Q&A Ken Fisher

You state that studying markets is both art and science, and that the scientific aspect is "in its infancy." Do you foresee a time when the science of investing will mature to the point that market prediction will be more consistent, more routine?
Ken Fisher: Heavens no. Markets evolve. Always have, always will. This is why investors need a scientific method—because the process of discovery will never end. Those who believe market prediction is or can be consistent or rote will get run over by the wildness of the market. Once a new discovery gets too widely accepted, it, itself, will be discounted into the market and of no subsequent use so the discovery process rolls and evolves.

Given the wealth of investment advice and tools available—especially online—and the fact that so much of it is conflicting, are small investors more prone to strategic and tactical mistakes than they would have been, say, 10 years ago? In other words, is there just too much, readily available, information?
KF: No and no. Too much information isn't the problem. Investors are the problem. There was always an abundance of distraction factors. Having more than too much is still just a variation on too much. On the other hand, greater access to free or cheap information makes investing accessible to everyone and takes away the advantage professionals used to have. That's a good thing. But just because we have access to more information—and conflicting information is nothing new—doesn't mean humanity isn't still prone to making the same errors. The fault lies in our hardwiring, as I explain in the book, not in the abundance of information.

You make the point there is much mythology surrounding money management and that financial advisors don't often beat the market, which you dub "The Great Humiliator"; does this mean people should forego seeking their counsel?
KF: Not necessarily. But investors should understand what financial advisors are and what they're not. Most are salespeople. They do make a living selling investment products and services. They aren't likely to help you know the most important thing, which is what others don't know. Investors should do their homework before accepting advice from these people. What's this guy's record? How consistent is he? Is he right more than wrong? Does he even have a verifiable record? Does he have a vested interest in increasing my assets over time (like discretionary money managers have)? Most advisors are wrong much more than right.
If he has a lousy record, you can still buy a mutual fund from him, but avoid paying for expertise that doesn't exist.
I think the financial services industry is pretty darn sleazy. Always have. I'm proud of how different my firm is from most money management outfits. We're not in the financial district of some big city. Our salespeople don't make a single money decision for our clients. There's too much conflict of interest! We don't custody clients' assets here. We don't make a dime off trading. If I want to hold cash for my clients for 18 months during a bear market, I can do it, and don't have to answer to an angry board because we're not selling mutual funds. It's all very transparent.

Talk about the process of distilling your investing strategy down to these three questions. Of the three which, if any, is the most important?
KF: Well, that's a bit like saying which of your children is your favorite. Of course you have a favorite, but you'd never admit it. I'm just kidding. The three questions are really one big question, which is "What do you know that others don't." No, one is not more important than the other. And each one doesn't really work without the other. Sure, you can ask, "What do I believe that's wrong?" and stop there. But good scientists want to know why they believed something wrong in the first place. And, what can you see differently know that you aren't blinded by myth? On and on and on like that.

What's a typical reaction when you tell an investor to be a cynic, to point out that the emperor wears no clothes, and "to be skeptical of yourself?"
KF: People don't accept this off the bat. Why? Because we're people, and we don't like to question ourselves or people we view as smart or experts. We prefer to assume we're already right and adequately knowledgeable. It's much more comfortable. It's why there's so much uniformity of thought. Few dare question conventionality!
When their beliefs are challenged, people are generally dismissive or react with fear or anger. When I tell people big budget deficits are not bad for stocks like everyone thinks, but very good for stocks, they dismiss me as a nut or some kind of ideologue. When I show them the supporting data, they tend to get angry. It's fun!

Have you ever had to discard a long-held personal belief about investing? If yes, what was it, and what prompted the realization that you were wrong?
KF: Yes! Continuously! Always! There's pretty much nothing about investing I take at face value. I always ask if my beliefs are true. And things change. Something can been true for a long time that no one knows, then people catch on and it's no longer true. The market is perverse.
Here's a really good example. I wrote a book called Super Stocks in 1984 about a valuation I created—the price-to-sales ratio. I found I could beat the market by screening for stocks with low PSRs. And it worked great for years. Then, people started catching on, maybe because they read my book, or heard it from other people who had. Now, it doesn't work like it did. Too many people know about it. I talk about this particular evolution in The Only Three Questions That Count. What prompted the realization? Constantly asking if what I believe is true.
But remember, I also used to be a pure value investor 20 years ago. I thought value was permanently better than growth, just like the folks I criticize in the book. Then I learned better and why and evolved. All of life is about learning what you believe that is actually false so you can improve.

