Thoughts from our recent conversation with Ken Fisher on his new book, Beat the Crowd, which can be listened to on the Newshour podcast page here or on iTunes here.
In Beat the Crowd: How You Can Out-Invest the Herd by Thinking Differently, Ken Fisher explained the key of true contrarian thinking—which is different than simply doing the opposite of everyone else—and also addressed the damage done to portfolios by too much focus on daily short-term events, or on sensational reporting from the media.
Fisher applied his insights to market forecasts for this year as an example of the need to think differently from the herd. Wall Street analysts “are avid collectors of information who interact with the world" and then place bets on future outcomes, he said. Their information has been discounted into a timeframe of around 12 months. With recent forecasts for a median 7.5% return this year for US and global markets, Fisher is betting on a surprise.
Regarding concerns about volatility, Fisher noted that this is quite normal and not necessarily the sign of a bear market. The market swoon seen in the first week of January “was only a little bit worse than 1998, which ended the year up 28%. That is just the nature of equities, people want to read too much into myopic short term movements,” he said. He further stated that uncertainty is normal at the beginning of a Presidential election year, and markets don’t do well in this kind of environment. But typically as you move through the year markets calm down, and, with a few exceptions like 2008, US stock markets tend to move higher after the election is over.
Regarding fears over a major market meltdown, Fisher said there is almost never a bear market when the spread between short-term and long-term interest rates is greater than one percent, as it is today. However, he does believe that we are in the latter stages of a bull market where you want to focus primarily on companies with “fat gross operating profit margins” (meaning greater than 50%). These tend to do well for where we are in the market cycle: “You want to put yourself in the kinds of places that work best instead of trying to swing for the fences,” he said.
From his years of experience, Ken has found that markets don’t care about the short term and they don’t care about the very long term—they only really care about the next 3-30 months. “So today we get all of this chatter on the media…you can get this tremendous interest in various stories that might be very important in non-market ways, but as they relate to figuring out where the market is going, they don’t help you at all,” he pointed out.
In the end, investors should recognize that “the investing game is one of probabilities, not certainties—you are just trying to stack the odds in your favor.” It is important not to try to beat the market, but to simply avoid the numerous mistakes made by average investors.
