Brian Tracy: Getting Rich Your Own Way: Chapter Summary

To read a high level summary of the book, click HERE

In the introduction to the book 'Getting rich your own way', Mr.Tracy divides the general population into two groups. The first group, the wealth and successful people are the 'Action oriented people'. they believe in taking quick action and getting things done. The second group is the 'Talking and wishing people' who wait for things to happen to them.

To understand how to become rich, it is important to understand the factors that keep people from becoming rich. There are five reasons. First reason is that it do not occur to people that they could become rich. Their reference group consists of people similarly placed as they are. Second reason is got to do with a decision. Path to riches starts with a decision to become rich. Some people, due to various factors, do not take that decision. Third reason for people not becoming rich is procrastination. They wait for the right moment to take action which (right moment) never comes. Fourth reason is that people are not ready to pay the price by delaying gratification. The last reason why people do not become rich has got to do with their view of time. Being rich needs effort over a longer period of time. They longer the view of a person, the higher their chances of being rich and successful. The longer your time perspective, the goals will be long-term and the plans will be long-term in nature. You will become sensitive to how you spend your time.

There are five ways to become wealthy. They are:

1. Become an entrepreneur
2. Work your way up in an organization
3. Become a self-employed professional
4. Become good at sales
5. All the rest

The good news is that you have some assets that you can leverage to become successful. These are:

1. Specialized knowledge
2. Skill: Better you are at your job, more you will be paid
3. Money raised through savings, cash reserves or debt
4. Network: The people you know. There are three things that you can do to expand your network. Make a list, network regularly and get involved in your community
5. your creativity: One great ideas is all you need
6. Good work habits
7. A positive mental attitude
8. The luck factor: Be prepared to receive luck. Try different things. Have clear goals and a plan of action. Clear goals lead to 'Law of attraction'
9. Personal energy
10. Choosing the right vocation

Do not accept any limits on your quest for success.

Chapter 2: Become a money magnet

The starting point of becoming wealthy is ‘Prosperity Consciousness’. You must become wealthy in your thinking before you achieve it physically. The first step in you path to become wealthy is the decision to change your thinking and impress in your mind the absolute faith that you can and will become a billionaire.

How you use your mind determines everything that you are or ever will be. You are just a mind with a body you use to carry it around.

There are three universal laws that one should use in one’s journey to become a billionaire. First is the law of expectation. This law says that whatever you expect with confidence – positive or negative – becomes your reality. If you confidently expect to become a billionaire and hold to that belief and act as if becoming a billionaire was inevitable, you will eventually become a billionaire.

Successful people expect to succeed in advance.

The second universal law is the law of attraction. This law says that your thoughts create a force field of energy that radiates out from you and attracts back into your life people and circumstances in harmony with those thoughts. Your main job is to keep your mind fixed on what you want and off what you don’t want.

Law of correspondence says that your outer world is like a mirror that reflects back to you what is going on you our inner world. As per this law, everything that happens outside of you corresponds to something happening inside you.

The laws are neutral. They can work for you or against you depending on the thoughts you choose to think.

If you passionately, madly want to become a billionaire, you will become a billionaire.

To become rich, one should think like rich people. You should try to find out how they think and try to imitate the same. One way to become rich is by following the law of accumulation which states that a great success is just the accumulation of many small successes. There are three areas where the law of accumulation is important for financial success. These are knowledge, money and experience. It is very important to continually accumulate all  the three to become wealthy and successful.  You must be serious about becoming successful. Also you must take charge of yourself. This means taking charge of your thoughts. Next step is to take charge of your actions. The first step in becoming rich is to have a reason why you want to be rich. Your goals must be specific.

The practical way to achieve your goals is the power of visualization. Create a clear mental picture of your goal as if it has already happened. The clarity of your mental picture will determine how rapidly your goal will come to light in real world.  Use the power of visualization to see yourself actually doing things to achieve your goal. This is called ‘Causative thinking’. There are four factors that can multiply the power of visualization. They are length of visualization, frequency of visualization, intensity of visualization and vividness of visualization. One way to increase the power of visualizations is the ‘Treasure Map’. Create a poster and put your goal and a picture of yourself. Surround the central image with a picture of clippings from magazines and news papers that support your goal. Practice positive affirmation like ‘I can do it’, ‘I make it happen’, ‘I make a billion rupees’, ‘I am the best’ etc

Other actions that you can take include reading about successful people, study your business and industry, attend to podcasts in your car, take courses and attend seminars. Another step is to be around successful people. This step, vis. Changing your reference group is mandatory to achieve success. Visualize your goals before you go to sleep. Finally start your day in a thoughtful, productive way that sets you up for the challenges ahead.

Chapter 4: Start with nothing.

There are four steps to success in any venture. These are desire, decision, determination,\ and discipline. One of the reasons why people do not achieve financials success is that they associate spending with pleasure and saving with pain. Another manor strategy to accumulate wealth is to decide ‘not to lose money’. ‘Low debt’ and ‘Slow and steady wins the race’ are two strategies that the rich people have followed over time. One of the reasons why businesses fail is that  the entrepreneurs do not know how to make a business successful. The tow key reasons for business failures are poor sales and low cost controls.

