Common Stocks Chapter 2: The 15 Points

"I want companies that have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years." — Philip Fisher

The Investment Context

The core of Common Stocks and Uncommon Profits is Fisher's 15-point checklist for identifying a great company. While not every successful investment will meet all 15 points perfectly, a truly exceptional company will score highly on the vast majority of them.

The points generally fall into three categories: 1. Business Potential: Does the company have products with massive market potential, strong profit margins, and an effective R&D department to create the next great product? 2. Management Quality: Does management have outstanding relations with its executives and lower-level employees? Are they candid with shareholders when things go wrong? Do they have unquestionable integrity? 3. Operational Excellence: Does the company have a highly effective sales organization? Do they have excellent accounting and cost controls?

The Wall Street Translation

Fisher's 15 points were revolutionary because they forced investors to look at the engine of a company rather than just the exhaust (the profits).

1. R&D and Sales (The Twin Engines): A great product without a great sales team will fail. A great sales team without continuous product innovation will eventually have nothing to sell. Fisher demanded excellence in both. Modern tech investors echo this when evaluating a software company's "Go-To-Market" motion versus its engineering talent.
2. The Integrity Premium: Wall Street often forgives bad behavior if the earnings are good. Fisher warned that if management lacks integrity, they will eventually find a way to enrich themselves at the expense of the shareholder. There is no such thing as a "cheap" stock if the management is corrupt.
3. The Growth Runway: A company might be highly profitable today, but if its Total Addressable Market (TAM) is saturated, the compounding stops. You must identify companies that are aggressively expanding their TAM.

4. The Three Hardest and Most Important of the Fifteen Points

Fisher acknowledged that not all fifteen points carry equal weight or are equally verifiable. In practice three matter most:

• Research effectiveness, not research scale: What matters is not how much is spent but how much revenue each dollar of research eventually produces. Comparing R&D as a share of sales against new-product revenue share across peers gives a rough measure.
• Durability of margins: High margins attract competition. The question is what prevents competitors from copying, not how high margins currently are.
• Management integrity: Hardest to quantify, but testable through history — do they disclose bad news promptly? Did past guidance prove accurate?

If these three cannot be confirmed, the remaining twelve are insufficient to support a long-term holding.

Actionable Trading Rules

1. Audit the R&D: Look at the company's track record. Are their current profits coming entirely from a product they invented 10 years ago, or are they successfully launching new product lines?
2. Watch Management During a Crisis: Read the earnings call transcripts from a quarter where the company missed expectations. Does the CEO take responsibility and clearly explain the problem, or do they blame macroeconomics, the weather, and "transitory" headwinds?
3. Evaluate the Culture: Does the company promote from within? Are labor relations strong? High turnover among key executives is a glaring red flag that fails Fisher's test.