Ken Fisher Busts Investing Myths; Tells Advisors to Seek 'Uncomfort Zone'

Q&A May 02, 2019 at 03:16 PM

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The long bull market will cool late this year, but not because of old age, renowned money manager Ken Fisher tells ThinkAdvisor in an interview. The cause: Uncertainty about the upcoming presidential election. What's the good news? An upswing will likely kick in mid-2020, he forecasts.

The outspoken Fisher, executive chair and co-chief investment officer of Fisher Investments, which he founded in 1979, also opines about today's biggest "dilemmas" for financial advisors, such as the issue of acting in the client's best interest. Concerning that, he has a few choice words on variable annuities, about which products he dedicates plenty of space on his firm's website.

The famed contrarian, 68, bases his market forecasts on historical data patterns and a career-long study of investor behavior.

In the wide-ranging interview, he advises FAs to seek "the uncomfort zone" when investing and provides five pointers when determining asset allocation ("Don't get arrogant" is one).

Fisher Investments manages more than $107 billion in assets for 55,000-plus private clients and 175 institutions globally. The firm, whose ads are ubiquitous on the airwaves, in cyberspace and in print, has increasingly expanded over the last several years, with offices now in about 15 U.S. cities coast to coast and about a dozen other countries, including Abu Dhabi, Italy and Tokyo.

Famed for challenging the conventional wisdom, Fisher, in the interview, argues that the federal budget deficit and congressional gridlock are positives for buying stocks and that the ongoing discussion about a U.S. bond yield-curve inversion is fatuous.

The industry veteran, who stepped down from day-to-day management of his firm in 2016, penned Forbes' Portfolio Strategy column for 32 years. He now writes weekly columns for USA Today and The Financial Times.

ThinkAdvisor recently interviewed Fisher, on the phone from company headquarters in Camas, Washington. He busted myths, proposed a way to reduce the deficit and argued that 2018's brutal fourth quarter was an ideal time to invest in equities.

Here are excerpts from our conversation:

THINKADVISOR: People keep worrying: "How long can this bull market go on?" Is that obsession a waste of energy?

KEN FISHER: Yes. Biological senescence doesn't apply to markets. Age doesn't kill bull markets. Markets die either because people get euphoric or because big, bad things happen that nobody has pre-priced. We're clearly not euphoric now. Could there be big, bad things that aren't pre-priced? Yes, and one should think about those potentials.

What's your outlook for the market for the rest of this year?

[An imminent recession] is crazy fruitcake talk! Historically, the third year of a presidential term is bullish. I expect this year to continue to have appreciation, partly fueled by the European Parliamentary elections coming up, which ripple over to America. [However], the third year typically slows down in the back part as you begin to get increased fear about how the election might look. But because of falling uncertainty midyear in the presidential election year, it typically picks up. I expect that pattern to largely follow during this year and next.

What can investors learn about the terrible market in the last months of 2018?

Just as the fourth quarter of last year was beating the hell out of people and causing a lot of them to become bearish, they should have been ever-more bullish. Now people are more bullish because there's a V-shaped bounce-back, but it's a little late to take comfort.

What's the most significant aspect of investing?

The biggest part is: Are you in the market, or are you not in the market? In a bear market, if you're not in, that's huge. In a bull market, if you're in stocks, that's huge. The pieces of the market that you're in count — sectors, countries, specific stocks. But they're secondary and tertiary. Is it better if you can be in all the right places? Yes, but the most important part is: Are you in or out?

What's the pressing challenge for financial advisors today?

The biggest dilemma is sorting out: Are you putting the customer's interest first, or are you putting your own interest first?

There's much less of, pardon my French, f— -the-customer mode in America now, but it's still here. In Europe, there's a lot more. But in an environment [U.S.] where fixed income returns are so low, it's very hard to give the customer something that makes them overwhelmingly happy that gets a great return and pays a lot to the advisor.

Where does the mode you mentioned show up, and what are the implications?

A lot of fixed annuities are actually variables in disguise or cross-dressed. As a percentage of annuity sales, there's less in variable annuities than there used to be, but there are still a lot of variable annuity sales.

Do you therefore think that something needs to be remedied when it comes to VA sales?

If you had the fiduciary standard, most of the bad annuities would go away — or else you would have successful lawsuits. One or the other.

What's another major challenge for financial advisors nowadays?

A fundamental dilemma that investment advisors, broker-dealers and, to a lesser extent, insurance people have to deal with is that capital markets are pre-priced of all widely known information. So they have to think, "If my so-called professional peers agree with me that it's got to be pre-priced, I'd better change my mind and come up with some different answer."

What's an example?

Right now, if everyone were saying "sell in May and go away," it would have to have been pre-priced fully. By the time you read about it, a lot of people have already thought about it before they even opened their mouths, and therefore it's pre-priced. "Sell in May and go away" is a falsehood to begin with.

Was release of the Mueller Russia report pre-priced?

Well, have you noticed any big market reaction to it?! The Mueller investigation had about 40 attorneys working on it and a whole bunch of other people working under them. They all talked to other people. Donald Trump had lawyers when he sent in his [answers]. Michael Cohen had lawyers.

And so?