The five keys to business success are.

1. Plan, organize and get results
2. Market and sell – One should learn to sell
3. Select the right people
4. Become a good negotiator
5. Learn to read financial statements

The five rules of entrepreneurship are:

1. Find a need and fill it
2. Find a problem and solve it
3. Focus on the customer
4. Bootstrap your way to success
5. Walk before you run. Be prepared to pay the price

Seven steps to business success are:

1. Set specific financial goals
2. Offer a superior product
3. Start small and grow slowly
4. Test before you invest
5. Grow from your profits
6. Selects people carefully
7. Use financial leverage

Chapter 5: Build your business

Seven principles of business success are:

1. Start at the beginning: Does your service solve and existing problem for a customer?
2. Offer good quality oat fair price
3. Practice frugality at all times. Remember if it is not revenue, it is expense
4. Maximize marketing: Sell, sell, sell
5. Love your customer
6. Develop a complete business plan before starting: The exercise of creating a plan will focus the entrepreneur to think through the critical issues that are involved
7. Never give up: Determination, persistence and patience goes hand in hand with business success. It takes time to succeed. Normally it take stow years to break even and four years to reach profits.

As per the factor of three, a new product or service must be better than its competition in at least three ways. Success rate for new product is only 10% while the success rate for improved products is 80%

Question to be asked and answered to succeed in business.

• Is your product suitable?
• Have you analyzed the market?

                Is there a market for this product?

                Is the market large enough?

                Is the market concentrated enough?

• Who is your customer?
• Why would they buy from you/
• What are the alternatives?
• What does each customer cost?

Seven great marketing questions.

1. What exactly is the product or service, in terms of what it does to change or improve life or work of customer?
2. To whom it is going to be sold exactly?
3. At what price is it going to be sold to the customer?
4. How is it going to be sold to those customers at this price?
5. Who is going to sell it in this way to this customer at this price?
6. How is it going to be paid for and when?
7. How is it going to be produced, delivered and serviced?

16 approaches to finding a product or service to sell

1. Start with yourself: Identify customer needs that are not getting satisfied in your area of interest
2. Look for a product or service that excites you
3. What can you improve upon?
4. Find ways to offer value
5. Keep your eyes open: Review the ‘Business opportunities’ column in the news papers
6. Read trade magazines in your field
7. Attend trade shows and exhibitions to learn about new products or services
8. Ask friends about ideas to sell or distribute
9. Keep current with business magazines. Look for ads for new products or business opportunities
10. Look for products worldwide. Seek out hidden opportunities
11. Introduce something new and different
12. Look under your won feet. It is estimated that people have four ideas each day when they drive from and to to work
13. Keep eyes open when you travel
14. Move quickly on opportunities
15. Continually scan the opportunity radar
16. Find something you like and believe in.

Some approaches to doing market research

1. Do your homework. Try the product and see how you feel
2. Find out what others are saying
3. Ask other peoples opinions
4. Ask your bank manager for advice
5. Ask friends and family for input
6. Get a customer’s opinion
7. Study your competition
8. Become a pessimistic optimist. Try to find the fatal flaw in your products
9. Look for hidden possibilities
10. Think long-term
11. Be open to negative inputs

Chapter 6: Market and sell anything

Five questions to answer before making a sale are:

1. Why should I listen to you?
2. What is it and what does it do? Product Feature
3. Who says so? Testimonials
4. Who else used it?
5. What do I gt? What is in it for me?

Various ways to sell. (Is your phone ringing?)

1. Personal sales
2. Retails sales
3. Distribution
4. Newspaper ads
5. Direct mail
6. Mail Order
7. Internet
8. Direct selling
9. Seminar selling
10. Party plan
11. Co-op mailing
12. Government sales
13. Manufacturer representative
14. Chain stores
15. Discount stores
16. Supermarkets
17. Department stores
18. Premium sales
19. Franchising
20. Displays and exhibits
21. Wholesale
22. Advertising specialty (Gifts)
23. Trade shows
24. Fund Raisers

Opportunity Gap Analysis:

10 questions that one cans ask to find newer or better ways to distribute your product or service

1. What other ways you could sell the product/ Take an existing product and find a different way to sell it (Home delivery of vegetables, for example)
2. What additional customers are there for this product? Find new customer base
3. How to modify the existing product to make them more attractive to your customers? Change packaging, functionality, increase size, reduce complexity etc
4. What non-customers could you develop for this product? Identify customers who are not using any products (Story of an island where people do not wear footwear)
5. What new products do your existing customers want?
6. What additional methods of distribution exist for the product?
7. What additional products could you distribute through your existing marketing channels?
8. What new products could you develop for your existing distribution channels?
9. What new markets exist for your new products and your current distribution channels?
10. What additional products could your produce with your existing facilities?

