Common Stocks and Uncommon Profits and Other Writings Summary

To invest successfully, you must think like a detective—dig deep, ask questions, and uncover the truth behind a company’s value.

1. Long-term growth beats short-term gains

Smart investing isn’t about chasing quick profits. Instead, it’s about identifying companies with the ability to grow steadily over time. These companies often have products or services that can sustain high sales for years, ensuring consistent returns for investors. By focusing on long-term growth, you can multiply your initial investment many times over.

Companies with growth potential often invest heavily in research and development. This ensures they can adapt to changing markets and innovate when their current products lose demand. For example, Motorola transitioned from making televisions to pioneering two-way communication devices, which allowed it to thrive even as other TV manufacturers struggled.

Additionally, companies with strong management and good employee relations are better positioned for long-term success. A cohesive team with a shared vision can navigate challenges and seize opportunities more effectively than a disorganized workforce.

Examples

• Motorola’s pivot from TVs to communication devices in the 1950s.
• Apple’s continuous innovation in consumer electronics, from iPods to iPhones.
• Amazon’s long-term focus on growth, reinvesting profits into new ventures like AWS.

2. Research is your best tool

Investing is like solving a mystery—you need to gather as much information as possible before making a decision. This means going beyond surface-level data and digging into every aspect of a company. The more you know, the better your chances of making a sound investment.

The “scuttlebutt method” is a powerful way to gather information. This involves talking to vendors, customers, former employees, and even competitors to get a well-rounded view of a company. For instance, a competitor might reveal weaknesses in a company’s strategy, while a customer might highlight its strengths.

Once you’ve gathered external information, it’s time to approach the company directly. Ask informed questions to management to clarify any doubts. However, this process is time-consuming, so it’s important to pre-select companies that align with your investment goals.

Examples

• Contacting former employees to understand a company’s work culture.
• Speaking with competitors to gauge a company’s market position.
• Using trade associations to gather industry-specific insights.

3. Buy during dips, not during hype

Stock prices often reflect the market’s perception rather than a company’s true value. This creates opportunities for savvy investors to buy undervalued stocks during temporary dips. These dips often occur when a company faces short-term challenges, even if its long-term prospects remain strong.

For example, a company might experience a drop in stock price due to unexpected expenses, like a research project. While the market reacts negatively, a smart investor sees this as an opportunity to buy low, knowing the research could lead to future profitability.

Timing is key. If you miss one dip, don’t worry—another opportunity may arise. Companies with growth potential often face multiple challenges, each creating a chance to invest at a lower price.

Examples

• Buying shares of a tech company during a temporary product recall.
• Investing in a pharmaceutical firm after a failed drug trial, knowing it has other promising drugs in development.
• Purchasing airline stocks during a downturn caused by rising fuel costs.

4. Confidence is your greatest asset

Doubt can paralyze even the most informed investor. Once you’ve done your research and identified a promising stock, it’s important to act decisively. Hesitation often leads to missed opportunities, especially when the market is undervaluing a company.

One common source of doubt is herd mentality. If no one else is buying a stock, you might question your judgment. However, the market is often wrong, and following the crowd can lead to overpaying for overhyped stocks.

Holding onto a good investment is just as important as buying it. Unless there’s a fundamental change in the company’s prospects, resist the urge to sell. Long-term growth often requires patience, and selling too soon can rob you of significant gains.

Examples

• An investor who hesitated to buy a stock at $35.50 missed out on $46,500 in profits 20 years later.
• Warren Buffett’s strategy of holding onto stocks like Coca-Cola for decades.
• Ignoring market panic during temporary downturns, such as the 2008 financial crisis.

5. Conservative investors should prioritize stability

For those who prefer a safer approach, investing in large, established companies with steady growth is a better strategy. These companies have a proven track record of profitability and are less likely to face the volatility of start-ups.

However, stability alone isn’t enough. The company must also have room to grow. Without growth, even the strongest company can be overtaken by competitors. Look for companies that invest in innovation and adapt to changing markets.

Strong companies share common traits: low production costs, effective operations, a focus on research and development, and sound financial management. These qualities ensure they can weather economic challenges and maintain profitability.

Examples

• Procter & Gamble’s consistent growth through product innovation.
• Johnson & Johnson’s ability to adapt to changing healthcare needs.
• Coca-Cola’s global dominance, supported by efficient production and marketing.

6. Employee satisfaction drives success

A company’s employees are its most valuable asset. Happy, motivated employees are more productive and innovative, which directly impacts a company’s growth and profitability. As an investor, examining how a company treats its staff can provide valuable insights.

For instance, companies that promote from within and invest in employee development are more likely to succeed. On the other hand, companies with high turnover or poor management practices often struggle to achieve their goals.

Teamwork is another important factor. A company with a collaborative culture is better equipped to handle challenges and capitalize on opportunities. Look for companies where managers delegate effectively and foster a sense of shared purpose.

Examples

• Google’s focus on employee well-being, from free meals to professional development programs.
• Costco’s reputation for treating employees well, leading to high productivity and low turnover.
• Toyota’s emphasis on teamwork and continuous improvement through its lean manufacturing system.

7. Profit margins matter more than total profits

When evaluating a company, focus on its profit margins rather than its total profits. High margins indicate efficiency and resilience, which are essential for long-term success. A company with strong margins can reinvest in growth and weather economic downturns.

Profitability also depends on a company’s ability to outperform competitors. This can be achieved through economies of scale, which lower production costs, or through unique innovations protected by patents or copyrights.

For example, a large pencil manufacturer can produce at a lower cost per unit than a smaller competitor. Similarly, a pharmaceutical company with a patented drug can dominate its market without fear of competition.

Examples

• Apple’s high profit margins on iPhones, driven by premium pricing and brand loyalty.
• Pfizer’s market dominance with patented drugs like Lipitor.
• Walmart’s ability to offer low prices due to its massive scale.

8. The price-earnings ratio reveals a stock’s true value

The price-earnings (P/E) ratio is a simple yet powerful tool for evaluating a stock’s value. By dividing a company’s stock price by its earnings per share, you can determine whether the stock is overvalued or undervalued.

A low P/E ratio suggests the stock is undervalued, making it a good buy for conservative investors. However, a high P/E ratio might indicate that the market has high expectations for the company’s growth.

Ultimately, the decision to invest depends on your risk tolerance and investment goals. A risky investor might accept a high P/E ratio, while a conservative investor would look for a more stable option.

Examples

• A stock with a P/E ratio of 10, indicating it’s undervalued.
• A tech company with a P/E ratio of 50, reflecting high growth expectations.
• Comparing P/E ratios across companies in the same industry to identify bargains.

9. Think beyond the stock price

A company’s stock price is just one piece of the puzzle. To truly understand its value, you need to consider factors like management quality, employee satisfaction, and long-term growth strategies. These elements often reveal opportunities that the market overlooks.

For example, a company with a strong research and development team might be undervalued because its innovations haven’t yet reached the market. Similarly, a company with excellent employee relations might be more productive than its competitors.

By looking beyond the stock price, you can identify hidden gems and make smarter investment decisions.

Examples

• Tesla’s early focus on innovation, despite skepticism from the market.
• Starbucks’ investment in employee benefits, leading to higher productivity.
• Microsoft’s shift to cloud computing, which boosted its long-term prospects.

Takeaways

1. Use the scuttlebutt method to gather information from diverse sources, including competitors and former employees.
2. Focus on companies with strong management, happy employees, and a clear growth strategy.
3. Don’t hesitate to buy during market dips, as these often present the best opportunities for long-term gains.