Saturday, September 18, 2010

The Making Of A Market Guru: 1992 - 1993

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.

Fisher advises that investors stay away from most mutual funds. Apart from the hefty fees, he argues that they invest with the crowds. His research shows that mutual funds own stocks with the highest P/B and highest P/E ratios, making them destined to underperform in the future.

Fisher also warns against owning the pharmaceutical companies at their price levels of the early 1990s. They trade at high P/E levels (above 20 in many cases) and profit margins that are at the high end (i.e. unsustainable). As such, they have room to fall as both profit margins and P/E levels contract.

While high P/E levels are often correctly associated with poor future returns, counter-intuitively, Fisher notes that when investors have bought the market at a P/E level greater than 25, they have done very well historically. This is due to the fact that earnings become so depressed during recessions that P/E levels rise, even tho market prices are low! The lesson here is that P/E levels alone are not a good indicator of market price levels.

Fisher also discusses what he thinks is the best indicator of future economic performance (in the short-term), the ratio of coincident to lagging indicators. This indicator will be discussed in a future post.

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