As an investor, top money manager Kenneth L. Fisher has zigged when others zagged. In his new book — a veritable bible on investing — he shares his proven methods of how to actually think in ways that will lead to big-time market success.
Indeed, Fisher’s deeply analytic thinking has made him more often right than wrong in the market: To wit, his ever-expanding Fisher Investments, of which he is chairman-CEO, has $68 billion in assets under management, and Fisher himself boasts an estimated net worth of $2.9 billion, coming in at No. 240 on Forbes’ 2014 list of richest Americans.
Now the outspoken value investor reveals a meaty assortment of his investing secrets in “Beat the Crowd: How You Can Out-Invest the Herd by Thinking Differently,” written with Elisabeth Dellinger (Wiley).
Fisher, 64, spoke at length about this, his tenth book, and other pressing issues in an interview with our sister site, ThinkAdvisor, on May 21.
Putting a new twist on contrarianism, he focuses less on bulls and bears, more on elephants; that is, spotting mighty elephants in the room that reveal either great opportunities or bad risks. Most investors overlook, ignore or forget these pachyderms hiding in plain sight. Be on a perpetual elephant hunt, he advises.
Fisher puts his spin on behavioral finance — on which the money manager has conducted significant research — calling out those twin demons of investing: lack of self-control and weak self-discipline. Both must be banished, he stresses.
California-born and reared, Fisher founded his firm in 1979. For decades, it was headquartered in Woodside, California. Since 2011, Fisher Investments — now operating on six continents — has been based in Camas, Washington, on a campus where more than 1,000 are employed. Another 600 work in the firm’s Woodside and San Mateo, California, offices; and more than 400 are employed internationally, mostly in Western Europe — London and Germany in particular.
Fisher, who developed the price/sales ratio, has penned the “Portfolio Strategy” column for Forbes Magazine for more than 30 years.
Speaking by phone from Camas, he talked with ThinkAdvisor about his forecast for how long this bull market will go on; his non-retirement, life lessons in out-investing the herd and memories of working for his late father, Phil Fisher, the influential growth-stock investor. Here are highlights:
ThinkAdvisor: What’s the single biggest mistake most investors make?
Kenneth Fisher: The common one is following your emotions. If you want comfort, markets are a very expensive place to get it. If you want to feel good, find a nice friend; get a dog.
Do financial advisors follow their emotions, too?
Fisher: Everybody has some tendency to be like that, including me. The tendency to seek comfort and to value your own emotions is the most self-destructive single thing that someone can do when it comes to the market; relative to the market, your emotions are your worst friend.
What are the attributes of a contrarian approach to investing?
Fisher: Being a contrarian is having a different way of thinking. Contrarianism is neither the apparent consensus view nor the opposite of that. It’s seeing what others don’t see. You use the crowd to figure out not what will happen but what won’t happen, eliminating possibilities. And then you contemplate other possibilities for what’s most probable. Contrarianism is not being “opposite.” What everybody thinks, as well as the opposite of what everybody thinks, are both already priced.
You write that “as a contrarian, your best friend is the relatively efficient market. Know it. Love it. Remember it. Send it a birthday card. The market is your weapon against media hysteria.” I daresay, you go in for considerable press-bashing in your book.
Fisher: “Media hysteria” is redundant. I should be a better writer than that! But most of what the media goes on about endlessly are things that are either too soon to matter or too far into the future to matter for stocks. If everybody is worried about the same thing regarding markets, it’s already priced. When you see people ubiquitously worrying about Topic X, take Topic X off your bucket list of things to worry about.
What does the market care about?
Fisher: Things that are three to 30 months into the future. Therefore, concerns that are very far into the future or immediate worries that are right in front of you nose don’t move markets much at all and should be ignored. Instead, the three-to-30-month time frame should be focused on.
What are the contrarian opportunities that pay?
Fisher: Inherently, the ones that haven’t been priced, that aren’t popular. So that’s value stocks early in a bull market, growth stocks late in a bull market, small stocks early in a bull market, big stocks late in a bull market. It’s the power of [political] gridlock. It’s the power of a Republican winning in the election year and the pain of a Republican in the inaugural year vs. the fear of a Democrat in the election year and the pleasure of Democratic returns in an inaugural year. Historically, when a Republican wins in election years, returns are markedly above average; in inaugural years, they’re overwhelmingly bad.
