Common Stocks and Uncommon Profits and Other Writings

2 7 8
 
capabilities in each of these areas if we discipline ourselves and make
the effort. 
While good fortune will always play some part in managing com-
mon stock portfolios, luck tends to even out. Sustained success requires 
skill and consistent application of sound principles. Within the frame-
work of my eight guidelines, I believe that the future will largely belong 
to those who, through self-discipline, make the effort to achieve it. 

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Appendix
Key Factors in Evaluating Promising Firms*
M
y philosophy calls for making a relatively small number of invest-
ments but only in unusually promising companies. Obviously, I am 
looking for signs of growth potential in the companies I study. As impor-
tant, I am trying, through my analysis, to avoid risk. I want to make sure 
that the firm’s management has the wherewithal to capitalize on the 
potential and to minimize my investment risks in the process. Summa- 
rized below are some of the defensive characteristics that I search for in 
the companies that are to meet my standards of unusual promise when I 
undertake financial analysis, interviews with management, and discus- 
sions with informed people associated with the industry. 
FUNCTIONAL FACTORS 
1. The firm must be one of the lowest-cost producers of its products or 
services relative to its competition, and must promise to remain so. 
a. A comparatively low breakeven will enable this firm to sur-
vive depressed market conditions and to strengthen its market 
*Excerpts from Fisher, Conservative Investors Sleep Well, Harper & Row, 1975. Chapters 1–3. 

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and pricing position when weaker competitors are driven out 
of the market. 
b. A higher than average profit margin enables the firm to gen- 
erate more funds internally to sustain growth without as 
much dilution caused by equity sales or strain caused by ov- 
erdependence on fixed-income financing. 
2. A firm must have a strong enough customer orientation to rec- 
ognize changes in customer needs and interests and then to react 
promptly to those changes in an appropriate manner. This capa- 
bility should lead to generating a flow of new products that more 
than offset lines maturing or becoming obsolete. 
3. Effective marketing requires not only understanding of what
customers want, but also explaining to them (through advertising, 
selling or other means) in terms the customer will understand. 
Close control and constant monitoring of the cost/effectiveness 
of market efforts are required. 
4. Even nontechnical firms today require a strong and well-directed 
research capability to (a) produce newer and better products, and 
(b) perform services in a more effective or efficient way. 
5. There are wide differences in the effectiveness of research. Two 
important elements of more productive research are (a) market/ 
profit consciousness, and (b) the ability to pool necessary talent 
into an effective working team. 
6. A firm with a strong financial team has several important 
advantages: 
a. G ood cost information enables management to direct its 
energies toward those products with the highest potential 
for profit contribution. 
b. The cost system should pinpoint where production, market- 
ing, and research costs are inefficient even in sub-parts of the 
operation. 
c. C apital conservation through tight control of fixed and work- 
ing capital investments. 
7. A critical finance function is to provide an early warning system 
to identify influences that could threaten the profit plan suffi- 
ciently ahead of time to devise remedial plans to minimize 
adverse surprises. 

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