11 rules to get free publicity

1. Ask for it
2. Prepare a press release
3. Make it newsworthy
4. Pinpoint your audience. Identify media channels used by your key customer segment
5. Select your media carefully
6. Create good working tools. Get goo letterhead, write good copy etc
7. Send a photograph of your product in use
8. Use direct mail. Identify food expert of TOI for example.
9. Go on radio or TV. Prepare a fact sheet for the announcer. Prepare a summary of the benefits and interesting features of your product or service
10. Offer something free
11. Leave information behind

Chapter 7: How to get the money you need

There are three reasons why people do not follow up on their dreams. One, fear of failure, two, ignorance and three, lack of money.

This chapter addresses the third aspect of the above, vis. Getting the money that you need.

Various ways to raise money.

• Your own savings
• Selling assets
• Credit cards: Raise your credit value while working and borrow off your card. This can be very expensive
• Personal loans: Create a borrowing history by taking loans and paying them back
• Borrow against collateral, gold loans for example
• Love money. Money from friends, relatives, parents etc
• Business loan from Bank. Before taking a loan, banks look for the following five factors

                Collateral

                Character

                Credit rating

    Capital

    Confidence

• Lease or rent: Especially during early stages
• Bootstrap: Start small, reinvest your profits
• Customer financing. Get customers to pay:

                Deposit

                Use payment terms: Tighter for the customers and looser for the suppliers

• Subscription: Get the customer to pay the entire year payment before receiving the first issue. Reader’s digest model.
• Sell online. Get paid first and then deliver services
• License the right: AMC Model
• Retainership
• Multi-level marketing: Use sample to get the sale
• Factoring the receivables: Take loan based on Purchase order from a customer
• Franchise: Expand the business by selling the rights to use the business system
• Venture Capital: There are three requirement for raising VC

                Proven success record

                Submit a complete business plan

                Competent management team

• Small business loan from Government
• Initial Public Offerings
• Supplier Financing: Ge supplier to finance you with liberal terms initially.

Chapter 8: Think and grow rich

There are various ways to stimulate your thinking. These include:

1. Positive thinking
2. Clear goals and objectives. You become what you think about most of the time. Regular focus on goals stimulates the conscious and the sub conscious minds. Thinking about your goals activate law of attraction and begins attracting to your life people and circumstances that can help you achieve your goals
3. Stimulate your curiosity. Develop a questioning and curious attitude. Use ‘why’ effectively.
4. Stimulate your mind by reading books, attending seminars, listening to audio courses etc
5. Practice creating visualization. Continuously imagine and visualize  your goals as if they are already achieved
6. Learn to laugh at yourself
7. Get physically active
8. Practice intense concentration. Focus on one thing intensely over long period of time. It could be data gathering, problem formulation and defining the problem in different ways etc. The more you concentrate, the more your intelligence is available to you.
9. Expect the best. Expect to be successful
10. Take charge of your life. Every time you face a problem, immediately seize control of the situation by saying ‘I am responsible’. When you accept responsibility you immediately take charge of the situation
11. Develop a burning desire. You must have an intense desire to develop your potential as a person.

Three qualities of a Genius

1. Single minded concentration for a long period of time till a goal is achieved
2. Systematic approach to solving problems, investigating, questioning and making decisions. They think on paper. They write down their thoughts and ideas. Thinking on paper makes a creative thinker.

Here are some steps to solve problems systematically

1. Define the problem clearly in writing
2. Make a list of all the causes of this problem
3. Identify all possible solutions
4. Select what appears to be the best solution at the moment. Do not strive for perfections
5. Assign responsibility for the solution to a single person
6. How to measure the success of the solution
7. Set deadlines for implementing of the solution. Please note that any solution is better than no solution.
8. Keep an open mind. Practice adaptive thinking as against mechanical thinking Adaptive thinkers keep the question open as long as possible, avoiding the tendency to jump to conclusion

There are three ways to stimulate your creative thinking. These are intensely desired goals, pressing problems and focused questions

Ways to get rich your own way

• Keep an idea log
• Relax and reflect. ‘Go into silence’ and let your mind float
• Magic wand technique. Practice the exercise of fantasizing at regular intervals. Use an imaginary magic wand to magically remover your obstacles. How will your life look like when your goals are achieved? What is the first step that you have take right now to achieve your goals?
• Project forward and think back. What would a successful you look like? How will you be thinking and acting? How will others look at you? What Will you be doing? How will you use your success for betterment of society, for building inner peace and serenity? What should you do now to achieve that success/
• Complete the sentence. Create a partial sentence and try to find multiple ways to complete it. You can use this approach for personal growth.
• Generate personal answers

                I could achieve my goal if I.....

                I could start a business immediately if I....

• Practice ‘mindstorming’. This is also called 20 idea method. Write down the problem statement on th top of a white sheet of paper. The tone of the question is positive and enquiring. Then write down at least 20 answers to the question. Initially it will be easy to answer. However last 10 answers can be very difficult. However if you practice long enough, you will find that you have many solutions to every one of your problems
• Practice brainstorming or mastermind technique
• Ask ‘What if’ questions. ‘What if it were like that..’, ‘why is this situation like this...’ etc

How to evaluate your idea?

