In advance of the the Fourth of July holiday weekend, here’s a Big Saturday Interview from our archives with stock market investor and money manager Ken Fisher. I hope you enjoy and prosper from his insights!
Few money managers are more visible than Ken Fisher, CEO and Founder of Fisher Investments. Founded in 1979, Fisher Investments has grown into a major global equity management firm for high net worth individuals and institutions. Increasingly Ken Fisher has introduced concepts and theories of behavioral finance to his work as a money manager. The goal was to understand not just the “tools of finance”, but how investors, as complex, psychologically- and emotionally driven individuals actually come to understand, use and misuse those tools as they invest in the capital markets.
We caught up with Mr. Fisher in late February, while the news headlines were filled with anxiety over the so-called “credit crunch” and pessimism over the economy was widespread. Those of you who are familiar with Mr. Fisher–either through books like his best-selling, The Only Three Questions That Count, or through his regular column for Forbes–will know that, to put it bluntly, he doesn’t believe any of it. Find out why–and how Ken Fisher is positioning the accounts of his high net worth clients–in our e-mail conversation with the man himself.
TradingMarkets Senior Editor David Penn: Right now we are hearing a lot of what we’ve been calling the World’s Most Anticipated Recession. How do you know when the consensus is right because the answer should be obvious–and when the consensus is wrong because, truth told, it so often is?
Ken Fisher: When it comes to markets the consensus is almost never right. Sometimes the reverse happens. Sometimes something else happens. Something it looks like the consensus is right, but is almost never is and then not for too long.
Capital markets are discounters of all known information, so whatever we’ve all come to largely agree on has, by definition in capital markets theory, already been priced into securities.
Penn: So the goal is to always be looking elsewhere …
Fisher: In an underlying sense you’re looking for what is going on that is big and important and fundamental. That no one is noticing. That tends to tell where things are actually headed–like my comment above that borrowing continues to increase in a world described as a credit crunch. No one notices, which is telling.
Folks say the stock buyback and takeover phenomena ended last summer. In number of deals that is true, but they just shifted to bigger deals like Microsoft/Yahoo and IBM’s buyback. The money value remains very strong.
Penn: You recently made some interesting comments about what you are expecting from larger cap stocks compared to smaller cap, and how advancers versus decliners going forward might fool more than one market technician into being bearish. Could you elaborate on that?
Fisher: There are currently only about 80 stocks globally whose caps are bigger than the money weighted average cap of the world. The market and subsets act like their money-weighted cap. So when truly big/super big stocks do better than small stocks, unlike most of the last eight years, only a small percent of the total stocks are beating the market.
In this environment the advance-decline line which technicians believe in deteriorates for years and actually turns absolutely negative. This drives technicians crazy because in their mind when the A-D line goes negative the market should fall.
“To me this period is just like the 1997-1999 period where the market went up while the A-D line deteriorated.”
Penn: Is there precedence for this?
Fisher: To me this period is just like the 1997-1999 period where the market went up while the A-D line deteriorated. Then we had the Asian contagion to kick it off and this time the American contagion.
This negative A-D experience contributes to folks being bearish and head-faked by the market. Technicians in particular have historically had difficult with super-cap led markets, which is what I see ahead. But of course, maybe I’m wrong about what’s ahead and the super caps do badly.
Penn: What are smart people–even people who have read and understand your work–still doing wrong when it comes to picking stocks?
Fisher: The same things I’m doing wrong, which is that all the time, even when we know better our brains are working against us. We weren’t set up to do this and our brains do everything they can to rebel and do us in. Some are better than others but even the best are doing this even if they don’t necessarily recognize it or admit it. Cognitive errors abound and largely because of our brains. The more brains you have the more likely you are to have cognitive errors in this arena.
Penn: How important is it to you as a money manager to keep in touch with your clients? How much time do you spend in a market like this helping people stay “in the boat”?
Fisher: Two answers to that. First, I run a firm and it is vitally important to our clients that we stay in touch with them to their satisfaction so they feel comfortable as we steer the boat through regularly rough waters. It isn’t terribly important that I do it personally. We have 22,000 clients and 1,100 employees to get that job adequately done. If we do it right, the clients are happy and I haven’t gotten too distracted from capital markets with client servicing, which is also what the clients want of me.
Penn: How does a person know if they should be investing in mutual funds or investing in stocks?
Fisher: One cut is how much money they have. Funds were created originally for small amounts of money, not large ones, a way to allow people with little money to achieve diversification at a higher price and with tax disadvantages. But still diversification. That was the original intent.
Funds are often misused today because the packaging is so convenient. A pretty simple rule of thumb is that something below about $400,000 pretty much has to be done in a fund and above that it is usually better to own underlying stocks.
But if someone was running concentrated portfolios that could do it with smaller amounts of money. I’m not much a fan of that. Large accounts can easily create passiveness, for example, cheaper than with the passive products with underlying stocks and have tax advantages.
The second cut is do you want to be active or passive. If passive, it’s easy to buy a passive product. If active the question is do you want to do it yourself or hire someone. But pretty much anything in large size you can do in a fund is done better in the underlying securities, unless you become a fan of some particular fund manager who won’t handle a separate account. But simply said funds are expensive and tax disadvantaged.
