Sunday, October 10, 2010

The Making Of A Market Guru: 2006 - 2007

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 bull market continued through these years (having begun in 2003), Fisher continues to remain bullish. His primary arguments are that sentiment is still not prevalently bullish, and that yields on bonds remain lower than yields on stocks. Ten-year bonds yielded about 5% at the time, while market earnings over price (the inverse of the P/E ratio) yielded about 6.5%. Fisher argued that this would result in more M&A and more buybacks, since the cost of funds was lower than the return on their investment.

Fisher also made the call in 2007 that housing is not in a bubble. He believed the market pessimism surrounding sub-prime was overblown and would be over shortly, and took all the pessimism as a bullish signal. He cited the fact that housing stocks were out-performing as a sign that the fears that there is a bubble in housing have no basis! In September of 2007 he writes "a few months from now, we'll be wondering what all the fuss was about".

In his final column of 2007, Fisher disagrees with those who say that after strong returns of the last few years, the market is ripe for a correction. Fisher writes "I want to be the first to say we definitely are in a New Era of above-average returns." He doesn't believe the end of the bull market can happen without extreme positive sentiment. Finally, he rifles off a few factors that he doesn't fear heading into 2008, including further collapses in the mortgage market and a credit crunch.

Fisher made a lot of correct calls over the years, but he was clearly off during this period, and not just by a little bit.


rayhaan said...

perhaps this is why buffet says that stuff about having a temperament that derives no special joy from going against market sentiment or with it. eh, saj?
really hope this guy is wrong only about the timing and right about everything else . As they say things are always obvious after the fact.
wot r ur thoughts?

Salsero said...

Mmm, that makes me think a little more carefully about his current bullish thoughts!

Thanks for sharing your reading like this. I've enjoyed this one since it gives me a quick insight into a book I have not read.

I also enjoyed your summary of Reminiscences of a Stock Operator, a book I had read. It was interesting to see how people thought and traded in the early twentieth century ... more like the day traders of the late twentieth century. It really was gambling back then. Beyond that historical insight, I didn't feel Jesse Livermore's story taught me much, so it was especially helpful to read your thoughts on the book.

Saj Karsan said...

Hi guys,

Yeah constantly going against prevalent sentiment can probably work more times than not, but not all the time, as Fisher tends towards. I would also draw a distinction that going against market sentiment probably works often (because of crowded trades) versus going against sentiment in predicting economic direction. I'm not as convinced about the utility of the latter.

Scott Hudgens (NYC) said...

Saj, you're just wrong on one major point. Fisher wasn't "clearly off during this period and not just by a little bit." In 2007 he beat the market! You have performance in the front of the book. This is just such an important point and I can't believe you're not making it. Because as is coming up in 2008, Fisher does lag the market, but just by a bit, then he makes up for it by beating the market by 20% or more in 2008. The relative performance here is so important. That's what makes his advice worth reading.

Aurora Vaughan said...

Based on your reviews of the past chapters, he nailed the 1987 and the 1990 bear markets, the huge bull of the 1990's, the 2000 tech call, the 2001 bear call, the subsequent bull market, and missed the 08 call. I know he has been bullish over the last year and a half so he nailed that bull call. What's the problem again? Who has a record like that? By my accounting the only people who hit 2008 on the head did it just because they had been bearish forever. That's hardly something to applaud.

Saj Karsan said...

Good point, Scott. But as the book's intro says: "The individual stock picks have been removed...". As such, I have kept my summaries to his macro predictions. To that end, perhaps I did not communicate clearly that when I said he was "off" this period, I did not mean with stock selections but rather his macro predictions for 2008.

Justin Henson said...

I agree with Scott. You got to include the performance. Fisher didn't exactly nail 2007 and he still beats the market? That's solid. Why don't you mention that? No one will be right 100% of the time. Expecting that is foolish. But if a guy can be wrong now and again and still get to a market-beating track record, that's a guru. Hence the name of the book I guess. And oh yeah, 2009 was freaking awesome.