Not all ideas are good or workable. Once you have an idea, you should evaluate its feasibility. Here are some ways to do that.

• Determine if the idea is valuable
• Remain objective. Do not fall in love with your idea. Ask various people about the idea. Be ready to throw away the ineffective ones.
• Let them cool. Give ideas time to become clearer
• Ask right questions including

                Will it work

                What it takes

                Is it simple (Most important)

                Will it significantly improve the situation

• How badly do you want it? Is it compatible with your values and dreams?

As per the law of manifestation, physical things are just the manifestation of inner thoughts. Everything is first created in the mind. The point made in the chapter will help you create your success first in your mind before it manifests in the outer world.

Chapter 9: Learn from the best

Five qualities of great people:

1. They display common sense: Ability to have experiences, reflect on the same and learn general rules from those experiences that can be applied across other situations
2. They act intelligently. Intelligent action move you forward to your goals
3. Expertise: Mastery of the domain
4. Take charge of t heir lives. They take responsibility for whatever happens to them. They avoid blame game and let the past go
5. They get the job done. They develop result orientation. Focus on getting the jobe done well and quickly. They set goals, objectives and priorities. They focus on what is important and stick to it until it is completed

Think in terms of hourly rate. This will help us use our time better than the rest. Identify you top three tasks list and focus on completing them

Qualities of leadership

1. Vision: Have a clear vision of the ideal future. Practice imagining your ideal life 3 to 5 years hence. Imagine yourself being described as a successful person
2. They have a deep sense of mission
3. They practice optimism. Have unrealistic expectation of success. This will help you try more things. Once you try more things, you will succeed in more things.
4. Know your business inside out
5. Look for opportunities

How to find your opportunities

1. Collect information. Attend seminars, listens to podcasts, read journals, magazines etc
2. Visualize yourself as successful. Create a clear picture of how you will look, walk, dress, talk etc once you are successful. Combine visualization with action
3. Keep your eyes open for opportunities. Look for problems in your working area. Start small with customer financing. Look for solution that can be widely applied. Look for solutions that can be sold by ordinary, competent sales people. Look for problems that really works and that can sell itself by word of mouth.

Study successful companies

1. How does a company attract customers?
2. How does thee company sell? What are the selling techniques? What are the successful selling methods? What kind of warranties and guarantees doe it give? What kind of follow up service it gives to it its customers?
3. Who buys the product or service? What type of customers does sell to? Who are the customers for a specific product or service
4. How does the company charge?
5. How much does it charge? Does it require a down payment? What terms does it give?
6. What does the company include in its sales?
7. Where does the company sell?Cities? States? Location in cities etc
8. How does it retain customers?

Twelve keys to following the leaders

1. Find out everything you can about the top people
2. Copy everything that people are doing to achieve success
3. Admire your successful competitors. Never disparage your competition
4. Look for formulas of success that you can transfer or adapt from one industry or business to another
5. Look for areas in the field where big profits are being made
6. Look at what small businesses are doing successfully and then consider the possibility of building a large organization doing the same thin on a large scale
7. Look what established giants are doing and then provide customers with less expensive alternative
8. Look for an area where you can use speed and flexibility to offer products faster and cheaper
9. Find a way to improve best selling products
10. Always follow the leaders Don't go in first with a new product or service
11. Borrow good ideas from others
12. Learn continuously. Never stop learning
13. Finally try, try and try again. No one has been successful without trying.

Chapter 10: Lead the field.

Some of the rules for health, wealth and happiness

• Do what you love to do. Analyze and decide on your natural talent and abilities and choose career accordingly. You should strive to do stuff that give you enormous amount of satisfaction and pleasure
• Identify7 your core competencies. Identify the area of work where you can make the greatest contribution
• Throw your heart into what you do
• Commit to excellence. Dedicate yourself to life long learning. Get better at what you do
• Become a life long student
• Save at least 10% of your income
• Do a great job where you are. Develop special talent and work in an area where your talent is valued.
• Strategies to put your career on a fast track
• Make yourself indispensable.
• Work harder than anyone else. Develop a reputation for very hard work. Start earlier, work harder, stay later
• Work all the time you work
• Invest the extra time
• Transform your career. Resolve to start one hour earlier. Work through lunch time. Sine everyone is out for lunch, this will give you one hour of uninterrupted work time. Resolve to work on hour longer than anyone else by staying later in the day.
• Accept 100% responsibility. Be clear with your boss regarding the most important things that you do for the company. Take over tasks from your boss that can handle. Always ask for more
• Step on your own accelerator. Work on priorities and do the job quickly . Have a sense of urgency.
• Develop a niche strategy. Create a niche strategy to improve the cash flow of the company. Identify the activities of the company that can affect the cash flow. Six such activities are.