I have a lot history of not being a fan of mutual funds and think separate accounts are better for most folks. But not everyone agrees with me. Hence, while we have commingled product to use internally for clients we don’t market mutual funds to the outside world. To my thinking the world is too enamored with the convenience of the mutual fund package, which is truly a marvel to behold.
“The primary feature we’re discerning is what types of stocks we want to own. That means country and sector, growth and size styles including valuation parameters.”
Penn: How do you tell the difference between a stock you want to buy and a stock you don’t want to buy? What are three criteria that you look for before buying a stock? What are three criteria that you look for before selling a stock?
Fisher: I’m primarily a top down manager and single stock picking is for me a secondary issue. So the primary feature we’re discerning is what types of stocks we want to own. That means country and sector, growth and size styles including valuation parameters. Then that takes us down to picking stocks from menus of those parameters, and to me stock picking is discerning which four of these 17 to own, which 5 out of these 27.
Then I simply discard the weirdest ones knowing that I’ll be throwing out some great stocks as well as terrible ones but I’m also throwing out the ones from the category menu that are least like the category, remembering that I want the category in the portfolio so the portfolio has the right total characteristics relative to the benchmark so we’ve controlled risk and reward tradeoffs.
Then, finally, it is time to assess the strategic positioning of the remaining stocks and I want the strongest strategic positioning, ranked, relative to value if I’m wanting to be value like and relative to earnings momentum if I want to be growth like.
When selling it is usually that I don’t want the category any longer, or want less of it. Secondarily it is that for some reason, pretty much any reason, the stock isn’t acting at all like the category, which for good or bad isn’t giving me what I want.
Penn: You talk and write a great deal about the importance of benchmarks. Why do you think they are so important when it comes to investing?
Fisher: For the same reason that a speedometer in your car and a GPS are useful. People have little real self-constraint, less sense of proportion and are easily adrift without a compass to show them how far they’ve gone and how much risk they’ve taken.
The real benefit of benchmark management is it makes it easy to measure and control your total non-systemic risk. Most non-benchmark using stock pickers are arrogant about risk because they simply assume it away–which is, of course, impossible.
Penn: You’ve said that the metrics for evaluating stocks change in their usefulness over time (i.e., price-to-sales). Why is that so? What metrics (that you can share) are you using to evaluate stocks right now?
Fisher: It is so because markets swing in favor of different characteristics like big versus small and growth versus value for long enough to drive almost everyone crazy if they can’t adapt to them. Recent studies show that managers with broad mandates on average do better than managers who adhere to rigid style slots.
In earlier years people thought the reverse was true. From 2000 through early 2007 we were in a period where small cap and value qualities led the market on the heels of the late nineties where big and growth leg. We’re now back to where big and growth are leading. Just about the time lots of folks decide value is forever it isn’t because the great humiliator makes sure it isn’t. In a world like today’s you have to know how to evaluate size correctly, which most folks get wrong because they think it’s trivial while it isn’t–and also growth, which is pretty trivial when most people think it is complex–and becomes in this phase of things mostly earnings momentum.
“We continue to be in a world for the intermediate term future where non-U.S. stocks should lead U.S. stocks.”
Penn: What is your opinion of international stocks? Are the biggest of that bunch also likely to outperform this year in your view? What should investors keep in mind when investing in overseas stocks compared to domestic stocks?
Fisher: We continue to be in a world for the intermediate term future where non-U.S. stocks should lead U.S. stocks–as has been the case in recent years. I don’t know how much longer that will continue, but it should through 2008. And, yes, the biggest should do best.
One point to remember when you look overseas from America is that in all other countries it is even more true than in America that the few biggest stocks in that country drive its prime, broad market index. This is what I call cap-skewed and it is very easy outside American for a few stocks to go one way, many the other, and have the market follow the few. Sector effects are bigger outside America than inside it, country by country.
It is also true that cultural effects are bigger outside America. American is the world’s main un-culture, the old melting pot concepts. Britain is number two in this regard. When cultures are more monolithic, stock markets run more volatile, hot and cold.
Penn: Speaking of culture, you’ve had many colorful things to say about politicians. But whomever wins the White House in 2008, what do you think they will be facing in 2009? Will the World’s Most Anticipated Recession that didn’t arrive in 2008 strike in 2009 instead?
Fisher: If you believe politics will fix the world, regardless of your ideology, you miss one of the great lessons of history: individual people in the private sector fix things in their little part of the world, if possible, and as things improve from that, government limps along decades later, reacting and retarding … all over the world.
Our American government is trying slowly and prudently to react and catch up to the 1980s right now. Eventually it will succeed, partially.
The big political issue of 2009? Rather obviously it will be how to avoid all the campaign promises made in 2008. The president’s main goal in 2009 will be how to turn on his or her power base to maximize the likelihood of getting re-elected in another four years, which is always the president’s prime goal.
As to your question about an anticipated 2009 recession, I’ve never seen in my life or in history an anticipated recession that actually occurred.