Sunday, October 3, 2010

The Making Of A Market Guru: 2002 - 2003

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.

One theme Fisher often repeats throughout the book is that US markets often rise in the third and fourth years of the US Presidency. As reader skepticism about this indicator is abound (many readers compare this indicator to the Superbowl indicator in that it may have worked historically, but that there is no cause and effect tying the two), Fisher sets out to defend the cause and effect relationship at work here.

Fisher re-iterates that the current market P/E is useless on its own in predicting the future direction of stock prices. While most experts argue that a low P/E is bullish for stocks, Fisher's research indicates that in reality stocks can go either way whether the P/E is high or low. The reason is that high P/E's are often the case when earnings are temporarily depressed (i.e. in a recession, when writedowns lower earnings temporarily).

As the years 2002 and 2003 were particularly volatile as the US emerged from recession, Fisher spends a lot of time guessing the direction of the market. He was mostly right in his calls, which, as discussed earlier in the book, are mostly based on investor sentiment. When sentiment is positive (negative), this sentiment is built into stock prices, so Fisher goes negative (positive).


rayhaan said...

hi saj, wassup? Hope d fund and u r doing well. U really should check out geff gannon's podcast. The way that guy is tough is on his stock picks, you wud think that guy was a writer of red herring prospectuses in a past life! Speaking of which, q1 .i know this might sound very absurd and i know you can blog about only about what u get on ur 'radar' but are net-nets ur signature move (i know i've asked dis b4 but still )? .q2. I've seen that sometimes you point out towards the combined profits of d last couple of years. (i'm confused)Y? Q3.i know dat whats popular is not necessarily a good investment but can't v review a few popular books like big short, black swan etc.? Q4. I was pretty intrigued by d 'dying by a thousand cuts' philosophy , as displayed by the longleaf capital guys and NNT . What are your views on the subject?
Hope i didnt sound cöndescending,

Saj Karsan said...

Thanks, Rayhaan! To answer your q's:

1) My answer is the same as last time you asked this question

2) More than one year's profits are useful because one year's profits could be an aberration. But by comparing several years of profits to market cap, the investor can get an idea of how many years worth of earnings he is paying for when he buys

3) The Black Swan has a very similar theme to another Taleb books, Fooled by Randomness, which is reviewed here. I haven't read The Big Short yet but it is on my list to investigate.

4) I have no idea what philosophy you refer to. Please link or explain

rayhaan said...

what i meant was bets which work out extra great wen dey work ,but most of the time u break even or lose money. U know, nnt kinda stuff. Like buying 10 year options on gold ,buying insurance on cdos in 2007 etc Dude u really ought 2 check out the big short. IT 'S FREAKING AWESUM! and yeah d value investors social network kud really use sumbody like u. eagerly awaiting ur reply, rayhaan

Saj Karsan said...

Hi Rayhaan,

Okay I will check the book out. Sounds like that could be a lucrative strategy, but I tend to prefer to protect the downside foremost.

Saj Karsan said...

Hi Rayhaan,

I've now read The Big Short. I agree, it was very interesting. I do think it can make sense to buy leaps/options where an event can result in a much higher/lower price.

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