Please elaborate on that point.
Fisher: Democratic election years are punkish, while Democratic inaugural years, with the exception of Jimmy Carter in 1977, have always been double-digit positive, averaging 19 percent. These are elephants in the room – but elephants people can’t [accept] because basically Republicans want to think Republicans are good, and Democrats want to think Republicans are bad; and Democrats want to think Democrats are good, and Republicans want to think Democrats are bad.
Why is gridlock an elephant in the room, and why would markets thrive on it?
Fisher: Statistically, it’s true that markets are in love with gridlock because people behaviorally have demonstrated to hate losses more than they like gains. Gridlock eliminates the ability of government doing much; and in the three-to-30-month time-frame, markets like it most when there isn’t the uncertainty of change because markets hate uncertainty.
In the book, you indicate an example of an elephant as inventive manufacturer-users of the new technologies. What are some other elephants in the living room right now?
Fisher: The power of companies with fat-growth operating profit margins in the second half of the bull market as opposed to revenues, which is the power of thin-growth operating profit margin companies in the first half of a bull market. When I was young, companies with very fat-growth operating profit margins were well understood to be strong late-market performers. But for decades, people have completely forgotten about that. This power, for cycle after cycle, is an elephant in the room.
But tell me more about companies with thin-growth operating profit margins.
Fisher: They typically shine in the first half of bull markets. So this is a device you can use [bearing in mind firms with fat-growth operating profit margins] to improve your odds of doing well now that we are clearly no longer in the first half of a bull market. This has been completely forgotten in what I consider to be over-infatuation with short-term earnings-per-share trends and short-term profitability.
What are the chances of the current market’s becoming a 10-year bull market?
Fisher: Good. There’s a good chance that this is the longest bull market in history. We’re still in the optimism phase. This market is taking an awfully long time just to get past as much skepticism and pessimism as we’ve had in the past. That indicates the potential for [greater] length. We’re a good distance away from the euphoria phase, and it’s euphoria that kills bull markets — unless a big, bad, terrible thing comes out of nowhere, which could happen.
When was the last time a sudden, terrible thing killed a bull market?
Fisher: In my opinion, the last bull market that died from a big, bad thing coming out of nowhere occurred with the $2 trillion of bank write-offs from FAS 157 [Financial Accounting Standards rule 157, which established measurements for fair value of assets]. FAS 157 was implemented in November 2007 and [amended to benefit banks] in [April] 2009. That $2 trillion is what turned an otherwise difficult time into a tragedy.
You’ve been such a successful investor, and it’s made you a billionaire. Are all your “secrets” in this book, or are there additional methods that you didn’t mention?
Fisher: Mostly, my life lessons that have culminated in what is now over 43 years in this industry are in the book. But it’s probably true that there are other features as well.
In what way can the book help financial advisors the most?
Fisher: By focusing them on what’s important to markets, what’s not important to markets and that they need to be self-controlling with their emotions and discipline.
You plan to step down as CEO of your firm in 2016. How come?
Fisher: I’m not retiring. All that “retiring” [misleading stories] newspapers had was nonsense. I’m stepping down as CEO because the firm continues to get bigger and will continue to get bigger; and it deserves someone better than I who is full-time devoted to running the business aspects. I need to be focused on the few things I think I’m best at, which would be investment stuff and communications stuff.
What fundamentally shaped your investing acumen and style?
Fisher: I was the youngest brother of three, and as a child I was conditioned to learn from watching others’ mistakes. My older brothers were smarter than I, bigger than I, obviously more experienced than I. I watched them make mistakes, and then I’d try not to repeat the same mistakes. I’ve tried to apply that to most things I’ve ever done. So I’ve come at life from what I perceive as a little brother’s mentality.
Is that what’s responsible for your impressive success as a business person?
Fisher: I’ve always thought of my firm, and still do, as little and up against superior competition – and [I] think, “How do I get by?” The superior competition may be the huge financial services firms, but it’s also true that the biggest superior force you can ever be up against is the market. I had to be able to engage the superior force without having it take me under, which meant that I had to zig when others were zagging and not be taken in by the crowd that might otherwise trample or stampede me or run me over.
You write that the biggest enemy of investing is oneself and that behavioral finance is a tool to control emotions. Please explain.