1. Marketing and sales: Identify ho to sell better and how to improve the collections
2. Finance: Learn to deal with banks, Venture Capitalists and other source of cash flow
3. Production. In a company with stable sales forecast, a production engineering, ensuring continuous production  is the key resource to improve cash flow
4. Distribution channels: For some companies distribution channels are the greatest sources of cash flow. If you can get into a position of impacting distribution channel, you can add value to the company’s cash flow.
5. Labor relations
6. Government relations

• Develop specialized knowledge
• Do things faster. Move fast on opportunities. Get reputation of speed
• Build your network

1. Develop a ‘Strategic Networking Plan’
2. Successful managers, who got promoted often, spend 54% of their time networking
3. Know more people. Get known to more people
4. Join an organization that will help you build the network
5. Talent X Relationships = Productivity

• Learn public speaking
• Be the best

1. Identify KRAs
2. Identify the weakest skill and continuously work on it
3. You could be one skill away from maximizing your productivity, performance, output and wealth. Learn new skills

• Develop good work habits
• Develop a power base. Develop personal power, expert power and position power in that order.

1. Use law of reciprocity to your advantage
2. Make a list of people who can help you start by helping them

• Guard your integrity

1. Be trustworthyTrust yourself. 
2. Be true to yourself. 
3. Keep your wordLive your life as if your every act were to become a universal law
4. What kind of world / country / company / family would it be if everyone in it were just like    me?

• Focus on the future. It only matters where you are going
• Work on your talents. Every leader was a follower once. They rose to the leadership position by working on their talents.
• Start where you are
• Develop a prosperity consciousness. Think of yourself as a work in process. Writ and rewrite your goals. Make and regularly review detailed plan to achieve your goals. Your outer reality is the expression of your inner thoughts and beliefs.

Get going and keep going. Never give up!!

Chapter Summary: Book #22:Common Stocks and Uncommon Profits

Part 1: Common stocks and uncommon profits

Chapter 1: Clues from the past

Traditionally there are two ways to make money in the stock market. One is to play the business cycle. Enter at the trough of the cycle and exit at the boom. However it is difficult for a retail investor to exactly time the troughs or the booms. This results in his receiving suboptimal returns or in worst case incurring losses.

A better approach would be to identify good companies with significant long-term potential and stay invested in them for the long haul. This approach will invariably lead to significant investment profits for a retail investor. This book is about identifying such companies.

What are the main characteristics of good companies? One, they need not be young and small. Even a big company can grow significantly for a long period of time by smart management. Two, the management of such companies balances long range planning with short range execution and three, these companies focus on continuous renewal through Research and Development. The good news for the investor is that many such companies exist today.

One key question that is addressed in this chapter is whether a retail investor should play the bond market or is she better off being invested in stocks. One of the trends in US is of deficit spending where government maintains a budget deficit to propel growth. Deficit spending leads to inflation and creates volatility in bond market. Investment in Bond Market calls for extensive knowledge which the retail investor may not possess. Hence it is better for the retail investor to stay away from the bond market.

Chapter 2: What ‘Scuttlebutt’ can do

Once an investor identifies a company to research on, the next step is to identify various sources that can provide information on the company. Initially one would start collecting information from various stakeholders outside the company, but we are aware of the company, its industry and its competitors. Author discusses a strategy called ‘Scuttlebutt’.  As per Scuttlebutt strategy, there are four main sources of external information. They are the Competitors, Suppliers, Customers and Ex-employees of the company. One can make intelligent assumptions about the company from the inputs provided by these sources. Only after the investor has got all the relevant information from the Scuttlebutt, should the investor think of talking to the company management, to fill the gaps in one’s understanding.

Chapter 3: What to buy: The fifteen points to look for in a common stock.

While researching a company to invest in, an investor should try to get answer to fifteen questions. These are:

