Book: Paths to Wealth through Common Stocks
Author: Philip Fisher
Key takeaways: Fisher is always always worth reading, and that applies to this book even though it is not a neatly packaged read.
History Lesson: Fisher says that the low level of stock market in the ’30s can be explained by two factors: (a) low level of “general business”, and (b) very high local and federal taxes compared to other peace-time periods, which led to (i) less savings by stock-owning wealthy populace, and (ii) liquidation of large blocks of stocks to pay for taxes at the time of the death of wealthy citizens. Fisher says that these two factors reversed in the post-war period, and also led to appearance of a new force: the institutional buyer, which over time, led to a sharp upgrading of general public’s opinion about the respectability of common stocks for conservative investors.
Inflation: Fisher argues (ala how Friedman argued in his A Monetary History of the United States) that central bank rate hikes and cuts are not necessarily consistent with a monetary policy that controls inflation. He argues that in certain cases, Fed raising rates can actually add to the inflationary forces (e.g. higher interest costs leading to firms postponing modernization of facilities that would have lead to lower cost for products). That said, counter to Friedman, Fisher argues that Fed is subordinate to the larger social trends in our society, and it has easier time addressing inflation in some cases and harder in some.
Finally, though, when it comes to stock picking, Fisher says that an average stock may or may not withstand and offset inflation, but a great one will. To quote him “stocks that are going to have a big rise regardless of inflationary conditions are the only types of stocks that will safeguard the investors’ assets against inflation”
Small cap vs. Large Cap stocks: Fisher makes the case that if a small-cap stock becomes large enough to just above enter the mid-cap level, and even if it has appreciated let’s say 5x over in the past, one should not sell it (unless the industry has become a momentary darling of the marketplace) because of the following reasons:
- institutional buyers will get involved and give a higher multiple to the stock, and
- the company itself is likely to better-managed because of the following reasons:
- company achieves more mgmt depth (vs. the founder CEO being a jack of all trades), and
- company is in touch with alert management of other companies and is able to see what others are doing to make their ops. more efficient etc.
- Personnel friction: there could be bitter friction among the top personnel, which could lead to significant inefficiencies due to internal rivalry and infighting. Even if one of the merged organizations is clearly dominant, one can have issues and the the acquired entity might prove to much less valuable than one had assumed at the time of the deal.
- Competency risk : as the personnel infighting unravels, the top management gets pulled into decisions that they have little to no familiarity with, which not only consumes time and effort, but also sets up the top management to make mistakes.
- Horizontal M&A much riskier than Vertical M&A
- The most successful record in M&A is of the companies that are not constantly seeking acquisitions, but make them when all the factors seem overwhelmingly propitious and when the acquired company is in a field closely related to the existing company’s activities.