Episode #104: “If You’re Worried About What Things Are Going to Be Worth Next Week…You’re Going to Make Yourself Way Poorer 20 Years from Now”
Guest: Ken Fisher. Ken is the founder, Executive Chairman and Co-Chief Investment Officer of Fisher Investments, a fee-only investment adviser founded in 1979, serving tens of thousands of high net worth individuals, foundations, endowments, and large pension plans. He wrote the Forbes Portfolio Strategy column for 32 ½ years until 12/31/16, making him the longest running columnist in Forbes’ history. He has written many books, including 6 best sellers: The Only Three Questions that Count (2006), The Ten Roads to Riches (2008), and How to Smell a Rat (2009), Debunkery (2010), Markets Never Forget–But People Do (2011), and Beat the Crowd (2015). He has been honored by Investment Advisor magazine as one of the industry’s 30 most influential individuals over the last 30 years.
Date Recorded: 4/26/18
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Summary: In Episode 104, we welcome the legendary, Ken Fisher.
Meb starts with a quick word of congratulations to Ken, as his firm just passed $100B in assets under management. The guys then discuss Ken’s interest in fishing with a bow and arrow, which eventually morphs into a conversation about a millionaire who allegedly hid a million dollars somewhere in the Rockies, leaving clues to treasure-hunters searching for it.
The guys then jump into investing, discussing Ken’s early days in launching Fisher Investments. They touch upon one of Ken’s early claims to fame, championing the price-to-sales ratio. This leads to a conversation about being factor agnostic, which includes some interesting takeaways from Ken on capital pricing.
Soon, Meb brings up Ken’s book, Debunkery, and asks about one of its points: namely, the misbelief by so many investors that bonds are safer than stocks. What follows is a great commentary by Ken about short-term volatility risk versus opportunity cost risk. When you look at longer, rolling time periods, it becomes clear that stocks are far less risky than bonds. And in the long term, stocks are less risky than cash. Ken tells us that in his business, it’s his job to focus his clients on the longer-term.
Next, the conversation takes an interesting turn, touching upon the explosion of tech science, and how it’s affecting our lives, as well as the capital markets. It bleeds into Meb suggesting that older investors tend to become more conservative or pessimistic, and so they tilt away from equities, and whether that’s a behavioral challenge Ken has to address with his clients. Ken gives us his thoughts, concluding with that idea that people need to be relatively comfortable in capital markets with things that are generally uncomfortable.
The conversation then veers into politics and the effects on the market. Ken tell us that when you look at presidents and market history, our system gives presidents much less power to affect markets than most people believe.
Meb jumps to Twitter questions, bringing up one that wonders how to position yourself in the end of a bull market. Ken gives us a fascinating answer which I’m going to make you listen to in order to hear, but it tends to focus on large cap and quality.
There’s way more in this great episode: capital preservation and growth… volatility (a great quote from Ken “volatility is your friend, it’s not your enemy, if you use it correctly”)… the media’s impact on investor perception… the Fed and sovereign balance sheets… the senate bill trying to eliminate the ability of public companies buying back their own stock in the marketplace… housing (and the need to account for the full housing costs when calculating returns)… and of course, Ken’s most memorable trade.
What are the details? Find out in Episode 104.
Links from the Episode:
- 1:57 – Welcome and a look at Ken’s bow fishing hobby
- 4:31 – “In Search of Forrest Fenn’s Treasure” – Crockett
- 5:31 – Motivation to start Fisher investments
- 5:58 – Super Stocks – Fisher
- 7:27 – The evolution of Ken’s thinking on the price-to-sale ratio
- 12:10 – Debunkery – Fisher…and the idea of bonds being safer than stocks
- 12:15 – The Wall Street Waltz: 90 Visual Perspectives, Illustrated Lessons From Financial Cycles and Trends – Fisher
- 16:28 – “Wife Haters” – Fisher
- 18:20 – Threats to your savings
- 22:41 – How do you convince investors to remain optimistic about their investments later in life?
