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PUBLISHED IN 1958, Common Stocks and Uncommon Profits by Philip Fisher was the first investment book to make The New York Times bestseller list.
Never heard of Fisher? Berkshire Hathaway Chairman Warren Buffett points to two key influences on his investment thinking: legendary value investor Benjamin Graham—and growth-stock proponent Phil Fisher. Indeed, I’d argue that Fisher’s words of advice on bonds, dividends and war scares are as relevant now as they were in 1958.
Bonds. Back then, economic conditions were similar to today. Fisher cites a study from the First National City Bank of New York showing that from 1946 to 1956 the dollar lost 29% of its spending power. That’s a 3.4% annual rate of depreciation, while bonds returned just 2.2%. Moreover, Fisher shows that, even if you bought bonds at the higher yields available at the end of this 10-year stretch, you still wouldn’t have outpaced inflation.
“Of course, these figures are only conclusive for this one ten-year period,” concedes Fisher. “It seems to me that if this whole inflation mechanism is studied carefully, it becomes clear that major inflationary spurts arise out of wholesale expansions of credit, which in turn result from large government deficits greatly enlarging the monetary base of the credit system.” Sound familiar?
Then comes the prediction: “One of two courses seem inevitable. Either business will remain good in which event stocks will continue to outperform bonds, or a significant recession will occur.”
Fisher continues: “If this happens”—the recession, that is—”bonds should temporarily outperform the best stocks, but a train of major deficit producing actions will then be triggered that will cause another major decline in the true purchasing power of bond-type investments.” Because a recession will ultimately lead to more inflation, Fisher believes that bonds “do not provide for sufficient gain to the long-term investor to offset this probability of further depreciation in purchasing power.”
Dividends. Many investors favor stocks with high dividends. Fisher called this sort of investing “hullabaloo.”
Fisher didn’t like dividends because he believed they showed a business’s best growth years were behind it. He compared dividends to a farmer who “rushes his magnificent livestock to market the minute he can sell them rather than raising them to the point where he can get the maximum price above his costs. He has produced a little more cash right now but at a frightful cost.”
Dividends can be a wise choice for companies if they don’t have reinvestment opportunities that’ll earn a return greater than their cost of capital. But for Fisher, such a situation was a warning sign. He wanted stocks that could continue to grow for a long time.
“Dividend considerations should be given the least, not the most, weight by those desiring to select outstanding stocks,” he wrote. “Perhaps the most peculiar aspect of this much-discussed subject of dividends is that those [investors] giving them the least consideration usually end up getting the best dividend return. 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.”
The lesson: Ignore the dividends that a company is currently paying—because they tell you nothing about the returns you’ll get in the future.
War scares. With Russia battling Ukraine and Chinese spy balloons being shot down over U.S. territory, the world feels less safe. While this sort of thing might not make for a good night’s sleep, Fisher counsels the reader, “Don’t be afraid of buying on a war scare.”
His advice: “If actual hostilities break out, the price would undoubtedly go still lower, perhaps a lot lower. Therefore, the thing to do is to buy but buy slowly and at a scale-down on just a threat of war. If war occurs, then increase the tempo of buying significantly.” If hostilities broke out between, say, the U.S. and China, those who have the cash to take advantage could be richly rewarded.
After 2022’s sharp market decline and 2023’s turbulent start, it can be easy to get scared out of stocks. Meanwhile, bonds are more attractive than in recent years, and—depending on your risk tolerance and time horizon—they may be a good fit for you.
Remember, however, that stocks are still the best investment for the long run. If you can stay the course, you’ll reap the benefits of the stock market’s superior returns. Fisher’s old wisdom for stock investors still applies to this new age: “A good nervous system is even more important than a good head.”
Dan Dawson is a naval officer and student at Harvard’s Kennedy School of Government. He is happily married to his high school sweetheart Emily. The views expressed here are his own and don’t reflect those of the U.S. government.
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I didn’t actually care for the article. Two items in particular:
one – ”Then comes the prediction: “One of two courses seem inevitable. Either business will remain good in which event stocks will continue to outperform bonds, or a significant recession will occur.”
Well no kidding-opposites.
2- “If hostilities broke out between, say, the U.S. and China, those who have the cash to take advantage could be richly rewarded.”
Do I just sit on a lot of cash waiting for something bad that may never arrive?
Regarding dividends: https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/WP106.pdf
I enjoyed this article, Dan, and also the paper from Hartford you reference, Rob. I suspect that the difference between their conclusions is that Hartford looks at reinvesting dividends with monthly rebalancing, while Fisher may not have done this as rigorously. (Granted, it was much harder to do in 1958!)
In general, perhaps a principle here is that the unacknowledged truths may lead to finding unappreciated value. Buffett, for one, has talked about how the tax code penalizes [rich] investors for accepting dividends, since they lose the ability to choose when they get taxed (or sometimes perhaps if they get taxed.)
Rich investors, like large companies, represent an outsized portion of the total market, so what matters for them matters for the markets as a whole. [But of course, smaller investors like me can sometimes benefit from choosing what the rich are disinclined to choose for unappreciated value.]
Shunning dividends is ignoring the value of compounding.
Dan, thank you for your service and for the interesting article about Fisher. Hope to see more articles in the future.
Be careful the way you talk about dividends, as it may be seen as heresy in these parts.