How long do you think it would take an average investor to change their mindset and implement the strategy you espouse here?
KF: Some people may read the book and embrace what I say right away. But far more will be too firmly entrenched in their mythology, cling to their biases, and refuse to question themselves.
Maybe they'll accept some stuff. But the assertions that are truly controversial, the things about debt and deficits being good and not bad, for example, those will be really hard for some folks. This all ties back to the third question, and how our brains are hardwired for bodily survival, not dealing with capital markets.
But this is all good news! Remember, the only way to make a winning market bet is by knowing what others don't. If most readers don't accept the strategy, those small few that do will have a greater advantage for much longer.

If financial literacy were made an educational priority in this country, what net affect would it have on the markets here and abroad? Is the lack of financial literacy among investors, and the population as a whole, placing the U.S. in peril?
KF: I think the U.S. is doing OK. Last I checked, we've had the best, most consistent GDP growth over the past 25 years. Growth of per capita net worth has outpaced other developed nations and is the harsh envy of our suave European friends. Our capital markets growth has outpaced the world and been above historical averages. Our unemployment rate is among the world's lowest. The media may not want you to embrace these facts, but it's the cold, hard, glorious, truth. Viva el capitalismo!
I digress. I'm no expert on what should or shouldn't be included in standard educational curriculum. My feeling is the government has messed up education enough, more regulation is not the solution. People will choose to learn about capital markets or they won't. If learning the French language were a requirement when I was growing up, I promise you, I wouldn't have retained any of it.
Anything broadly known cannot move the market, so the impact of a globally increased acuity in capital markets would probably have zero net impact. It'd be nice if more people were educated in finance. Maybe we'd have more free markets in the world and less mercantilism and socialism. That'd be a net positive.

Are there any technologies in development or on the horizon that you think will change for the better the business and/or personal side(s) of investing?
KF: Definitely. Do I know what they are today? Not really. We're always innovating the next new thing in my firm, with the aim of having clearer capital markets views. The truth is, we just don't know now nearly as much as we'll know about investing in 10 and 20 years. Every new thing we learn opens the door to more development. It's never ending. And usually we don't know what we'll learn until just about the time we learn it.

Where do you see the markets heading over the next 5, 10 years?
KF: Don't know. Can't know.
I only make 12 month forecasts. I talk about this a lot in chapter seven of the book. Here's the truth, and you don't want to hear this, but no one today has any knowledge or capability allowing them to forecast more than 12 to 18 months ahead of time. Folks may say they can. But they can't. They're just deluding themselves.
Stock prices, always and everywhere, are determined by shifts in supply and demand. I go over this in great detail in the book, so I won't put time into it here, but basically, longer term, stock prices are driven largely by shifts in supply. No one has anyway of predicting how many IPOs will happen 5 years from now, how many new issues of stocks or bonds, how many stock buy backs, and how many cash-based takeovers will take place. These events either increase or decrease stock supply in ways we, sitting here, today, just cannot predict.
You asked me previously what new technologies were on the horizon. If someone could develop a way to predict future stock supply, that would be key in longer-term forecasting. But at this moment I don't know how that can be done. Maybe one of my readers will use the three questions to figure it out.
But, in general, markets are more positive than negative. I'd wager, 10 years from now, markets will be higher. Could be wrong. But probably not.

Aside from yourself, of all the financial gurus out there, who "gets it" best?
KF: Do you mean people who are still alive? You have to admire all those who have long-term, verifiable portfolio management records that beat the market. This includes folks like Bill Gross and Bill Miller, who I admire tremendously. And they keep evolving. Bruce Jacobs of Jacobs Levy is very inventive, as is Rob Arnott. But the people who get it best are usually relatively young or in the midst of their career. They tend not to be very old. Very old guys tend to get set in their ways for reasons that run very parallel to the physical aging process. Warren Buffett evolved tremendously over his life and did very different things at different times. And this isn't a criticism of him, but at his age that probably goes away soon if it already hasn't. I know many people will think that is heresy, but there are great portfolio managers and old portfolio managers but there are no old portfolio managers who will be great.
Probably, the people who get it best right now are a tiny percentage of people so young they haven't had time to qualify as what you call "gurus." And so I don't know who they are. But youth has that naturally inventive, rebellious, young Turk and evolving quality.