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  • Transcription of interview with Ken Fisher on March 19, 2012.

  • Douglas Goldstein, CFPÆ, Financial Planner & Investment Advisor

  • Ken Fisher is the founder, chairman and CEO of Fisher Investments Company, which manages

  • about $41 billion. He has been known for over 27 years as Forbesí portfolio strategy columnist

  • and is the fourth-longest running columnist in Forbesí history. He is also a New York

  • Times bestselling author and wrote the book, Markets Can Never Forget (But People Do).

  • Douglas Goldstein, financial planner & investment advisor, interviewed Fisher on Arutz Sheva

  • Radio.

  • Douglas Goldstein: Can you tell us a little bit about the link between the stock market

  • price/earnings ratios and stock prices?

  • Ken Fisher: Much of what we commonly believe about things is because of the way our brains

  • work rather than the things themselves, and people have difficulty with that. Our brains

  • were set up to process information a long time ago, but they were not really set up

  • to deal with the kinds of modern phenomena that we also encounter today, and we process

  • that information through those old processors. Things like price/earnings ratios are ones

  • were we routinely presume because our brain naturally assumes that high P/Es are riskier

  • than low P/Es, and this becomes part of a common culture that is widely accepted. People

  • agree on it, but the fact remains at almost any time I put any information in a framework

  • that is a framework of height, people will always see a heights framework as risky because

  • we are descended from people where heights were inherently risky if you fell. You likely

  • got killed or maimed, and if you are maimed, itís almost as bad as getting killed so heights

  • were risky.

  • For example, if you pick a high P/E and flip it into any key that would be earnings divided

  • by price and think of that as an interest rate as compared to other interest rates,

  • the heights framework goes away and the compared of cost of money becomes more important. You

  • become more rational and analytical, and you get closer to a reality that make sense in

  • an economic way, but if you just think in terms of P/E, people auto default that high

  • P/E is risky and low P/E is safe. Meir Statman has done a lot of work on this that was published

  • long ago. Any way you measure it, looking at one, three, or five years, doesnít tell

  • you anything at all about risky returns.

  • Douglas Goldstein: If youíre buying something and paying 30, 40, or 50 times earnings, it

  • is very expensive. Youíre saying that thatís just how we are programmed to think and itís

  • not really the reality of how the market works?

  • Ken Fisher: High P/E stocks over one, three, and five-year periods donít have a markedly

  • higher or lower return than low P/E stocks except in the periods where high P/E stocks

  • do better and periods where high P/E stocks do worse. But if you take out just a very

  • few, which you could think of as outliers and outliers are always things that have a

  • status of additional ones to throw out, itís likely not to be very meaningful and doesnít

  • look at the bulk of the returns. So you donít see any effect that actually leads you anywhere

  • on a predictive sense that anybody would ever want to bet on, and yet thatís what our brains

  • want to do.

  • The same is true if you think of, for example, the total market. People generally believe

  • that things like markets are less risky when the marketís P/E is low. They are more risky

  • when the marketís P/E is high and you can just measure looking at one, three, and five-year

  • returns, how many times the market depends at this P/E level, that P/E level, and the

  • other P/E level. High P/E tells you nothing about whether it will in the next year go

  • up or down or by how much, because for example you can give me a high P/E market that has

  • done terribly and I can show you a complete example of how an exactly identical high P/E

  • time period over the next 12 months did wonderfully. Itís actually very 50/50, and the same as

  • true with low P/E. Low P/Es sometimes do wonderfully, sometimes they do terribly, and if you look

  • again at one, three and five years, itís very 50-50, but yet thatís now what our brains

  • want to believe. One of the key things of behavior is that we tend to see information

  • that confirms our prior biases and we tend to be blind to the information that contradicts

  • some of these.