- 23:13 – Ric Edelman Podcast Episode
- 26:48 – Educating investors
- 28:45 – Expecting average returns in the market
- 33:07 – The Only Three Questions That Count: Investing by Knowing What Others Don’t – Fisher
- 34:44 – What works best at the end of a bull market
- 38:56 – Sponsor: Inspirato
- 40:10 – Capital preservation and growth is an impossibility
- 42:27 – You have to expect volatility
- 43:47 – Euphoria in the markets
- 44:40 – Reaction to current Fed policy and concerns about the US balance sheet
- 50:26 – “Despite what politicians say, stock buybacks aren’t evil” – Fisher
- 55:12 – Ken Fisher on housing in USA Today (article 1) (article 2)
- 1:01:02 – Housing as a way to help people save and keep them from making dumb investments
- 1:03:13 – Most memorable investment for Ken
- 1:04:48 – Ken’s guitar playing
- 1:06:08 – Little Red Rooster – Rolling Stones
Transcript of Episode 104:
Welcome Message: Welcome to the Meb Faber show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
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Meb: Welcome podcast listeners. Today we have an awesome show for you with one of the most iconic figures in investing today. He’s written the “Forbes” portfolio strategy column for 30 years, written 11 books but you probably best know him as the namesake of his investment advisory, where is the founder of Fisher Investments. We’re honoured to have him today. Welcome the show, Ken Fisher.
Ken: It’s great to be here, although actually, you know, I don’t write for “Forbes.” I wrote for “Forbes” for 32-and-a-half years, but I haven’t written for them since January of…maybe December of 2016.
Meb: You moved on to what, “Financial Times,” “USA Today?” There’s some other places, Fisher Investment website, you can still find the content.
Ken: I switched in America to “USA Today,” and I write in “The Financial Times” and other places as well.
Meb: And in your spare time you’re now…by the way, congratulations on I think just crossing 100 billion. Is that right?
Ken: In fact, you know, 100 billion here, 100 billion there, kind of like Everett Dirksen said, “Pretty soon you got real money.”
Meb: Yeah, right. Well, good. Look, before we dive into investing, and I’m super excited to talk about the great humiliator for hopefully an hour, I wanted to ask a couple of questions. First, you’re the only person I know, second person I’ve ever heard of, the other being Bo Jackson, that’s been fishing with a bow and arrow. Can you tell us a little bit about bow fishing? Was this just a young pursuit? Is this something you’ve continued to do in your older years?
Ken: No. I every once in a while still shoot bow and arrow with my grandchildren, but when I was young I totally fell in love in a neuromantic way with the concept of bow hunting, and was a fanatically devoted follower in the era before he was famous as Saxton Pope, who actually was a friend of my grandfather’s, who I adored. So I took up bow hunting when I was young, and I killed a lot of stuff.
And among the stuff that I killed were fish. And the problem with bow hunting is, it’s a tough thing. You’ve gotta get closer to the animal. You gotta to be able to…you gotta have a lot of power. You can’t get obstructed at all by brush or anything like that. And then with fish, you get a parallaxing effect as the arrow hits the water, and you’ve got a line that is coming off a hole on the back of the arrow that’s connected to either a rod and reel or connected to your bow that you’re gonna yank the fish back in on assuming that you hit them, and you’re needing to hit a pretty big fish.
So, I mean you can’t get a little fish with a bow and arrow, it’s gotta be you know, something at least the size of a bat. And you’re splashing around in a boat when you’re a kid, so you don’t know anything. And it’s just a good way to get in trouble and have fun when you’re a teenager. Everybody’s gotta do crazy things when they’re a teenager, and it beats the heck out of heisting cars.
Meb: I hear you. You know I grew up mostly in Colorado, North Carolina, and so I came from a family of fishermen. Have you ever heard of the Forest Fenn treasure, by the way, this art dealer that hid some treasure somewhere in the Rocky Mountains?
Ken: I have heard about that. I haven’t paid a lot of attention to it. I know that a lot of people have looked for it. No one’s ever found. The guy says that probably no one ever will, so I don’t know how much of it is really mythology or how much of it’s real. What do you know about it?
Meb: That’s about it. I read the poem. Listeners, we’ll post show notes. It’s an art dealer from Santa Fe who supposedly hid $1 million or $2 million worth of gold and other such kind of rarities into a chest in the Rocky Mountains, and wrote a poem with clues as to where it’s located, and has given clues over the years. But the funny thing about it, his whole point was try to encourage people to get out in the wilderness, but I think five people have died looking for it. But it’s probably a huge net positive. But the funny thing is, if you found it you’d probably never disclose it because in the IRS would come after you.
Ken: Well, on the other hand, probably there’s a 50-50 chance that somebody discovers some hidden Aztec treasure while they’re looking for this before they ever find this.