1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years? It is possible for a company to make a one time profit by tight control of  the costs. It is also possible that a company can make profit for a number of years due to anticipated market changes, for example the sales of Radio Manufacturers increased manifold with the advent of TV, but now the sales have tapered off. Also, one should not expect the company to make profits year on year, rather one  should have a block of years in mind while comparing the performance. Investor should look for companies which will have sharply increasing sales for some years ahead.
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when growth potentials of currently attractive product lines have largely been exploited? New products tend to do well if they are incrementally improved over the existing products rather than developing a new product altogether. Management should have the awareness and the conviction to continually look for new products to augment the organizational portfolio. Points 1 and 2 taken together implies that while the current products are selling well, the smart management is aware of the need to continually develop new products and shelve old ones.
3. How effective are companies R&D efforts in relation to its size? While most of the companies report their R&D expenses separately, the components of what goes into the expense vary significantly, making comparisons difficult. For R&D efforts to be successful, three vital areas of co-ordination has to be considered. First one is the co-ordination within the R&D team. This means that all the different experts in the R&D team must be able to work together as a team. The second is the co-ordination between the research team and the Business and Operation teams. Without this co-ordination, the new products developed will fail to take off. The third and the most important is the co-ordination with the management. R&D effort will take time and focus. If the management continuously shifts the R&D focus based on external factors, the research effort will not be effective.  One area where the R&D effort fails is in integrating the research effort with market inputs. Many a times it can happen that esoteric products are developed in house only to find that there is no market demand for those products.
4. Does the company have an above average sales organization? Sales is the lifeblood of any organization. Any smart investor should look for signs of strength in sales organization. One way is to look for the recruitment and training and retraining processes for the sales team. This is area where Scuttlebutt can provide good insight.
5. Does the company have a worthwhile profit margin? An investor should look for good current profit margin with a potential to expand. Sometimes effort in improving sales or research can lower the profit margins. If the investor is convinced of the reasons of low profit margin is as mentioned above (GPM will be high while EBIDTA margins will be low, for example), she can invest in that stock even though the current margins are low.
6. What is the company doing to maintain or improve profit margins? The easiest way to maintain / improve profit margins is to pass on the additional costs to the customer. Investor should look out for those companies that can do that (having a ‘moat’ as per Mr.Warren Buffet). If that is not possible, the organization can improve margins by cutting costs. One aspect of this is to review operations to bring in economies of scale. Another way is to continually bring out new products that can maintain the margins.
7. Does the company have outstanding labor and personnel relations? Absence of Labor unions can provide a clue to the labor relations. Investor should look for amicable relations between management and unions where one exists. Some of the signs of good labor relations are labor turnover, waiting list to join the organization, speed of grievance settlement, rate of wages to profit and attitude of management to employees.
8. Does the company have outstanding executive relations? Investor should look for merit based promotion policy, regular wage increment without employee having to demand the same, wages in line with industry standards, policy of promoting internal talent to key jobs etc.
9. Does the company have depth to its management? Investor should look for policies enforcing delegation of authority. Also she can look for instances where management was receptive to adverse criticism (demonstrating the management depth) rather than sitting on their pride and ego.
10. How good are the company’s cost analysis and accounting controls? Availability of detailed, accurate product cost information is a very important requirement for the company. However it is very difficult for an investor to verify the availability and accuracy of the cost information.
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition? Investor should identify industry specific factors and do a performance comparison of the company with its peers. For retailing companies, renting and leasing costs may be significant cost and any company that handles this efficiently can become a winner. For asset rich companies, insurance costs can play a major role in cost escalation.
12. Does the company have a short-range or long-range outlook in regard to profits?  How does the company treats the special requirements of the vendors and customers that could impact its profit margins? A company looking at transactional approach will try to squeeze the maximum profits out of the current situation while a company looking at relationship approach will take a temporary hit in current margins but which will pay off spectacularly in the long run.
13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholder’s benefit from this anticipated growth? Investor should look for historic patterns of how the company had financed growth. Any company that can finance its growth through retained earnings and prudent debt should get a better valuation. If the company cannot take anymore debt then it will have to resort to equity dilution by issuing more equity. This will lower the value for the current shareholders.
14. Does the management talk freely to investors about its affairs when things are going well but ‘Clam up’ when troubles and disappointments occur? Investor should give a lot of importance to management communication and openness. It is quite normal that the business will go through good and bad. Any management that shuts up when things are bad is not to be trusted.
15. Does the company have a management of unquestionable integrity? This is very important. Management should do what it says it will do. To test this Warren Buffet advices the investor to go through management reports of five years ago and see if the management had followed through on the commitments made then.

Chapter 4: What to buy: Applying this to your own needs.

The recommendation for the average investor is not to invest on one’s own, but to invest through an expert. Secondly an investor should only invest their surplus funds after ensuring the availability of contingency fund. While small sized growth companies have more potential to grow, they are riskier. An Investor should invest about 80-85 percent of his funds in medium sized growth companies. Finally, do not focus on dividend yield. For a growth investor dividend yield is irrelevant.  Author also points out that growth investing will always triumph over value investing. This because, while the upside to value investing is more limited, there is no limit to the upside from growth investing.  For example, assume that the company A is trading at 100 (close to its intrinsic value) and due to some reason its price falls to 50. At 50 price, it becomes a value buy. However, the potential rise in price is to 100. However if one buys a growth company at 50, there is no limit to the upside. 

Chapter 5: When to buy

The traditional discussions on timings forecasts the business cycle and if they are positive, a buy is recommended and if negative, a sell. However, Mr.Fisher looks at timing in an innovative way. As per him, the characteristics of stock will tell an investor when to buy it. For example, if the growth company is in the verge of a new product, that is a time to buy. Another time to buy will be when the first plant comes on stream. Another time to buy is when a good growth company falls into temporary difficulties. Yet another time to invest is when a successful growth company makes incremental investments. In each of the above cases, market will provide the investor with very profitable buying opportunities for a few months. In addition, you may find a good stock trading at a high price. In this case it is better to use SIP route to buy into this stock.

Chapter 6: When to sell, and when not to

Answer to the question ‘When to sell’ is almost never. However, there are three reasons why one should sell a stock. First reason is that it becomes clear over a period of time that the original purchase was a mistake. The second reason is that the company no longer meets the requirements of 15 questions discussed earlier. The third reason is to sell is to buy into a better opportunity. The author discourages selling based on reasons like ‘Stock had a good advance’, ‘Stock is overpriced’ etc

Chapter 7: The Hullabaloo about dividends

The author is not a fan of investing based on Dividend Yield. Remember that value investors give a lot of importance to this ratio. As per him, most of the stock investors are in it for the appreciation in their investments. A good growth company can serve its investors better by investing their funds in growth opportunities rather than returning the same as dividends to the investor. In addition, a good growth company with low current dividend yield could offer significant dividend yield as it enters its growth phase.

