Saturday, October 2, 2010

The Making Of A Market Guru: 2000 - 2001

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.

As the tech bubble continued to heat up through early 2000, Fisher declares that tech stocks are in a bubble and that investors should reduce their exposure to this space. Fisher arrived at his conclusion by comparing the tech sector as it stood in 2000 to oil stocks of 1981. Across a range of benchmarks (IPO percentage, sector weight in the overall market, price to book values) tech stocks looked a lot like oil stocks of 1981, which collapsed shortly afterward.

Fisher argued that the bubble would burst when some of the less useful companies (dot-coms without earnings) would run out of cash. By his calculation, some 140 companies were on schedule to run out of cash in the next 12 months. These companies would need cash infusions, which would cause investors to start exiting companies at risk of needing more cash. Fisher notes that his column describing the tech bubble received the most hate-mail of any column he has previously written, which only served to confirm his view, as sentiment on this sector was far too positive.

As the bubble burst and readers looked to Fisher for direction in the ensuing year, Fisher maintained that he was bearish due to market sentiment. Too many forecasters were predicting a mild recession and were bullish on the market, expecting it to rise towards pre-recession levels. Fisher notes that this is not the kind of sentiment that occurs at market bottoms. At the bottom, there is no M&A (unlike in 2001, where HP bought COMPAQ in a massive deal, to use one example), and forecasters are predicting a glum future, where headlines discussing a potential depression and declaring that it's the end for stocks are rampant.

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