Meb: On the to-do list, but not the point of today. All right. Let’s get back to the topic at hand. Let’s go let’s go back in time again after bow fishing, maybe before you were playing guitar at Venturi’s [SP], maybe after your stint boxing, and when you started Fisher Investments, so late 1970s, really from scratch. And I wanted to hear a little bit about the motivation to start it in parallel mainly. Kind of, what was the motivation to write the first book?
I know you’re doing some research. You became very famous for a lot of the work popularizing and talking about price to sales ratio, early factor investing. Maybe talk a little bit about what the motivation there was and how that kinda paralleled development of both starting an investment company as well as writing your first book.
Ken: Well, I didn’t have any experience that was worth being some bananas. And I didn’t know how to sell my way out of a paper bag or market my way out of a paper bag. And I didn’t have much of any kinda client base, and I discovered the power of the price/sales ratio at that point in time, and it was basically kind of a way to be self-promotional in a way. I’m writing about it because I’d found this thing. Nobody else had ever written about it.
I mean, there’s very, a very minor allusions to some connection there that you can find in some footnotes in various places in financial literature but no description, no writing, no methodology, no data, etc. So, it just seemed like a logical thing to do in a vein of trying to figure out…and I mean, in those days I kinda thought that if I could ever get to where I had $100 million under management, I’d have it made. And I had thought the book might help me with that in some respects. In many respects, I underestimated that effect, but that’s neither here nor there. Basically, I was wondering my way out of the wilderness so to speak.
Meb: You know, he’s one of the things that I wanted to touch on, because I think it’s fascinating, I think it would be really hard for a lot of people, is that using a factor like price to sales, you know, and you became well known for it, and a factor that’s worked great over the years. But it kind of in recent years or I’m not sure really kinda when the shift started to happen, you know…and this is a rarity. I think in finance investing so many people become totally beholden to one strategy.
You know, somebody’s, “I’m a dividend guy,” or, “I’m a gold bug” and just totally inflexible, particularly someone who’s invented popularized a single approach. You’ve kind of come you know, around to where you say, “You know what? It’s not something that we necessarily use as much. It’s maybe lost some of its effect.” Maybe take us through that, because I think that’s a really hard concept for a lot of investors, is being somewhat agnostic or honest about an approach that certainly they were tied to and worked one point, and maybe eventually don’t use as much anymore.
Ken: So I don’t know that I’m any more honest than the next fella, but I’m as pragmatic as I know how to be. And fact is, you either plan to go to hell or you don’t. And I’ve always thought veering away from hell was a good idea. So, early on I got the power of the blessed Holy Spirit in me, and the greatest ism extant as near as I can tell in all of the holy religions is capitalism.
And once I got the core of capitalism, which I still think few people fathom correctly, I realized that at its centre was the capital market pricing mechanism. And therefore it had to be impossible if calculated correctly for anything as a trick to be permanently better than any other trick. It could only be better as long as people don’t appreciate it and pre-price it in.
And once you get that pre-pricing power of capital markets in a pre-processing all-widely known information, you take something like the price sales/ratio, which once was a non-concept and therefore had sustainable enduring power, and it turns into something that you could…I mean, in those days, data was very rare. But then fast forward, it turned into something where you can find it for free, in websites all over everywhere, and it’s got wide appreciation, and it’s taught in the CFA curriculum, and blah, blah, blah, blah, blah. It’s gotta be pre-priced.
There is a time where price/sales works very well. It’s a leveraged play on value when value works better than growth. But just like all of the value adherence, there’s a time when value works, a time when value doesn’t. There’s some tricks in the data going back to Fama French, and all that kind of stuff, once upon a time. The same is true with small cap, with bonds, and reganom [SP], and [inaudible 00:10:13] and all the rest of that.
And if you sidestep the tricks in the data, the reality is, you either believe in the blessed Holy Spirit of supply and demand overpowering any factor once it’s widely known and accepted although potentially moving in and out of style as sentiment swing. And if that’s the case, you believe in the power of that equilibrium in the long-term as opposed to some perpetual factor being some dominant play.
Decades ago, it became very clear that things like value, which is, I mean, I started the value investor, the value goes into phase and then goes out of phase, and then goes into phase, and then goes out of phase. And there’s all the people that tell you, but value’s better, just like there’s all the people who tell you that small cap’s better.