Chapter 8: Five don’ts for investors

1. Don’t buy into promotional companies: Promotional companies mentioned in this book is what we call ‘Startups’. Small companies with excellent growth potential but without any operational or profit performance history. This makes it difficult for investors to analyse these companies. Author recommends investing in those companies with at least 2 years of operational history and one year of operating profit.
2. Don’t ignore a good stock because it is traded ‘Over the counter’: The companies in ‘Over The Counter’ (OTC) segments are those which are not yet listed in the stock market. You could get good bargains in this segment if your are a savvy investor.
3. Don’t buy a stock just because you like the ‘Tone’ of its annual report: An the corollary, don’t ignore a stock just because you dislike the tone of the annual report. Most of the annual report send to investors are prepared by professionals whose job is to make it look snazzy. Do not go by the looks, go by the quality of the content of the reports
4. Just because PE is high, do not assume that there is no further growth potential: There is a misconception that high PEs of some companies will ultimately ‘revert to mean’. While this may be a general case, there could be many exceptional growth companies whose PE will continue to remain high for significantly long periods.
5. Don’t quibble over eighths and quarters: This is a very important lesson to retail investors. If you have decided to buy a stock and if your are planning to buy in small numbers, it is better not to wait for a small fall in stock prices before you start accumulating the shares. It is possible that the stock will not reach your target price at all and you will end up regretting.

Chapter 9: Five more don’ts for investors

1. Don’t overstress diversification: Diversification is a recommended strategy for investors to mitigate risk. There are two aspects to diversification that one must consider. One is that there will be significant internal diversification within certain companies. For example if you buy CESE, you are getting exposure to Utility as well as a Retail (Spencers) play.  Secondly, more stocks do not mean more diversification. For example, out of 10 stocks, if eight are in Financial sector, the investor is not adequately diversified. In addition, if you are investing in a company with shallow management depth, you will need more diversification. Same is the case with investing in cyclical stocks where you will need more diversification to ensure steady returns.
2. Don’t be scared of buying into a war scare: War scare provides very good buying opportunities. This is because market excessively sells off at the whiff of a war or tension. A savvy investor will look for such opportunities to build significant wealth.
3. Don’t forget your Gilbert and Sullivan (Don’t be influenced by stuff that doesn’t matter): There are some financial statistics that is given undue importance by investors. One such is the price range at which the stock has traded historically. Considering that one is investing for future, the past price trends do not have any meaning. Another number is the EPS of the last five years. Another heuristic is the belief that the past can be extrapolated to future.
4. Don’t forget to consider time and price when buying a true growth stock: Even if you identify a good growth company, it makes sense to wait for the correct time to buy the same. For example, if you are expecting a plant to come onstream in 6 months, it will make sense to buy the stock just before the event takes place.
5. Do not follow the crowd: An investor should look for real reasons for a stock price movement. These could be new product launch, new factory commissioned, price increases etc. All these will impact the stock price positively. However, even when there are no fundamental reasons for the stock prices to fall or rise, the evaluation by the financial community can lead to market price fluctuations. A savvy investor should be careful not to transact based on the assessment of financial community (Mr.Market) about the value of one’s portfolio

Chapter 10: How I go about finding a growth stock:

This is the question for which probably most of the readers are trying to find answer to. 20 percent of the Author’s investment ideas come from friend s that he know of. The remaining 80 percent comes from savvy investment experts that he has business relationships with. Once he has an idea, he goes through the ‘Scuttlebutt’ approach to separate the chaff. If Scuttlebutt shows that the stock is not worth investing, the same is discarded. If the stock overcomes the ‘Scuttlebutt Test’, he will approach the management to fill the gaps in his knowledge. The focus is on getting answers to the 15 questions that were previously asked. It takes effort, but the returns are commensurate with the efforts.

Chapter 11: Summary and conclusion:

While the economic, scientific, political and corporate management environments are changing rapidly over the time and will significantly change in future, the basic principles of successful investments has not changed. One has to identify and stay invested in companies with potential to grow their revenues over the long – term. The part ends with emphasizing the importance of staying invested, of conquering one’s nerves, of not being affected by either greed or fear.

Part 2: Conservative investors sleep well

Introduction

A ‘Conservative Investment’ is one that conserves the investor’s purchasing power at a minimum risk to the investor. Conservative Investing looks at factors that determine a conservative investment and identify and invest in specific conservative investments.  This part of the book discusses the factors that make a Conservative Investments. Many of the points discussed in this section are repetitions of points already mentioned in Part 1 above.