  • My newest book which came out last year, called Markets Can Never Forget (But People Do),

  • is just chock-full of examples of the things where our memories just donít work for us

  • in showing us what it is that weíve often seen many times before. But because itís

  • inconsistent with our prior bias, we donít accept it until we donít see it, so weíre

  • blind to it. One of the points thatís amazing about our brains and our memory is that our

  • memories about some things are very good. Weíre very good at recognizing facial patterns,

  • for example, and holding them for a very long time period and being able to recognize somebody

  • that we havenít seen for 20 years as their face changes and ages. Weíre really good

  • at doing that, but thatís a really old thing that weíve done for a really long time with

  • people. A lot of us are in the framework that once we have ever dealt with our own, what

  • we tend to do is believe that all of our friends believe it. We tend to think itís true, which

  • reinforces our tendency to believe it. Yet in fact, the message that Iím saying is check

  • it out for yourself to see if itís really true because most of what you believe isnít

  • really true. People find this troublesome, and they also find it to work and yet the

  • whole world of markets takes advantage.

  • Douglas Goldstein: One of the very common numbers that comes out and affects the markets

  • all the time is consumer confidence. How does that affect stock returns?

  • Ken Fisher: Consumer confidence is something that is largely and overly simple since it

  • moves with the market with a very slight time lag. If you know what the stock market has

  • done in terms of the global stock market, you know pretty much where the consumer confidence

  • numbers are going to come out. When the market goes up, rising and performing well, strong

  • consumer confidence tends to rise. When the market tends to be falling, consumer confidence

  • is often updated and revised a little bit after theyíre initially released, but the

  • revised numbers largely have a slightly lag effect to the stock market. The stock market

  • is telling you the same thing- that consumers will be able to see how theyíre feeling.

  • The point is so simple that most people donít want to believe it. For example, in the media

  • it regularly says that you should be more optimistic because consumer confidence is

  • up and thatís the sign that things will be better ahead. On the one hand, the stock market

  • is in of itself the leading indicator, and it always has been both on the upside and

  • on the downside but an improvement in consumer confidence is really a statement that the

  • stock market has already been up. Itís not because consumer confidence is up, so you

  • should be bullish, or that because consumer confidence is down, you should be bearish.

  • We see lots of these things, but weíre just unwilling to accept them because we donít

  • want to accept them. The most egregious that I know of are all of the features that surround

  • deficits and debt. We have heavy biases with the Western world and much of the rest of

  • the world. Everything that has to do with debt is that debt is bad and more debt is

  • worse, but there are lots of examples that contradict it. But people donít want to look

  • at those examples of where somebody had debt and they got into trouble, and therefore this

  • reinforces their view that this is bad. The willingness of people that contemplate that

  • their bias might be wrong is very low, very small. Thereís this tremendous desire to

  • say which behavior was called accumulating pride, which is, ìWhat if Iím smart? So

  • you want to see me doing it againand that tendency really doesnít want to challenge

  • its own belief system because when you challenge your own belief system about basic things,

  • itís scary and as if youíre ego-driven.

  • Douglas Goldstein: If you were to give advice to regular investors, what would be the number

  • one thing that people should be doing when theyíre beginning to work on their own finances?

  • Ken Fisher: I presume that if youíve been right, youíre probably lucky, and if youíve

  • been wrong that you should be focusing on learning something that changes some belief

  • set that you have. Otherwise, maybe youíre overconfident if youíre not ready to do that,

  • and if youíre overconfident, maybe you shouldnít be making your own decisions. Thereís a tremendous

  • tendency among humans of all types to be overconfident, to presume that they can make decisions that

  • arenít the basis as they donít really know anything.

  • Finance basically says, to make a long story very short, that you need to know something

  • other people donít know or when you make decisions youíll either be right because

  • youíre lucky or more often be wrong and be worse if you made no decisions at all. I decide

  • Iím going to buy stock X because I really like the new product that theyíre coming

  • out with, which is a really easy thing for somebody to see that you might do that, and

  • it goes up so you think you were smart. If it goes down, you think, ìI didnít really

  • decide to buy that stock; the broker sold it to meThe fact is, what a financier

  • would say is that if you didnít know something that other people didnít broadly know, you

  • shouldnít be making the decision, and if youíre going to be an investor, you should

  • largely just be passive. The part that says I want to give up my overconfidence is a very

  • hard thing for most people.