But if you actually parse out a few concentrated bursts in history, the rest of that, all of which come out of homogeneous periods of time, and if you can predict those homogeneous periods of time, well then you can predict everything in the market place. You don’t need any other factors because you can just leverage that. But if you X-out those homogeneous times, small, big, growth, value, they all end up in the long-term doing the same to around in here.
Meb: You know it’s interesting. I think it’s really hard for investors and in pros alike to really be not just asset agnostic but also style or factor agnostic where they admit that a lot of these go through cycles in another example would be, of course, price-to-book where you know, DFA put I don’t know how many hundreds of billions of dollars into, you know, strategies that were very heavily reliant on price-to-book.
And price-to-book, as a factor, has really struggled in recent decades. And a lot of interesting work going on, I think, these days about individual factors and styles, and kind of when they might be more expensive or cheap. The good folks at Research Affiliates have been doing a lot there, and hopefully some more as well.
So, in prep for this chat, I went and re-read pretty much all your books, and Jeff as well, had read most of them already. I think my favourite is still “Wall Street Waltz.” And so some of them, you know, the topics kinda inner-weave in a number of them, but I thought we’d may be used debunkery as a jumping off point for a couple of topics, because I think a challenge for a lot of people is that…and there’s a quote in here. It says, “A huge part of successful investing is just avoiding common errors most folks make repeatedly.”
And you had about, I think, 10 things you’re debunking in the book, but I’d love to touch on about three of them if possible. And we can go off tangents if you like. And one of them, and I’ll let you just expand as you feel like you like, but one of them was the concept of bonds being safer than stocks. So, maybe you wanna talk a little bit about that?
Ken: Sure. I’m delighted to talk about that. Is there are a controversy there?
Meb: You know, it’s funny, Ken. So, I did a tweet maybe a week or two ago, where I said, “Hey, my Twitter readers, here’s a poll, just because I wanna poll my audience,” which by the way, is a very engaged…they have to be pretty interested in finance and investing to follow a quant like me. And so, most of them, probably professionals. And I said, “What do you think the historical real drawdowns after inflation of long-term bonds has been in the past 120 years?”
And 80% of the people got it wrong. So I think it was 0-15, 15-30, 30-45, above 45 or something like that. And 80% got it wrong but also got it wrong in the totally opposite direction. So the majority of people thought long-term bonds had only declined 0% to, I think, 15%. So, it’s a very, I think, common misunderstanding, but this is something you talk about in your book. And I don’t know if you wanna expand anymore or jump off there as well.
Ken: The central issue is always, what is risk? It’s a question that most people don’t really touch correctly. And risk is a multifaceted beast, but the two biggest risks are like a fulcrum. And the first one’s the one that people pay attention to is what I’ve always viewed as valid but myopic, which is short-term volatility risk. And if you’re focused on that as the measure of risk going back to kind of, you know, at the beginning of modern portfolio theory, then absolutely, stocks are riskier than bonds. Bonds are riskier than cash, etc. by any standard.
If you think instead of opportunity cost risk, which presumably lots of people that took economics once upon a time learned, then once you start looking at longer rolling time periods, and the consistency and/or dispersion of returns, it becomes clear that those two kinda reverse, and that stocks are far less risky than bonds, that in fact, my next “USA Today” column will be making the point that in the long-term, stocks are less risky than cash. And in the short-term of course, the reverse is true.
And everybody gets the short-term in their bones because the inherent nature of humanity for evolutional reasons is largely myopic. But the fact of the matter is, in the world in which we live, most people are gonna live longer than they think, most people are gonna live a really long time. And when you look at long-rolling time periods, stocks overwhelmingly do better than bonds, consistently. The variance is mostly by a lot.
I’d done the data lots of ways, lots of times, lots of periods, but if you go off in…if you take your 65-year-old retiree today, who’s married to a 60-year-old woman, there’s a pretty darn good chance she’s going to live into her 90s, and that she’s got a 30-plus year time horizon. And when you look at 30-year-time horizons, this notion that I’m 65, I’m retiring, so I should become very conservative with my investments and on mostly bonds and cash is subjecting yourself to huge risk because you either believe in the power of the holy blessed-ism or you go to hell.
And years and years and years ago I wrote a “Forbes” column that I liked a lot, that basically said, if you’re in that kind of a condition, a 65-year-old with a 60-year-old wife, and I think I might have used a 65-year-old with a 55-year-old wife, I don’t know. And the purpose of your money is to take care you and your spouse for the rest of your life, and you’re investing it mostly in stocks and bonds, why don’t just go ahead and hit her, because it’d be kinder to hit her now than to subject her to age and poverty.
