Listen to this article
Ken Fisher, chief executive of Fisher Investments, is an outspoken and influential commentator on stock markets. The author of the recently released The Only Three Questions that Count: Investing by Knowing What Others Don’t, Mr Fisher runs a firm with some $35bn in assets for private clients and institutions in the US, UK, Canada and beyond.
He also holds some unconventional market and economic views. Mr Fisher’s view is “bigger is better” when it comes to US and UK trade deficits, and the US trade deficit doesn’t weaken the dollar as most believe. He also believes stocks cheaper than most think at the moment.
Mr Fisher will answers your questions below.
Do you have any plans to invest in the Central Asian countries of the former USSR? I am sure that you know about political and economical situation in Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. When do you think the big transatlantic companies and investment funds will come to these markets?
Iskander Buranov, Tashkent, Uzbekistan
Ken Fisher: These are perfectly fine places and the politics and economics are great and the answer is yes but a caveat: Your goal for the most part in equity investing is to keep up with the equity markets and a little better. My book goes into great length that you start with a benchmark and manage against it and that the best benchmarks are the broadest ones like the Morgan Stanley World or the ACWI. When you put a lot into a tiny weight in the benchmark you are taking a lot of risk should it go haywire. Hence little weights in the benchmark should have huge weights in a portfolio.
That concept, while not usually applied by most in a different sense will keep the major western financial services firms from pouring in too much money to these areas because they are tiny weights in the world and must be. It is the same reason not to go hole-hog on any small weight in the world-because if you do and you go wrong you end up in the “hole” and get butchered because you were a “hog”.
Can you explain why you believe “bigger is better” when it comes to US and UK trade deficits?
Ross Garrard, Mersyside, UK
Ken Fisher: I explain this in my book, using both the US and UK as examples. But simply, it doesn’t work like people think it does. Free market players everywhere put their money where they will, and they will where they think it is good. Money flows there (US and UK), creating the current account deficit. That money gets spent in that country, creating the trade deficit. The more they pore in the less pour in that country you have. These “deficits” need never be paid back. The key is they fund growth.
Again, as I said earlier in this Q&A, America and Britain have almost identical trade deficits as a percent of GDP, currently and cumulatively, but these derive from their almost identical current account deficits. Look at the places that don’t have these and you see worse markets, slower growth economies, more massive unemployment and market thinkers who have their heads in the sands living a neo-mercantilistic reality that should have been abandoned, as I say in my book, 200-plus years ago.
Pray for bigger deficits.
Why isn’t the Vix index of stock market volatility a good tool for investors?
Jo Turney, New Jersey
Ken Fisher: I show you at length in my new book that statistically it doesn’t actually have any predictive power at all - hence useless. It’s predictive powers are just a myth.
Out of all the equities in the world, what is your favourite for the next ten years?
Jay Dauer, US
Ken Fisher: My favourite, bar none, is the equity in my own firm but you can’t buy it. Otherwise I don’t have favourites just like I don’t have favourites among my three sons-and if I did I wouldn’t admit it.
Following the rally experienced by the stock market, is it too late to enter the market as a newcomer? Do you think the markets are over valued? What strategy should I follow in light of current markets?
Shishir Sanghvi, Geneva, Switzerland
Ken Fisher: No. The market is fine but a newcomer always suffers from inexperience. There is an age old saying that the market is a place where a person with experience gets money and a person with money gets experience. The market is fine but it is still easy in a great market to hurt yourself if you don’t know what you’re doing.
Valuation wise the market is cheaper today than normal and by a lot. The best way to think of valuations is to flip the P/E into an E/P and then compare that to long-term interest rates. A P/E of 10, for example, would by an E/P of 1/10 or 10 per cent. Today, in every large nation in the world, the E/P is above that country’s 10 year government bond rate. This started in 2003 and is what is driving this bull market. It is the first time this has happened since 1982 and then not for very long. Stocks are cheap compared to long-term capital which is the hurdle stocks ultimately have to leap. In America the spread is about 2 per cent. In Euro land about 4 per cent.
Strategy? Well, I recommend new stocks every issue in my Forbes column which you could find on the web - I have done for 22 years. If you buy them all in equal proportion you won’t do to badly. Of course, as a beginner you could also by a tracker fund and then will do exactly like the market and in a rising market make money and not otherwise get killed.