  • The fundamental basis of investing should include an extra dose of pre-plan humility

  • that is actually very hard for many people to engage in. Most people fall to this notion

  • that behaviorists call ìaccumulating prideî and ìshining regretwhich associates success

  • with scale repeatability and associates failure with victimization or bad luck. Our ancestors

  • accumulated pride and shining regret in almost everything they did, which motivated them

  • to keep trying, and we are the descendants of people who are very heavy priers because

  • if you think of doing something as audacious as taking a stick with a stone point on it

  • and running up next to some large animal and thinking youíre going to stab it and take

  • it home and defeat it, that takes a fair amount of confidence and a fair amount of willingness

  • to take a risk that you donít get trampled in the process and killed yourself. We are

  • the descendants of people who are very successful at engaging in these activities, where they

  • were on the one hand overconfident, but they were good at what they did, compared to others

  • who are not their descendants because they didnít pass on their genes. The fact is that

  • that overconfidence plays really well in a lot of environments.

  • So, in a distant time in a tribal format, one time I had to go into the north, to the

  • east, to the south, to the west, and the guy that comes back at the end of the day with

  • a couple of gazelles over his skin is a big hero around the camp fire that night. The

  • guy that comes back with nothing for the day comes back with a lot of excuses as to why

  • it wasnít his fault. The winds are blowing the wrong way, there were big noises in the

  • area that scared all the gazelles off, the neighboring tribe were making a lot of noise,

  • but nobody really appreciates all the excuses. They leave and go back out to hunt the next

  • day. The guy with both gazelles has turned into a real hero around the campfire and people

  • are talking about how maybe the chief is going to have the guy marry one of his daughters.

  • The next day, the guy who was unlucky the prior day may actually just stumble on a gazelle

  • that had mangled its leg and canít get away, and even if heís a terrible hunter, he brings

  • back meat because he got lucky that day, and thatís still good for the tribe. The one

  • that came back with the two gazelles accumulates pride as around the campfire they associate

  • his success with scale repeatability, and the one who comes back with nothing associates

  • his failure with victimization or bad luck that allows them to continue trying the next

  • day, which for the tribe is a good thing.

  • We as people have been hardwired for millennia on accumulating pride and shining regret,

  • and in that environment where we came from it is actually a beneficial feature to our

  • society. In the environment where weíre engaged in security transactions and capital market,

  • it actually builds this overconfidence that causes us to do things that we really arenít

  • able to do and the market takes advantage of us, which is central to some of the basic

  • tenets of behaviorism.

  • Douglas Goldstein, CFPÆ, is the director of Profile Investment Services and the host

  • of the Goldstein on Gelt radio show (Monday nights at 7:00 PM on www.israelnationalradio.com.

  • He is a licensed financial professional both in the U.S. and Israel. Securities offered

  • through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA, SIFMA. Accounts carried

  • by National Financial Services LLC. Member NYSE/SIPC, a Fidelity Investments company.

  • His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered

  • at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.

  • Disclaimer: This document is a transcription and/or an educational article. While it is

  • believed to be current and accurate, divergence from the original is to be expected. The original

  • podcast can be heard at https://sites.google.com/site/goldsteinradioshows/. All information on this website is purely

  • information and should not be used as the sole basis for making financial decisions.

  • The opinions rendered herein are those of the guests, and not necessarily those of Douglas

  • Goldstein, Profile Investment Services, Ltd., or Israel National News. Readers should consult

  • with a professional financial advisor before making any financial decisions. Please see

  • the complete disclaimer at https://sites.google.com/site/goldsteinradioshows/.

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B1 INT donít itís youíre consumer confidence market goldstein

Ken Fisher - Consumer Confidence and Prehistoric Man - interview - Goldstein on Gelt - March 2012

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