Ken Fisher and Lara Hoffmans have published their layperson’s guide to building a basic wealth plan — I couldn’t recommend it more.
Much like his other books, Ken Fisher takes a route of empowering the average investor, being less didactic or preachy and offering usable perspectives in terms everyone can understand.
In my view, it’s one of the ultimate things a skilled expert can do for us: to give his knowledge back in a way all can participate in. Ken has seen it all, done it all, and been very good at it for very long time; it’s a pleasure to read about the fundamentals of wealth-building with all the signature wit and uncommon perspective he and Lara always bring.
I’m a fan of futurism. I don’t think most of it applies to how capital markets work (which price in 18 to 24 months into the future at the most), but contemplating theories of the future is, well, fun.
Here’s Ken Fisher’s take: Fisher Investments CEO heralds ‘the singularity‘
Some say the Singularity is hogwash. I don’t much care either way about the “singularity” part. What’s interesting is how regular and consistent the concept of accelerating change is throughout world history. Read more about Singularities in Ray Kurzweil’s book on the topic. It’s a great book, if dense.
This is a needed perspective: most artistic visions of the future are dystopic—it’s seldom we contemplate our future with true optimism, which we should do more often.
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.
Eddie Van Halen recently turned 57. This is not important for investors to know. But in a way, it sort of is.
Eddie was/is a heretic—he was never taught music, he never went to a formal school. Instead, he loved it so much he taught himself. There are stories of him sitting on the edge of his bed in high school, when everyone else was out, playing the guitar the whole night through, for many nights in a row. He never followed anyone else’s path (though he did learn a lot of Clapton songs), and as a result his take on the instrument is so singular and unique, you can tell it’s him in just a few notes, and no one can truly mimic him to this day.
This is what investing is all about. If you follow some program, or some other set way of thinking about the world—all you’re doing is mimicking, and that almost never works in investments because known and accepted programs get priced in. You can’t be Warren Buffett or Ken Fisher, only they can be. You have to forge your own way, your own style of thinking. You have to be unique.
From Wikipedia: The All Music Guide has described Eddie Van Halen as “Second to only Jimi Hendrix…undoubtedly one of the most influential, original, and talented rock guitarists of the 20th century.” He is ranked 8th in Rolling Stone’s 2011 list of the Top 100 guitarists.
I wanted to be Eddie when I was a kid. I still do. I’ve logged so many thousands of hours trying to play like him, and spent so much money on his gear…at some point around age 22 I realized I would never be a great guitarist because I was trying to be somebody else. I took that lesson into my career at Fisher Investments, and I spend all my focused thought trying to forge my own way, and learn from it when I’m wrong.
Eddie doesn’t do many interviews or speak very much, but I remember him once saying, “You only get twelve notes, it’s what you do with them that counts.” In investing, we all pretty much have the same information now, all the same newspapers and so on, for the most part. It’s what you do with the information that counts—it’s the unique insight. No computer or algorithm or statistic can do it for you.
I couldn’t be more excited for Eddie, now 57 and on the eve of the new Van Halen album and tour. The VH sound has always been both distinct and consistent, even when singers changed. And yet Ed tends to reinvent himself every time—there will be something new he pioneers in this album, some sound we’ve never heard before. If only we could all do that in investing: consistent innovation, driving the whole system forward along with us.
If you haven’t yet perused Ken Fisher and Lara Hoffmans’ new book, Markets Never Forget, it’s a must read for any serious-minded stock investor (all their books are). So what if I’m biased (I work with both). Their work offers views you won’t read elsewhere, and no library of investing knowledge is complete without them.
Check it out here: www.marketsneverforget.com
So far, 2011’s been a difficult year: Bulls can’t get much traction, and bears are wondering when the big drop will happen—it’s been a choppy, basically flat market so far, where neither big fears like sovereign debt nor big boons like blockbuster earnings are tipping the scale either way.
In my view as a Fisher Investments analyst, the rest of 2011 likely holds more of the same. Here are six things investors should look for the rest of this year:
- Investors will be haunted by the ghosts of sovereign debt. My boss Ken Fisher wrote about this in his most recent Forbes column (read “Ghosts Around Every Corner” 7/18/11 here). And I quote: “It feels like there are ghosts around every corner. In 2008 and 2009 we came to fear mortgage debt problems and expected more of them. Debt fears have persisted ever since.” Indeed. Whether it’s US debt default fears, municipal debt fears, PIIGS fears, consumer over-indebtedness or some other debt fear, expect them to persist in the popular media but have a lesser and lesser effect on markets as the bull market goes on. It can be tough to see this but is plainly true—stocks have rallied strongly since March 2009, despite all the debt fears that persisted and morphed in that same period.
- Few will realize this isn’t a recovery. A simple, stark truth: We’re no longer in a recovery but an expansion. Nominal GDP—both in the US and the globe—is near or at all-time highs. Reading today’s headlines this seems almost impossible. But it is so. The global economy has recovered from the recession and is in expansion mode.
- More Financials underperformance. Based on Fisher Investments research, it’s typical for a sector leading a bear market down to get a quick pop in the initial part of the new bull, but then lag afterward (think Energy in the early 1980s and Tech in the early 2000s). Financials fit this archetype indubitably. They continue to be everyone’s favorite villain, and are likely to continue struggling mightily relative to the rest of the market this year.