If there were smoking guns, that would have been pre-priced because all the people on the inside and on the outside and all the people they talked to would have yakked about them. You don't need that many leaks in the pipe to get the water to not come out the other end.

What else is a problem for advisors?

Taking comfort from the views of their customers, hoping that the customers and they can come to a comfortable agreement about what to do. But people need to seek the appropriate "uncomfort" zone.

What other issues do advisors need to pay close attention to?

Basic asset allocation: Keep it simple. Don't try to be too cute. Don't get arrogant. Don't do what everybody else does because if you do, it's been pre-priced.

You've written that "age equals asset allocation" is a myth. Yet most advisors adhere to that "formula." Why is it a myth?

It's a heuristic, an attempt to make overly simple what a person's future time horizon is. Most heuristics, by definition, are imperfect. This is where the advisor isn't really providing advice. They're providing heuristics, which you can get from a robo-advisor.

Why is this particular asset allocation issue so complicated?

A 70-year-old married to a 70-year-old whose parents and grandparents died in their 70s, and who are obese and smoke and drink too much [need] a very different asset allocation from a 70-year-old who's married to a 55-year-old whose parents lived into their 90s and who are in great health. So the reality is that you could have a very short time horizon at 70, and another 70-year-old could have a very long time horizon.

Why, then, do advisors typically use age-only and ignore other facts?

They're trying to minimize agency risk, which, in the corporate world, is: If all the other corporations are doing something and I do it too and we're all wrong, I don't lose my job. Advisors don't think of it quite that way; but they think that if they're wrong, they won't get criticized. For instance, if they [put a customer into] the same asset allocation as the [FA] down the street, and the next guy and the next guy [do the same allocation], they think they won't get fired [if a poor outcome results] because they're all doing the same thing.

What's a specific example?

[An FA] has put a customer into 60%/40%, and they're unhappy with what he or she has done for them. So the client goes to another advisor, who says, "I'm going to put you in 60%/40%." So now the customer just goes with the guy that they like the most.

Do you think advisors' expanding use of technology has helped boost client returns?

There's way more attention paid to the technology of advice than is actually useful to the advisor. These days, there's a huge effort to have the right portfolio system, the right CRM system [and so on]. All that stuff is just a toolbox. There's way too much attention paid to the notion that technology is going to solve your problem for you. We [Fisher Investments] spend more money on technology than the next 10 largest firms put together in the realm of investment advice.

And how much does that help you?

Not much.

What's the main reason firms buy so much new tech, then?

There are only two things [about technology] that matter: Does it help you actually manage the portfolio better than you did before, and does it give you a better customer experience?

Please explain.

It's the advisor, not the tools. It's that big-picture advice that's important. The reality is that whether you buy a hammer from this maker or that maker, one might be a little better than the other; but a good carpenter is going to work just fine with either hammer. However, give a bad carpenter the best tools in the world, and they still do a lousy job.

With regard to the market, what's another sign that gets overlooked?

People miss the pattern that [congressional] gridlock is overwhelmingly positive. There are [typically] two possible scenarios: an obstacle course of stationary obstacles — no legislation [passed] — and an obstacle course that's big, sharp, fast-moving and has swinging obstacles. The stationary obstacle course is safer, and you'll take more risks with it than with the big, sharp swinging one.

When does the swinging one occur?

In the first two years of a presidential term because that's when all the legislation [is passed]. Almost no legislation ever happens in the third or fourth year of a president's term.

One popular belief you dismiss is that the federal budget deficit is bad. Please elaborate.

Throughout history, the more debt we've had — the federal deficit — the better the stock market has done. A lot of advisors don't get this: In the long term, the market doesn't lie.

But in fact there is a big debt problem. Do you have a solution?

What the government ought to do is roll its short-term debt into long-term debt. Even if it pushed up long rates some, it would lock in these relatively low rates; and we wouldn't have a debt problem in this country for an eon.

Why do you think the discussion about U.S. bond yield-curve inversion is "stupid," as you've called it?

What really matters is the GDP-weighted global yield curve, which currently has a 2% upward slope. Single-country barriers aren't important the way they once were. Within the Western world, they're subordinate to the global curve. And the global curve isn't inverted. It's positive.

You recently wrote that the government's fining companies is good for stocks and indeed are buy signals. Why?

A fine is like a ripple on the water while the boat is moving forward. The fine is announced, and it's over. The money isn't important; it's the potential damage that would occur from the government messing around with you. Once the government starts an investigation, they want a payoff: They want to walk away with something they can point to as victory.

How do they win that?

What you see over and over again is that companies don't deny or admit. There's a fine, they pay, and it's over. That's the bullish signal.

You expect a market slowdown later this year because of uncertainty about the 2020 election. What are your thoughts about President Trump? Do you think he'll be re-elected?

I don't have a clue. But if Trump is the nominee, even if he loses the popular vote by 3%, he'll get re-elected because he'll win the Electoral College handily. The Democratic candidate doesn't get anything extra for more votes in California, New York and Illinois — states where he'll get killed.

So, presumably, you don't think Trump will be impeached?

That'll happen when hell freezes over. It would take the Republican senators to turn on the president. Most members of the Senate support him. You can't get them to vote for his impeachment because they'd be afraid that would be a down-ticket disaster in 2020: There are about six close Senate races in 2020.

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