1) What is the best way to evaluate an analysis report? 2) Do you think analysts produce better research now compared to their outcome seven years ago?
Apostolos Constantinidis, Athens, Greece
Ken Fisher: 1) Hold it upright with it’s upper right hand corner slightly above its upper left hand corner. Hold by the upper right and corner. Light a match and attach at the lower left hand corner. Hold for four seconds and drop into a large empty metal can. Walk away.
2) No. Do your own analysis and you will be better off. You get more from simply looking at Morningstar’s webpage on a stock and launching on your own from there than industry sales reports (which is what they are).
Do you like investment opportunities in emerging markets? In particular the so called Bric economies? Is the risk pricing right when compared to opportunities in the US and European economies?
M Dowling, London
Ken Fisher: I do like the emerging markets right now, including Bric countries. But, recall these markets are volatile. If I’m right that this year will have a stronger market than pretty much anyone expects then emerging markets will do better still, pretty much like last year.
If I’m wrong emerging markets will likely do badly. They tend to be feast or famine and be particularly sensitive to the economies and markets from the west. Relative pricing right now is perfectly fine and in a good market I expect good things. If I’m wrong somehow, relative pricing won’t protect you because in a bad market all volatile categories suffer.
Do you see any potential growth in the Middle East at the moment? Money is booming in the area, and cities like Dubai and Doha are becoming very attractive for European investors and corporations. Where do you see the future of foreign investment in the Middle East going, and what type of strategies do you think should be delivered to the such business.
Nader Aljaroodi, Middle East
Ken Fisher: I don’t know anything there that others don’t know so I would only get into trouble. I hate getting into trouble. So, the answer is no.
But I would encourage you and everyone to look outside your own region to see what you can see that is unique elsewhere. As my book points out, it is a big world and global thinking is blessed.
How do you spot undervalued stocks?
Florent Danset, Singapore
Ken Fisher: I start by looking for stocks that sell at a combination of P/E, PSR and Price to Book, that is below the average of the sector that the stock comes from. Then I look for classic macro quality issues like market share, brand name strength, regional strength. Then I look for emergent qualities like growth.
But then I also just simply look at what has lagged for a long time and apply the same principles other than valuations because sometimes superficial valuations for single stocks can mislead.
A lot of great investors offer similar advice: don’t follow the sheep. My question is: how do you identify the sheep, or more specifically how do you distinguish information that is sheep fodder, from information that is really reliable? In relation to this question, are fears that the commodities bull market has reached its peak a reflection of sheep-thinking? Do you think the commodities bull market is coming to an end?
Xu Si’an, London
Ken Fisher: As I say in my book, finance theory is very clear that “information” that is widely disseminated is “noise” and people who trade on it are noise traders. Information is little known. Otherwise it is opinion and priced into the market.
Then you ask my opinion. No, I think commodities will react well to the economy doing better than people think it will this year. Most folks look for a soft or hard landing. We won’t have a landing. As we speak the global economy is accelerating pretty nicely.
I have read your column in Forbes for 20 years and have tried to heed your advice to question conventional wisdom and avoid crowds. Today, it appears the professional investment community is overwhelmingly bullish. To wit, strategists see a 9-12 per cent gain in the S&P 500 this year, mutual fund cash levels are near 4 per cent, the Investors Intelligence poll of advisors shows more than twice as many bulls as bears, guest commentary on CNBC is nearly unanimously optimistic, pundits talk of a Goldilocks economy, and the private equity shops are awash in liquidity, a.k.a. leverage. Meanwhile, the smart money is selling with secondary offerings and insider selling at or near record levels. How does this square with your forecast of world markets up 20-30 per cent in 2007?
Ken Fisher: If you’ve read my column for 20 years you know I think if everyone thinks something will happen something else will, although not necessarily the opposite. Most strategists do see a 6-12 per cent gain this year, which means the market will be dismal or very, very nice - 6-12 doesn’t happen and you get higher or lower. I go over this technology at length in my new book. I’m betting on the later.
As to the Investor’s Intelligence numbers, my buddy Meir Statman and I did a study in the Journal of Portfolio management entitled, “Cognitive Errors in Market Forecasts”, that demonstrated statistically that these kinds of sentiment measures have zero, I repeat zero predictive power despite everyone believing they do.
