Stock investing can be simply understood as buying a stock today and expecting to sell it in the future for more than what you paid, thus making a profit. The reasons behind why someone might invest in stocks vary:
- Achieving financial freedom
- Earning more than the inflation rate
- Seeing others, like a junior, profit from investing and wanting to do the same
Regardless of the motivation, the ultimate expectation is that the money invested today will yield more in the future.
Challenges of Predicting the Future
From what I’ve seen in the news, it seems like time machines haven’t been invented yet. We can’t peek into the future to see which stock will give the most profit, otherwise, everyone would just buy that stock. And if everyone knew which stock would rise, who would sell it? But that’s a topic for another day.
Since we can’t look into the future, we can follow the methods suggested by Philip Fisher. By understanding how people made profits in the past, we can apply similar strategies today.
Philip Fisher’s Approaches to Profit
According to Philip Fisher, there are two main ways people have profited from the stock market in the past:
- Business Cycle Approach
- Long Term Investment Approach
1. Business Cycle Approach
In simple terms, this approach involves buying a stock during tough times (when its price is very low) and selling it when good times come (when its price has risen significantly). This could be due to poor economic conditions, bad management decisions, or any reason making the company’s future look bleak at the moment.
In the 19th and 20th centuries, many people made money using this approach. But why doesn’t everyone use this strategy if it’s so easy? Here’s where things get complicated:
- This strategy requires knowing the right timing of the market. You need to know when a stock’s bad times are ending and good times are starting, and you need to know this before everyone else to buy low.
- According to Philip Fisher, this strategy was mostly profitable for those with inside information about the company or those with strong connections in the finance world.
2. Long Term Investment Approach
The best part about this approach is that, according to Philip Fisher, you don’t need to time the market. Instead, you buy stocks of outstanding companies and hold them for the long term. This approach is much less risky than the business cycle approach and doesn’t require precise market timing because you are holding the stock for a long period.
If you’ve bought stocks of outstanding companies, you can generate significant wealth in the long run.
Finding Outstanding Companies
I know what you’re thinking – how do you find these outstanding companies? This book is entirely about that topic.
Opportunities Today: Better Than Ever
We can’t see the future, which means we can’t be 100% sure which stock will go up. So, we try to learn from the past, understanding how people made profits then. But can we use this knowledge today? Absolutely.
In fact, according to Philip Fisher, there are more opportunities available today than in the past. This is thanks to changes in corporate management and the economy.
Modern Corporate Management
In the past, large corporations were usually operated by family members. Shareholders’ interests were often ignored, and management positions were passed down within the family, leading to less improvement and innovation.
Today, things have changed significantly. Corporations no longer operate solely as family businesses. They hunt for talent and choose the right person for the job, focusing on growing the company and increasing shareholders’ wealth. This creates more opportunities for investors than ever before.
Inflation and Bonds
Bonds have been considered a good investment option, but high inflation can make bonds risky. If inflation is higher than the fixed income from bonds, our purchasing power decreases, resulting in a loss. (Bonds are a big topic and deserve a separate article, so we’ll keep it short for now.)
On the other hand, investing in growing or outstanding companies can help us beat inflation. Outstanding companies, with the help of their exceptional management, continually increase their earnings over time, allowing them to grow more than the rate of inflation.
By understanding these approaches and recognizing the opportunities available today, we can make informed investment decisions that have the potential to yield significant profits in the future.