Home > Behavioral Finance, Capitalism, Market Cycles, Market Risks, Media Hype/Myths > Ken Fisher’s New Book: Markets Never Forget

Ken Fisher’s New Book: Markets Never Forget

My boss Ken Fisher has been a pioneer in a lot of things: behavioral finance, the investment advisory business, to name a few of the biggies. To me, his newest book is especially important: Markets Never Forget (But People Do): How Your Memory Is Costing You Money-and Why This Time Isn’t Different (Wiley, November 2011).

So much of the work in psychology and economics/investing talk about the mistakes people commonly make in abstract terms or with lab experiments. But Ken Fisher’s book does something different: it takes many important lessons about how our minds fail (particularly our memories), and puts them in the context of market history. In particular Ken Fisher focuses on how short our memories are, collectively—how so many things we think are unprecedented actually have ample and clear precedence in our past, we just fail to remember. Psychologists call it “myopia”, “biases”, “aversions”, and many sorts of other official-sounding technical definitions.

Forget the technical terms and focus on the reality. This is a key reason to study market history carefully—it prevents you from forming false idols and notions about things that didn’t really happen the way we (you, me) remember them. Ken Fisher’s book reminds us it’s not that we simply forget (we do), it’s that we misremember routinely—brains tend to remember details based on emotion, not rationality.

Here’s a bit from a recent interview with Ken Fisher on history and market forecasting:

Ken Fisher: History doesn’t repeat, not exactly. And the past cannot predict the future, but it is one good tool in determining if something is reasonable to expect. Investing is a probabilities game, not a certainties game. Nothing is certain in investing—all you can do is determine what a range of reasonable probabilities are.

In the same way, it’s not a possibilities game. It’s possible the world gets hit by an asteroid and destroys life as we know it, but the far greater probability is no such terrible thing happens.

You can’t develop a portfolio strategy around endless possibilities. You wouldn’t even get out of bed if you considered everything that could possibly happen. Instead, as I show in the book, you can use history as one tool for shaping reasonable probabilities. Then, you look at the world of economic, sentiment and political drivers to determine what’s most likely to happen—while always knowing you can be and will be wrong a lot.

For more information on Ken Fisher’s latest book, visit Wiley’s website.

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  1. March 1, 2012 at 8:06 am

    Chapter six of Markets Never Forget—Long-Term Love and Other Investing Errors—highlights a nearly permanently salient point. The chapter touches on the fact markets are complex, dynamic systems that evolve—meaning no one category is permanently superior or inferior to others. What’s more, the chapter has a section on long-term forecasting.

    The latter part is what I’m referring to most. I couldn’t tell you how many times I’ve come across articles discussing a dim outlook or mega-bullish outlook over the next 3, 4, or 10 years. Sometimes more! Heck, the government even has the CBO attempt to project economic conditions and budgets out a decade—with little success.

    http://www.fool.com/investing/general/2012/02/15/grain-meet-salt-why-you-shouldnt-take-budget-forec.aspx

    The Fed’s long-range projections seem little better.

    http://online.wsj.com/article/SB10001424052970204652904577197010637908348.html

    No matter who you are, forecasting markets more than a year or maybe two in advance is a fallacious exercise. The book sheds more light on this. If you’re concerned or encouraged by a long-term forecast, my suggestion is you temper your emotion by reading this chapter.

  2. February 29, 2012 at 4:11 pm

    Most folks have multiple and varied fears surrounding either US debt or deficits or both—but nearly all of those fears are misguided. Consider: The US has had a higher debt level in the past, and markets did just fine despite (or perhaps because?) of it. Many also fret (or applaud, depending on political viewpoint) President Obama’s recently released proposed 2012 budget. But Congress hasn’t even passed a budget in over three years, yet the economy and the markets over that time period have done just fine (gangbusters, some might even argue).

  3. February 24, 2012 at 12:56 pm

    When it comes to enormous numbers like US debt and deficit levels, some important tactics for scaling are to 1) consider the debt interest payments implied by said level and compare them to GDP and 2) examine history. In applying the former, you realize given the US ’s extremely low interest rates, our debt interest payments are entirely manageable versus our GDP. And with respect to the latter, as mentioned before, the US (and other governments globally—like the UK ) have historically had higher debt-to-GDP ratios and yet had economies and markets that grew just fine.

    Ken teaches readers how to think about such worries that crop up repeatedly through history in MNF.

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