- A continuation of the first half. I wrote about this back in March (Click here for the full recap.) In a nutshell: I think some investors will remain skittish and unable to shake the yips from the 2008 bear, others will see the last two years’ great run and get too bullish (instead, the market’s treaded water). Pessimism about the global economy will be rampant, with the effects of the Japanese earthquake overwrought (the earthquake effects are already passing, and GDP in many regions is coming in ahead of expectations). Some will panic about inflation (there’s been scant sign of it this year, and likely won’t be for some time to come). Others will fall in love with covered call strategies. And, lastly, many will go overboard on emerging markets investments (which have underperformed so far this year, and yes, inflows into those assets this year have been big overall).
- More “can it continue?” earnings chatter. Earnings have been far better than most anyone predicted for a few years running now. So far, Q2 earnings for this year are simply crushing expectations. Corporations won’t trounce expectations forever, but 2011 is a year where earnings remain strong and ahead of expectations. (More on earnings from Fisher Investments MarketMinder here and here.)
- The China and Emerging Markets “hard landing/soft landing” debate will drone on. I don’t believe in “landings” for an economy. It’s a bad economic metaphor (once an economy “lands”, then what?). As I said in March, don’t go overboard with emerging market stocks in your portfolio—sentiment is very high on them right now, which may limit upside potential in the near term. But I think you should expect their economies to continue driving strong corporate earnings and global GDP to new highs. Parts of emerging markets will thrive, some will dive, and some will tread water. But overall their growth probably won’t tank in 2011.
A flattish year in the stock market doesn’t mean it won’t be choppy—ups and downs are common and there won’t be any reprieve. But on balance, I think the rest of 2011 has neither great nor doomsday expectations. By the time we get to December, expect pundits aplenty to ask, “Where to now?” for the markets. They will cite “uncertainty” about 2012— uncertainty about the elections, about earnings, about the global economy. But when were markets ever certain looking into the future?
We’ll deal with 2012 when we get there. For now, steer clear of these common investing misconceptions for the rest of 2011.
Lara Hoffmans, co-author of several bestselling New York Times investing books along with Ken Fisher, a senior editor over at Fisher Investments Marketminder, and all around mad genius, has come up with a term you should know: Grey Pigeons.
The grey pigeon is a response to the concept of a “Black Swan”, which people seem to be seeing more and more of every day.
Sorry, but Japan’s earthquake (devastating as it was in human terms), or the problems of the Middle East are not only NOT Black Swans, they’re not all that uncommon. I challenge someone—anyone—to find a year where some major geopolitical, geological, financial, or otherwise big scary event didn’t happen. The world is full of them through history—now is no different than any other, though folks always feel the present moment is “different this time”. Goodness gracious, 1998—a fabulous year for stocks—was also the year of Long Term Capital Management, among other things like the Russian Ruble problems and Asian banking issues.
As I said on Fisher Investments MarketMinder months ago, the whole point of a real black swan (if they exist at all) is that they’re hugely rare. Note that recent events did not crater the markets—they were grey pigeons.
This is the first installment of a 3 part series. Books discussed in this review:
Unconventional Success: A Fundamental Approach to Personal Investment – David F. Swensen
The Investment Answer – Daniel C. Goldie and Gordon S. Murray
The Ivy Portfolio: How to Invest like the Top Endowments and Avoid Bear Markets – Mebane T. Faber and Eric W. Richardson
How Doctors Think – Jerome Groopman, M.D.
All analogies are imperfect, but to compare investment professionals to doctors is apt. In both cases, customers should consult a professional—self medication is perilous. Except there’s no Hippocratic Oath for investing pros, which means there’s a lot of voodoo advice out there.
If you have a minor ache, you pop an Advil, ask the pharmacist, or just consult WebMD. But if you need major surgery, you need a doctor—and you want the best. And not just the best, you need the best specialist. If you’ve got a brain tumor, you don’t want a cardiologist.
Also, doctors are wrong quite a lot! Even in medicine, situations are contextual and the body sometimes does things against expectations, and there are fewer ironclad rules than we’d like to believe. So the quality of the doctor matters—the best ones are sometimes wrong, but are generally less wrong than the bad ones. You listen to your doctor—even if you think he might be wrong or what he prescribes is counterintuitive. Why? Because you know your doctor has a better chance of being right than you do. Atul Gawande has recently become something of a guru in popular medicine writing. And I’m always delighted to read his books and compare what he does with what professional investors do. (It’s not always the same, of course, but a wonderful analogy nevertheless.)
It’s all the same thing with investments and planning your financial life. It’s absurd for the vast majority of folks to believe they can handle their investments on their own. You need to find a good professional to help you—someone who knows what they’re doing and isn’t just a salesman. If you need stocks, you need to find a stock specialist, and so on. And, yes, just like a great doctor, the reality is the more complex your circumstance and needs, the more that service will cost you. (This won’t be a review about how to pick the best adviser, but I can direct you on how to avoid the legit crooks: Read CEO of Fisher Investments Ken Fisher’s How to Smell a Rat: The Five Signs of Financial Fraud.)
The landscape is littered with investment advice books of the self-medicating variety, particularly, those ultra mass-market guru tomes admonishing you to “revolutionize” or “make over” your money. This is sort of an over-the-counter style of investing—fine enough for some basic tips. But let’s face it, to plan your financial life you need more than an ultra-commercialized set of tautological (and often fairly condescending) tips, like being told to “save more.” Well, duh.
To be continued…