Saturday, September 11, 2010

The Making Of A Market Guru: 1988 - 1989

Ken Fisher manages $35 billion in individual and institutional funds and is value-focused. His father wrote a terrific investment book discussed here, but this book is about Ken's investment philosophy, which evolved over his career. This book chronicles that value-focused evolution over his 25 years as a Forbes columnist.

Following the 1987 stock market crash, investor sentiment suggested the event was a one-off that would not affect the economy. While it is believed that Main Street can affect Wall Street, the converse was not generally believed to be true. Fisher argues this assumption to be false. When liquidity dries up in the capital markets, companies focus on cash flow and paying down debt rather than expansion. As a result, a recession often follows stock market crashes.

Rising interest rates also lead to recessions, Fisher argues. But rates are often ratcheted up when sentiment is bullish, and so the upcoming lack of liquidity is often unnoticed. But the lack of liquidity catches up to the market eventually, often resulting in a violent downward readjustment of prices.

Fisher also devotes an entire column to the benefits of investing in companies where managements own significant stakes. The incentives of management are aligned here with shareholders (as opposed to when management is receiving most of its gains from salary), which often leads to great results for shareholders.

Finally, Fisher discusses the merits of a research technique termed "Scuttlebutt". The technique was first discussed by Fisher's father, Philip, in a book we have previously summarized.

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