 

 

Fisher was spectacularly right in his timing of when the bull market bubble was about to burst, and almost right in judging full force of what was to happen.  Yet except for a possibly small boost in his reputation among a very small circle of people, this had done him no good whatsoever.  From then on, Fisher was to realize that all the correct reasoning about an investment policy or about the desirability or purchase or sale of any particular stock did not have the least bit of value until it was translated into action through the completion of specific transactions. 

 

Life is about timing.  Fisher started up his own firm at the right time because a bear and downward market just occurred so nearly everyone was so dissatisfied with their existing broker that Fisher could penetrate the market.  Also people weren't afraid to listen to a younger broker and businessman had a lot more time to visit someone like Fisher because they were doing little in pursuing their own affairs.  One of Fisher's big customers later confessed to Fisher that, if you have come to see me a year or so later, you never would have gotten into my office.  The unattractiveness of the other bad job offers that Fisher was getting was what really instigated him to start up his own brokerage firm. 

 

Fisher determined that one of his biggest mistakes was not taken the time and effort out to judge and analyze the management of a company. 

 

The quality of people in a business are critical.  There are two different characteristics that lead to good quality or success.  They are business ability which has to do with handling the day to day tasks of the business with above average efficiency and the other one is to look ahead and make long range plans that will produce significant future growth for a business without at the same time running financial risks that may invite disaster.  Both are necessary for real success. 

 

Fisher thinks one of the most important fundamentals of success is to train yourself to zig when the crowd is zagging.  This mainly has to do with not following the crowd.  In order to zig when the crowd is zagging you must be very, very, very sure you are right. 

 

Fisher has a three-year rule where he keeps stocks for up to 3 years and if they don't make the initial move Fisher plans, then he sells them.  "If this same stock has performed worse rather than better than the market for a year or two, I won't like it.  However, assuming that nothing has happened to change my original view of the company, I will continue to hold it for three years. 

 

Any time a manager shows the kind of honesty where he discloses a disastrous event that needs to be disclosed although it will hurt his reputation most likely or embarrass him, he is a very good candidate for a manager.  These are the type of managers you want managing your company. 

 

"All of the correct reasoning in the world is of no benefit in stock investment unless it is turned into specific action.  Fisher said this after he predicted the bear market of the early 30's but still went out seeking "cheap" stocks he thought he could profit off them.  He was wrong.  He got nothing more than a little bit of a higher rep from a small amount of his coworkers whom he told he thought there would be a downturn in the market. 

 

Fisher believes a very bad investment habit is one in which he used to be guilty of and many other investors are as well.  That is the habit of putting limit orders and trying to save 1/8's of a point just to make a little extra profit even though the business he seeks are for the long term so these small points don't matter at all. 

 

"I am thoroughly aware that if a buyer desires to acquire a very large block of stock, he cannot completely ignore this matter of an eight or a quarter, because by buying a very few shares he can significantly put the price up on himself for the balance.  However, for the great majority of transactions, being stubborn about a tiny fractional difference in the price can prove extremely costly. 

 

One of Fisher's favorite questions when talking to an executive for the first time is what he considers to be the most important long-range problem facing his company. 

 

"Never promote someone who hasn't made some bad mistakes, because if you do, you are promoting someone who has never done anything."  The failure to understand this element by so many in the investment community has time and again created unusual investment opportunities in the stock market. 

 

Companies can be extremely good bargains when a company with abnormally successful management makes a bad mistake.  After all humans aren't perfect and mistakes are bound to happen. 

 

"If you can't do a thing better than others are doing it, don't do it at all."  No profit margins are safe in this environment because of the heavy-handed government intervention in so many types of business activities like regulation, high taxes, unions, etc. 

 

World War I and the Civil War were following by long periods of recession and no economic growth.  Because of this all the financial community thought that after World War II there would be no growth and they feared to invest during this time.  It turned out that this wasn't true at all and there was a lot of growth as company earnings grew year after year. This shows that there is no direct correlation from the past to the future. 

 

Holding a company for a long time and getting out when fundamentals are still relatively good and the price has not appreciated nearly as much as you thought it would, is a very inefficient way to grow capital. 

 

One of Fisher's mistakes was to try and project his skill beyond the limits of experience.  In other words, he was investing in industries which he didn't know very well and didn't have comparable background knowledge.  Always invest in what you know.  "Nevertheless, an analyst must learn the limits of his or her competence and tend well the sheep at hand.

 

You can't time the market.  When you get out of a stock it is hard to get right back in at the bottom or where you got in at. 

 

"Let me underscore my belief that the short-term price movements are so inherently tricky to predict that I do not believe it possible to play the in and out game and still make the enormous profits that have accrued again and again to the truly long term holder of the right stocks. 

 

Some companies may be a lot better of reinvesting their dividends into the company and investing in more innovative products.  There are institutions such as pension and profit-sharing funds whom which pay no income tax on their dividends therefore these are some of the reasons why a company may offer a dividend when they shouldn't.  They are trying to please these long-range investors.  These institutional investors have to follow a policy.  Fisher would look for non-dividend paying companies with strong earning power and with attractive places to reinvest their earnings.  The clients he looked for were the ones who agreed with Fisher's policy of retaining dividends.  "In general, more attractive opportunities will be found among stocks with a low dividend payout or none at all.”

 

Every decade between the 40s and 70s saw an appreciation in stock value.  Therefore, you should always be invested. 

 

Fisher says, "The more things change, the more they remain the same." I don't fully understand this but he is talking once again about the importance of always being invested in the right long-term growth companies. 

 

If the market was as efficient as it has become fashionable to believe and if important opportunities to buy or significant reasons to sell were not constantly occurring, stock returns should not subsequently have the huge variations that they do.  By variation, I am not referring to change in prices for the market as a whole, but rather the dispersion of relative prices changes of one stock against another. 

 

Fisher does not believe that the prices of stocks are efficient for the diligent, knowledgeable, long term investor.  This means that there will always be stocks that are bargains available to the long-term investor that he can profit off of. 

 

Fisher proves that an efficient market doesn't exist by explaining a meeting he attended by the management of Raychem.  They explained their strategy regarding their failing projects.  The stock eventually doubled in price but it took a long time because weeks after the meeting the stock stayed steady.  This could be due to institutional investors not believing what Raychem management said at the meeting. 

 

Fisher says there are groups who follow the fallacy of the efficient market theory.  These are students and unfortunately institutional investors. 

© 2018 Mike Gorlon                                                                                                                                                                                                                                         Amazon Affiliate