Sound advice from Philip A. Fisher

For best results in your investing, take time to read books on the topic by some of the best investing thinkers — like Philip A. Fisher. His classic “Common Stocks and Uncommon Profits” (Wiley, $25) laid out many valuable rules for studying and finding the most promising stocks.

For example, he recommends that you seek companies with solid plans to deliver “dramatic” growth over the long run, and aim to buy shares when they’re selling at attractive prices, often because other investors don’t see their value. Plan to hang on to these companies for a very long time, until something fundamental about the company changes or it has grown so large that its growth will likely lag that of the overall market. Do your own research and your own thinking, and don’t be afraid to have a contrary view.

Fisher favors companies with lower production costs than their rivals, as they’ll be better able to get through bad years. They should have competitive advantages over their competitors, and have “outstanding” research and development operations that generate new products and services to help them keep growing.

While dividend-paying stocks will serve many investors very well, Fisher says that if you want to aim for maximum growth in your stocks, you should avoid dividend payers: Since they have to pay out part of their earnings in dividends, they can’t use it all to further their growth. (While that’s true, you might be a balanced investor, holding both dividend payers and nonpayers, for the best of both worlds.)

Finally, Fisher reminds us that all investors will make mistakes: “Willingness to take small losses in some stocks and to let profits grow bigger and bigger in the more promising stocks is a sign of good investment management. Taking small profits in good investments and letting losses grow in bad ones is a sign of abominable investment judgment. A profit should never be taken just for the satisfaction of taking it.”

Next week we’ll cover how Fisher evaluates companies.