 Chapter 1: The first dimension of a conservative investment

For a company to become a conservative investment, it must meet the following criteria:

1. It is the lowest cost producer in the industry: There are two aspects to this. One, the cost should be much lower than the Break Even Point giving the company a cushion in difficult economic environment. Second, it should have significant profit margin that can finance the organizational growth.
2. It should have an excellent marketing organization: A good marketing organization will understand the changing needs of the customer as well as anticipated changes in business environment. While they will advertise their products, they will also make customers aware of some needs that customer did not realize and then provide solution.
3. It should have a major focus on researching and developing new products: This was earlier discussed under 15 points in chapter 2. In summary a good R&D strategy will call for internal co-ordination between the R&D team members, co-ordination between the R&D team and the Business team that they are supporting and finally a management focused on R&D. The ideas that this team should focus on must come from good market research.
4. Should have highly efficient finance and accounting control processes: Organization should know its cost elements very thoroughly so that it can focus on products with highest margin, has a good budgeting process that can give early warning to potential problems, an efficient capital allocation process and finally a good receivables and inventory control processes.

Chapter 2: The second dimension: The People Factor

Company should promote employee engagement. For this, the management should treat employees with respect and dignity. In addition, there should be delegation of work so that everyone has a chance to learn something new. Also, there should be focus on internal promotions so that employee feels a sense of ownership. There should be training programs to help employees grow. There are three elements of corporate policy that an organization has to understand.

1. The world in which the business is operating is changing rapidly. Company must be nimble and flexible to accept this challenge.
2. Employees must feel that company is a good place to work. This includes, in addition to training, telling employees the what and why of major decisions and quick grievance redressal etc
3. Management should submit itself to the discipline required for sustained growth. Focus on long-term profit is required from management.

Chapter 3: The third dimension: Investment characteristics of some businesses

From the perspective of ‘Profitability’, the investor should consider both ROI and Profit Margin on Sales. A high and sustained value in both of the above is the best situation. From the perspective of ‘Safety of Investment’ all emphasis must be on Profit Margin. There are four ways in which company can ensure high profit margin. First is the obvious, Pricing Power. Next is by cutting costs using ‘Economics of Scale’. The more the company produces, the lower will be the unit cost of the product. Another is to have a combination of technology and associated service (Washing Machine and After Sales Service, for example) and the last one is Brand Equity which ensures repeat business.

Chapter 4: The fourth dimension: Price of a conservative investment

The next three chapters talks about how the financial community (Mr.Market) appraises the prospects of the company. This appraisal determines the price which the market is ready to pay for the stock. There could be situations where a company that is identified as a good stock is trading at a low price. From the perspective of the conservative investor, the following criteria are to be followed in the ascending order of potential risk. The lowest risk is investing in a company that does well in the three criteria above and is trading at a very low PE. These are bargains and investor should lap them up.  Next up is a company that is doing well in the three criteria but which is trading at the intrinsic PE. These stocks are good and suggestion is for the investor to buy them.  Next in risk level is a company that is doing well in the three criteria and which is trading at a high PE. Mr.Fisher advises to buy these stocks since it is difficult to identify companies that are doing well in the three criteria. Companies that do not do well in the three criteria should be avoided irrespective of the PE at which they are trading currently.

Chapter 5: More about the fourth dimension

Even when the characteristics of a specific stocks are good, they are traded in the context of the industry in which it is operating. When the market perception of the industry is negative, all the stocks in the industry are traded at low PE multiples. This is currently happening to the Power and Oil Exploration industries in India. It is better for the investor to evaluate the market view of the industry before investing in a specific company.

Chapter 6: Still more about the fourth dimension

Investor return depends on the price performance of the stock. This in turn depend on market perception of the industry of which the stock is a part. Yet another overriding factor is the performance of the Stock Market in general. There are times when markets sell off excessively bringing down the market returns. There are three external factors that impact market returns. One is the interest rates. When they go up, investors will sell off the stocks and move the same into high interest paying debt. Another is the savings rate, which, when it goes up, more money flows into the stock market and market tend to move up. Also, new issues could suck up money from the markets leaving stocks down.

Part 3: Developing an investment philosophy

Over a period of about 50 year, Philip Fisher straddled the American Investment environment like a Colossus. He had very few highly satisfied long-range customers for whom he made returns in the range of 50 to 100 times.. Mr.Fisher’s investment philosophy can be summarized in the following eight points.

1. Buy into companies that have plans of ensuring long-range growth. The factors to be considered as summarized in the 15 points discussed in chapter 2 of this review.
2. Focus on buying these companies when they are out of favour in the market
3. Hold the stock until there is a change in state like a change in management or if the company cannot grow faster than the economy. Do not sell expecting the market to correct.
4. Do not focus on dividends. Instead focus on capital appreciation.
5. Making mistakes is normal in investing. Try to learn from every mistake to become a better investor.
6. There are relatively small number of outstanding companies. Since they are rare, when favourable situation exist (as when L&T traded at 550) full advantage must be taken of the situation. Have about 12-15 stocks in the portfolio if you are an individual investor
7. Do not go with the crowd. If think that your judgement is correct, have the courage to be contrarian
8. Success in common stock investing depends on hard work, intelligence and honesty.