When AdvisorOne last spoke with Ken Fisher, just after the Japan earthquake and tsunami, and the nuclear crisis unfolding, he had just added to his portfolio weighting in Japan.
“Natural disasters don’t break markets—and so they’re an opportunity, but usually to the extent they’re an opportunity it’s pretty fleeting,” Fisher told AdvisorOne in an interview Monday evening. Fisher’s investment views carry the weight of the $44 billion his firm manages for its 25,000 clients.
The founder, CEO and CIO of Fisher Investments says “our views are very granular this year. We’re not [betting] as big as we have been in past years—sort of big fanatic bets. We think there won’t be such a thing overall this year as a trend to emerging markets—that emerging markets will break down by country.”
“This is a form of a picker’s year…including in America,” he adds. “This is a year we think America will do better than the world as a whole—and it has so far—but you’ve got to pick your shots in America pretty carefully.”
“At a 10,000-foot level we like technology and the parts of technology that are more new tech,” the game changers, “as well as materials, as well as industrials.” Fisher says his team is “starting to phase away from where we’ve been with very heavy overweights to consumer discretionary, and our material underweights are consumer staples, big pharma—although we’re increasing our weight to big pharma as we transit through the year—utilities and telecom.”
“The key in our thinking about pretty much everything right now,” according to Fisher, “is that we want to be moving to companies that have capability to generate fundamental, organic growth, or what you think of as natural growth—not growth from M&A; not cyclical effect, but actual, fundamental growth that comes from either new product or new market for existing product.”
“I think pretty much every bull market ends with a period where what’s perceived as both high quality and the ability to be independent from the cycle create a false image—but an image nonetheless—of being able to be above it all. This is why at one era when I was young we had the ‘Nifty-Fifty.’ And in the late 1990s we had not just tech but the super-cap effect, where the biggest stocks just did best because they were seen as high quality; that they could buck the economy—which, if you think of them in aggregate is a ridiculous notion, but at the time was a common notion,” he explains.
“From that temporarily comes an increase in multiples. Half of investing is fathoming reality and half of investing is fathoming what other people are going to think about reality before they do.” But Fisher says it isn’t that he thinks the bill market is over, yet, just that there are “some categorical rules that I believe in that don’t work all the time, but they work more often than they don’t, like: the beginning of bull markets tend to be led by smaller and more valuous stocks; the back part of bull markets tend to be led by bigger and growthier quality stocks.”
Can Smaller RIAs Compete With Large Branded Firms?
We talked a bit about the dilemma smaller independent RIAs face regarding growth of their firms and competing for clients against the larger and heavily branded banks, brokers and insurance companies.
Fisher notes that plenty of RIAs want to remain at their current size and serve their clients well; he recognizes the benefits of smaller or larger firm size. Early on he says he realized that “smaller RIAs are typically valued at about 2.3 times revenue, and bigger RIAs are typically valued at about 5 times revenue. Initially, for every dollar I put down I got $2.3 back in the value of the firm. I’d do that forever until I’d make no income at all,” and defer taxes.
Would You Trade a 55% Income Tax for a 15% Cap-Gains Rate? Of Course.
For years, Fisher says, he took only enough out of the firm to “pay my immediate bills, and plowed everything back into the firm, because the government effectively subsidizes you to grow your firm if you make no profit. Then of course you’ve got a deferrable capital gain that you can take when you want to”. In California, at an “effective 55% income-tax rate,” building the business instead—trading the 55% income rate for a 15% capital-gains rate seems like a good strategy.
In addition, Fisher says, “building the firm increases your price-to-revenue ratio—by itself—you get about a doubling in your price-to-revenue ratio as you go from the little independent to something that’s seen as a standalone business where somebody could buy it and they’re not dependent on you,” to stay.
The Advantage of ‘Quitting’
Fisher notes that leaders of RIA firms, whether large or small, are really running “consumer services” firms—and they can learn from the large “consumer products firms like Procter & Gamble.” He advises leaders of RIA firms to “mean well, try hard and put the customer interests first; engage in every part of consumer services the way Procter & Gamble would with consumer products,” and “quit” the things “you are the worst at, and hire somebody” to do those for you. Then you end up concentrating on the things you do well. The goal, he says is to make yourself “superfluous,” and if you have do well, you end up with a firm that can endure after you are gone.
“Along the way,” Fisher cautions, “there are a million pitfalls…and there’s a lot of ugly out there.” He reveals that his father, investor Philip A. Fisher, “drummed into my head Rudyard Kipling’s ‘If’ poem. Wherever I go, I keep the ‘If’ poem with me and read it once a week,” he says. “It’s one of the most powerful things for somebody in intangibles. It’s a poem from a father to a son but you could extrapolate it from a father to a daughter and the same thing works.”
“If,”by Rudyard Kipling
“IF you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don't deal in lies,
Or being hated, don't give way to hating,
And yet don't look too good, nor talk too wise:”
Click here for the entire poem, “If.”