Ken Fisher on Double-Digit Returns and Beating the Consensus
When it comes to investing, most tend to be trend followers, focusing on known information to make calls. This time on Financial Sense Newshour, we spoke with Ken Fisher, well-known investment analyst, founder, and chairman of Fisher Investments, and one of the longest-running columnists for Forbes magazine, about his take on the current consensus and how he makes predictions based on identifying what people aren’t paying attention to.
Consensus Is Likely Wrong
For Fisher, the idea that the last few years have been difficult for forecasters is a bit of a mischaracterization. The truth is, it’s always a tough time for forecasters.
“On balance, the things that professional forecasters represent … are a compilation of all widely known information, which is exactly what markets discount and pre-price,” he said.
At the beginning of any year, professional forecasters lay out their views and have already placed their bets. These predictions are therefore pre-priced.
For 2017, the average of all professionals’ forecasts is a fairly tight bell curve expecting around 5% returns for the year. Based on this, Fisher argued that the greatest likelihood is for something that forecasters aren't expecting, either well above or below that number.
“If we don’t get that much stronger market,” as Fisher anticipates, “it’s likely that we get some big bad thing that comes along out of no place, that nobody’s expected, and we actually get a negative market,” he said. “The notion of a middling market is unlikely to occur because that’s what everybody bet on.”
Looking Where Nobody Else Is
For his part, Fisher expects to see bigger gains in 2017 along with fading political fears.
“We look for the things that we think we can see ahead, that are based on both … the norms of history that make sense in this environment, as well as things that are non-historical that we don’t think anybody talks about,” he said.
In doing so, he’s found that prolonged periods of below-average returns in bull markets are typically followed not by more of the same, but by bigger returns.
“Earnings will improve more than people think,” Fisher said. “If you just take out the negative effect in 2016 of both the losses from energy companies and non-energy materials companies, and eliminate that, you get … into about a 10% per year, year-over-year change in earnings.”
One issue people need to keep in mind is that, in an inaugural year with an incoming president who is widely feared, that high level of concern tends to subside simply because presidents can’t usually do as much as they would like to.
“The impact of all of that is, I think we get falling uncertainty … (which is) good for stocks,” he said. “Last year we characterized the year of falling uncertainty tied to US presidential elections … This year we’re calling it ‘The Fall of Uncertainty 2,’ because of what’s primarily going to go on in Europe.”
His biggest and most controversial forecast for the year, Fisher says, is that long-term interest rates will fall, which is far out of the consensus view.
What to Expect This Year
Fisher considers a big move up in the market as much more likely, but the negative outcomes no one is thinking about, and that therefore can’t be pre-priced right now, could derail this outcome.
This could be anything, such as a short, sharp event toward the end of the year that scares everyone around the world. For example, a presidential assassination could produce a sharply negative outcome.
“It’s the unanticipated that gets you. The vigilance is looking out for all of those things. What we’re doing here is spending an increased amount of time on (looking at) regulatory changes.”
The history of the market, Fisher noted, is that average returns are not normal. Only in a small percentage of history have we seen returns in the 0 to 10% range. Most of history has either been at returns markedly higher or somewhat negative.
“The average is made up of those extremes,” he said. “Markets are inherently non-linear. There’s more noise than I’ve ever seen at a point in time about politics right now after an election. … Eventually, it will abate. But all the noise will … blanket out the thing we have to watch for, whatever it is.”
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