Fisher: Many people try to argue that behavioral finance is a device you can use for beating the market. Usually, those people cast themselves as some version of a value investor.
What is the essence of behavioral finance?
Fisher: What behavioral finance is appropriately about is self-control and self-discipline. It’s not about tricks to beat the market. It’s about the ability to not get yourself [roped in] by the tendency of the human brain to be [your] enemy — whether it’s about dieting, exercising or markets.
So that’s where the self-discipline comes in?
Fisher: Yes. By using self-control, don’t get distracted by things that are more than 30 months into the future or sooner than three months into the future. Don’t get carried away by all the hyperbole of the media when they tell you how terrible this, that or the other thing is going to be.
But having self-discipline is easier said than done.
Fisher: Almost everything is. Being married is easier said than done. Losing weight is easier said than done. The book is trying to give you the boundaries of the discipline, which is what kinds of things have been priced, how to see the kinds of worries you might worry about vs. not wasting your time worrying about. If everybody else is worrying about something, you don’t have to because they’ve done it for you; and it’s been priced into the market.
How should investors deal with what you call “Dracula around the corner…a ticking time bomb”? Is the thing to do just tune it out?
Fisher: Yes. The reality is that a short-term obsession is something you should avoid. The first few days after 9/11, the market fell. But 30 days after 9/11, it was higher than when 9/11 happened. The people who sold on panic, lost.
Talk about what you term “mean elephants.”
Fisher: These are things that our memories just wash out of our brain, whether, for example, it’s an inverted yield curve or the [perennial] fear of war, which drives people to sell. We know that unless it’s a World War, a war doesn’t create a bear market. Mean elephants are risks everyone knew, then forgot. For instance, what if people forget to fear debt?
For years, you’ve been writing that P/Es aren’t predictive. What’s your thinking?
Simple P/Es have never been predictive of anything. A P/E is sometimes high because the price is up. It’s sometimes high because the earnings are down. And in that case, it’s just as likely that the earnings are about to come back. Usually they’re down because of a temporary phenomenon like a recession.
Do you agree with your father [who died in 2004 at 96] that diversification is “overrated”?
Fisher: I think that today, diversification is, to some extent, overrated. A lot of people are too diversified. We as a society have become over-enamored with diversification. But my father was living in a different world, one of hand-cranked adding machines and electric typewriters. His world was much more prone to thinking that you should find a few things that are very good, and don’t put all your eggs in one basket; but don’t have very many baskets, and watch them closely.
Contrast that with investing in today’s world.
Fisher: It’s easier because computers keep track of [securities]. But we’re also much more inundated with noise of every type, and it’s easy for people to get to the point where they don’t know anything about what they own. They [may] own hundreds and hundreds of stocks through a universe of, say, ten mutual funds. Some of those stocks overlap; so they don’t really get diversification, and it’s all watered down.
Let’s go back to your father for a moment. Since you were the youngest of three children, were you close with him?
Fisher: My eldest brother was emotionally closest to him. I was closer in a business sense. I was the one that was in the [financial services] business all of my father’s life, once I became an adult. So he had two different [relationships]; one was with an emotional heartthrob — he adored his firstborn. The other was a more practical relationship.
What was he like on a personal level?
Fisher: In my opinion, my father suffered from what would have been diagnosed as Asperger’s syndrome. Being a classic Asperger’s case, he was [an] unusual [person]. But when I [observed] him in interactions with my older brothers, I didn’t take his unusualness negatively.
Did you ever work for your father?
Fisher: For about a year, when I was starting out. It was something that quickly convinced me that I was either going to kill him, or he was going to kill me — and that if I were going to maintain a good relationship with him, I’d better separate myself. At that time, I didn’t understand, of course, the conduct of Asperger’s. I was a kid fresh out of school; and he was this guy who basically was excellent with written and verbal communications, math skills but with very little ability to figure out how to relate to people emotionally. Being close to him in a working environment was a very tough thing.
In what other ways was he “unusual”?
Fisher: He liked to pace rooms corner to corner. At one level, he was brilliant: He could lecture a crowd of people, give a speech. But at the cocktail party afterwards, he was a fish out of water. If he wasn’t lecturing a group of seven people standing around him, he would be hiding in the corner. He liked to be alone and think. My father was a good man. He was just an Asperger’s guy. I always thought of him as weird-good.