Sharing Knowledge in Smallcaps

[Frank Pembleton]

A Beautiful Market
Interview by Robert Graham

The market is absolutely beautiful right now. When people are fearful, as they are now, it's time to be greedy, and so it's a good time to own stocks, says Fisher Investments Inc. CEO Ken Fisher

Transcript
GUZIK: Welcome to InvestorCanada.com. I’m Donna Guzik.
Not many people would call this market beautiful, but as Rob Graham found out, beauty is in the eye of the beholder.

IC: If you’re like many investors, the equity portion of your portfolio has suffered a steep, steep fall in this long, drawn-out bear market and good looking is probably not how you would describe the current market. But according to our next guest, this market is one of sheer beauty. It’s stunning, he says.

Joining us from Woodside, California, is money manager Kenneth Fisher. He also writes the Portfolio Strategy column in Forbes Magazine. Ken, welcome to the program. Why do you find this market so attractive?

Fisher: Well, attraction is a function of looking forward, not looking backward and there are some very simple rules in life. One of them is that big bear markets are always followed by big bull markets.

Even if in the long term, the market doesn’t end up going anywhere, in that whenever you had a huge drop in the market in the range of more than 40 percent, you’ve always found that after you hit the bottom, whenever that is, seeing a rise that’s 30, 40, 80, 120 percent. And it might be that after a couple of years of that it goes away, but that’s enough to be beautiful. Big is beautiful.

Secondarily, it’s a beautiful world because of all the pessimism that we have right now. As a general rule in life, you want to be greedy when other people are fearful and fearful when other people are greedy. And right now, people are fearful, which is a good time to be greedy, and that’s beautiful.

There’s a simple feature that when you look in history at the bear markets that have been in the range of over 40 percent, the average movement of the first 12 months, once you’ve hit a bottom, has been of 50 percent up.

That’s the average move. So that’s a lot and that’s when you’ve thrown out the move coming off the bottom of the Great Depression, just looking at the more normal bear markets.

So simply, it’s beautiful because people are frightened by so many normal things. For example, right now you have quite a lot of people frightened about a war in Iraq potentially. But the history of wars is that as they begin, usually the market does relatively well and it’s never actually done terribly as the war has begun.

IC: Yes, ahead of a war, that’s when there’s trouble on the market because it’s uncertainty.

Fisher: Well, there’s the age-old saying of sell on the scare, buy on the bullets. That might be amended today to sell on the scare, buy on the bombs, but it’s sort of the same concept.

IC: There’s this ongoing debate as to whether or not we have in fact hit bottom. Should we really concern ourselves with that?

Fisher: Well, the answer to that depends on who you are, but if you think of the vast majority of people who would listen to this program who would not have successfully seen the top when it happened and don’t have some long history of analysing markets and figuring out where bottoms actually are, the answer is no.

It would be perilous to try to do that because when you’re actually at the bottom, all of the news must be bad. The market must have acted badly for a long time. Everyone you talk to will be pessimistic and it will be hard to find reasons for that person to think we’ve hit the bottom. So that would be a treacherous thing to do.

For the most part, all you have to see is things are pessimistic, the market’s been down a heck of a long time and a heck of a long distance, and then remember be greedy when people are fearful, be fearful when people are greedy rule, and that tells you this is a good time to own stocks.

IC: Investors are wrestling with many issues. I'm wondering if we could say that this is a unique period for the market. Corporate scandals are eroding confidence, still paying the price for that big, big bubble that built up through the late 1990s. And now, we touched on this earlier, the threat of war in the Middle East. Is it different this time, or no?

Fisher: It’s never different. In fact, at every bottom people say it’s different this time. The fact of the matter is the market has faced corporate scandal issues many times before.

Perhaps the closest parallel to this is the 1903 bottom which is the period leading into the phenomenon of buffeting up the US trust operations, the steel trusts, the oil trusts, etc., etc., which again was a corporate integrity scandal issue and saw a market that in its first 12 months rose 60 percent in the face of that.

IC: How do you counter the argument that some people are still making that share prices in relation to earnings are still high by historic standards, even though stocks have come down so far? Their argument – things are still too expensive.

Fisher: Well, the reality of that is that that’s complete and utter misunderstanding of how markets bottom and what markets are about. The fact is, and I’ve done a lot of work on this, a lot of fundamental research on this.

First when you look at the history of market returns versus valuations, valuations counterintuitive though it may be, have never actually been any kind of a good forecaster for market returns looking one, two, three, four, five years out.

That is statistically higher valuation markets go up and down, just as many times and just as much as lower valuation markets do. And valuations have never in history been a driver of market timing.

And so if you think that the next three years must be bad because valuations are high, you’re actually saying something that has no basis.

The secondary feature of course is that often, although not always, valuations appear higher by the way some people measure them at market bottoms than they do at market tops, because particularly if you look at things like price earnings ratios, a little more than half the time in a bear market, the earnings fall more than the prices do, making the price earnings ratio rise as the prices fall.

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