Redwood-rich Woodside, Calif., is geographically and aesthetically about as far away from Wall Street as you can get within the U.S. Yet this small town on the San Francisco Peninsula is headquarters of one of the investment world’s foremost experts.
Money manager Ken Fisher, 59, a champion of value investing, is developer of the price/sales ratio and famed for ground-breaking investment-cycles research. In the autumn of 1990, he notably called the start of the decade’s roaring bull market. He has written Forbes’ “Portfolio Strategy” column for 25 years.
Fisher, son of legendary investor Philip A. Fisher, is founder, chairman and CEO of Fisher Investments, managing $38 billion in assets of prominent institutions and affluent individuals. Founded in 1979, it has a London subsidiary as well as a joint-venture affiliate in Germany.
In his latest book, How to Smell a Rat: the Five Signs of Financial Fraud, written with Lara Hoffmans (Wiley 2009), The New York Times bestselling author tells consumers how to spot a swindling advisor to prevent falling victim to his scheme.
Research chatted with the native San Franciscan about how his book can help financial advisors, as well as a broad range of economic, political and market trends.
Your book alerts consumers to red flags that might signal embezzling FAs. But what’s the lesson to advisors?
To set themselves up to do the reverse of those things — and not just for the sake of marketing or even client service. For instance, separating custody from decision-making protects you from yourself. Many Ponzi-scheme artists didn’t set out to intentionally cheat clients; some took custody and then, at a moment of weakness, dipped into the till and never got out.
Why should investors seek advisors that make it easy to conduct due diligence on them?
The easier you make it for clients, the more likely they’ll do it — and the more likely they’ll be comfortable with the advisor. Be as transparent as possible. The Ponzi-scheme guys invariably make it as hard as possible because they don’t want to get caught.
You advise against the popular strategy of putting assets in disparate pockets but, instead, to think holistically. Please explain.
That’s the basis of Modern Portfolio Theory. It’s such a basic concept, but so hard for people to “get”: You want the simplest portfolio that maximizes expected return relative to expected risk. Anything beyond that is excess diversification and a negative; anything less isn’t enough diversification.
Be wary of advisors who make a big deal about their hobbies, you write. Why?
I’m not trying to suggest that no one should have a hobby or that golf should be banned. But bragging about your hobby leads to the notion: Is the customer hiring you because you’re an advisor or because, say, you play in a rock ‘n roll band? If it’s because you play in a rock ‘n roll band, that’s a bad reason.
You warn readers about feeder funds, or funds of funds. What’s wrong with those?
They’re ludicrous. It’s fees on top of fees on top of fees. It’s ever-more complexity in a world where less complexity is better for the customer. Myriad managers co-mingled creates excess diversification and lack of control — both are negatives. It creates complexity so that neither the customer nor the advisor really knows what they’re getting.
You recommend that investors ask advisors, for example, how they decide which countries to invest in. Do clients really have to know that process?
The advisor needs to be able to explain basically what they do. That doesn’t mean the customer could do it or that they necessarily understand all the nuances. But if advisors believe that it’s not any of the customer’s business to understand how they do what they do, it puts them in the realm of the Ponzi-scheme artist: “You can’t figure out this stuff, so don’t ask.” Whereupon, they take it out the back door — because “You don’t know what I’m doing anyway.”
Zeroing in on 2010, what can we expect from the market the rest of this year?
Going back more than 100 years, in the United States a big market drop followed by a positive year — which is what we had 2008-2009 — has been positive for the next year all but one time. And that was only a negative four-tenths of one percent in 1933. A huge drop (a bear market) and then a positive year (the big rally of 2009) is a very bullish sign for the period ahead. So this combination portends a positive 2010.
But that’s going only by history. What if some terrible event occurs? Couldn’t that throw it off?
Sure, we could have a nuclear war or an actual [viral] epidemic. But you can’t find one example showing the second year to be markedly negative after a big drop that was followed by a big year. Whenever you’re [expecting] something that history hasn’t had happen before, it’s a really tall order. History isn’t a perfect guide; but when you want to buck it, you’re asking for something big. It’s a hard thing to bet on.
What does the term you’ve coined, “the Pessimism of Disbelief,” mean — and what’s important about it?
Investors are focusing on negatives. That stocks aren’t higher and people aren’t wealthier have them pessimistic. Anything that’s bad is, of course, bad. But anything that might be characterized as a positive is disbelieved and turned into something bad, a negative.