Saturday, October 9, 2010

The Making Of A Market Guru: 2004 - 2005

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 economy recovered slowly from the recession that followed the bursting of the tech bubble, many observers were bearish on the US because of its deficits, both fiscal (government) and trade. But Fisher takes the opposite view: that America should be borrowing even more. Based on the country's aggregate income over its equity (the country's assets minus its debt), the company is earning far more than the cost of borrowing. As long as this is the case, Fisher argues that America should continue to borrow and invest in assets that continue to generate returns for its citizens.

Ken also takes issue with those who argue that stock returns over the next decade are destined to be flat. Those who make that suggestion show you that they don't know a lot about what drives security prices: supply and demand. Over the short-term, security supply is fairly inelastic, as new securities take time to be issued. As such, the market's daily movements are due mostly to demand factors. But over long periods of time, companies can choose to IPO or list more shares based on prevailing market prices. Fisher does not believe one can predict what will happen to the supply of securities 5 to 10 years out to be able to make a prediction about security prices a decade away.

In his July 2005 column, Fisher also predicts that the housing market is not in a bubble. He argues that interest rates are low, justifying the increased activity and prices in housing. Furthermore, he argues that because there is so much fear about a bubble, that we couldn't be in one. It will be interesting to see whether his position changes in the next two years...

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