I agree that people are mildly bullish and mostly so. But as I show in the book, pretty often when that happens, like in the late 1990s, they simply aren’t bullish enough. Stocks are cheaper compared to the long-term cost of money than they’ve been in more than 25 years all over the world and particularly outside America. Hence my more bullish view.
Which sector do you think is outperforming from investment point of view in US and UK?
Matin Ahmedi, London
Ken Fisher: My current views, which may be wrong, obviously, are that the US should lag non-US, Britain should do better than the US but worse than the non-English speaking world-because valuations are more compelling there. And that generally economically sensitive areas should do better in 2007 than non-economically sensitive areas.
Hence consumer durables, materials, energy (which obviously lagged badly in 2006). And the non-money centre bank portions of financials (financials being the biggest weight of the world and in both America and Britain.
In your book, you stress asset allocation over stock selection, and the fact that one particular stock should not make up more than 5 per cent of the portfolio as we can be wrong. How does this apply to small individual investors who have less than $200,000 to invest, and is this a deviation from the strategy of the late Philip Fisher, who advocated focus investing in order to outperform the market? Was Warren Buffett merely lucky when his biggest holdings such as Coca-Cola, Gillette and Washington Post pulled up his overall performance?
SK Tan, Hong Kong
Ken Fisher: My views on this have nothing to do with my father and, yes, are at variance with his views. His views worked well if you’re perfect. But most folks aren’t. His view could be summarised as, “find a few great stocks and hold them forever”. But if they aren’t great then you end up lagging and not ever able to make it up. My book emphasises my view that most of the greatest make a lot of mistakes.
As I point out if you’re right 70 per cent of the time in the long-run you end up a super-hero. That means accepting a lot of error. If you’re perfect you don’t need my book, the kinds of questions I like to ask, or the question you’re asking here or to waste time on a website because if you’re perfect, you’re perfect. But I’m not and I doubt if most questioners or readers here at FT.com are.
As to Mr Buffett and luck, no one knows how lucky another person is on a single action they undertook. Most folks don’t know how lucky they are themselves, so I have no view and won’t go there.
Warren Buffett, among many others, believes that the US trade deficit will, sooner or later, necessarily weaken the US dollar. You disagree - could you please explain why. Also, what is your personal opinion on Buffett`s investment style and philosophy?
Ken Fisher: Well, it is easy to prove the trade deficit doesn’t impact currencies. In my new book, The Only Three Questions That Count, I do this in depth. But the short punt is that our deficit currently and cumulatively over the last five, ten or 15 years is the exact same size relative to our GDP that Britain’s is to theirs. You can’t argue ours causes our currency to be weak and theirs, of the exact the same sort and size causes theirs to be arguably the strongest major currency in the world over any of those time periods.
I go on to explain in my book how unexpected shifts in short-term rates and yields curves between countries is actually what causes currencies shifts between nations.
My book also speaks to Mr. Buffett’s investment style to some extent and as I said there, I don’t think he has a style. He has changed quite a lot over the decades ranging from what today we would call Small Cap Value decades ago to what “franchises” to big-cap growth and back to small cap value. He just goes with his intuition which has changed markedly over the last 50 years.
Why do 47m people in the US not have medical insurance? Do you believe that the US reliance and love of the markets has created an unfair society? The US philosophy is one that is criticised heavily here in Latin America and indeed its an economic model that has been rejected by many if not all developing countries.
Fag du Clooner, Venezuela
Ken Fisher: You are destined to hell. You miss the core of spiritual essence. Capitalism is the one true holy “ism”. If you miss this you miss the essence of the entire evolution of humanity and its interaction with the universe. My book covers this in length. I don’t have time to cover it in this Q&A because it is the centre of life and the center of spirituality, and missed by most who end up damned for it materially and spiritually.
Note, I am not urging you toward a religion; I am urging you toward the one true blessed “ism”. If you miss this you end up eventually in the exact same place Osama bin Laden ends up eventually. Latin America suffers because it fails to adequately embrace the holy spirit; the holy “ism”. Repent. You may save yourself still. Seek the “ism”. It saves. Latin America doesn’t.