And I wanted to call the title, “Wife Beaters,” but they got all annoyed at me, and said I couldn’t actually say “wife beaters,” that wasn’t politically correct. So it had to become “Wife Haters.” And that was one of my all-time favourite columns, because it spoke to opportunity cost risk, which in the long-term for most people unless they’re very aged with a truly short time horizon, is their bigger concern.
And when you look at that over and over, I see not just in America but all around the world, we operate in Europe as well, where there’s a lack of ability to see that the long-term opportunity cost is for people with a long time horizon, actually more important than short-term volatility, and yet isn’t much thought through because of the bias to be myopic just the same way it is for a drunk and for an obese person. And it’s pretty much the same thing when you get right down to it.
The difference between being, you know, overburdened in cash, being unable to lose weight, and being a drunk are all similar in their short-term versus long-term appreciation of risks and benefits. And again, going back to my point about going to hell, I just prefer not to go to hell and focus on the long-term opportunity. And then, in the practice in which we engage as a business, it’s our job to manage the client’s mentality so that they can appreciate that correctly and not get too hung up on short-termism.
Meb: I struggle with that as I think about it. You know, we think a lot about behavioural nudges to keep clients from doing dumb things. And I’m trying to think about, and I don’t know the answer this or have an opinion necessarily is that, I don’t know if the under appreciation for the risk of bonds and cash is that investors just don’t think in real verse nominal terms because almost everyone thinks in terms of nominal returns, but real is really the inflation is the risk for bonds and cash as well, or they just are so emotionally wedded to the volatility of stocks in the short-term. And I don’t really know which one is the main driver there but maybe both a little bit.
Ken: I think there’s a third. I mean, those two are perfectly valid, and you’re 100% correct about those two, but I think there’s a third, and that’s the point where you’ve got the intersection with the road to hell. And that’s that. Forgetting about all of the micro-details that we all focus on, what stock do I own, what sector do I own, should I be value or growth in perpetuity or this moment in time, all that other kind of stuff.
Forgetting about all at the moment, in the long-term, we are in a unique period of humanity that’s existed for the last couple of 100 years where there is an explosion of science, technology transferring into know-how, deployed off in through capitalism for the benefit of humans, not perfectly but consistently better than people ever forecast. And all that translates over time into the capital markets.
And it’s that upside from the part where human accumulation of science, technology know-how, deployment in creative ways whether it’s a technology product, something that somebody uses technology to produce a non-technology product or just somebody with a crazy-assed idea that people end up liking. We are doing things that to…my grandfather was born in San Francisco in 1875.
If he had tried to describe to his grandfather, the things that he would see in his lifetime by the time he died in 1958, my great, great grandfather would have thought that he was some kind of crazy kid dreaming, and would have been upset at my great grandfather for allowing him to have all those wingnut thoughts. I mean, “My gosh. Arthur told me that he was gonna be able, when he’s an adult, to sit in a room in his house and watch the president of the United States speak real time in a box,” that’s crazy.
And reality is, stuff from my childhood in the 1950s, when I’m a boy having a good time in a wonderful world, now, when you think of all of the things that we could never have fathomed, the evolution is stunning, and yet all of that stuff translates back through capitalism into stock prices, and that’s the third leg of the tripod that makes that trade-off unique.
It’s not just short-term versus long-term, and it is, it’s partly the power of capitalism over time to come up with a solution to something that some wild dreamer created that translates into something that benefits humans somehow, someway, that nobody earlier could have conceived that makes that person and other people rich, creates jobs, does all these other wonderful things, whether it’s this company, that company or the other company, and bankrupts Sears Roebuck to create Walmart then later to get Amazon. And that process that evolves in creative destruction is just so ongoing and so underestimated in the long-term.
If you talked to people at any point in history, they almost always feel like we’re at the end of that process, and they always have as opposed to the fact that we’ve been early in a process that’s been a J-curve up to the upside, and that J-curve to the upside just keeps exploding, and that explosion is one that there’s not gonna be much of that explosion in the next three months. And the next six months, you’re not gonna notice, but in the next 20 years, you sure as heck will.
Meb: You know it’s funny because you see a lot of articles where if you take a step back and look at the general progress of humanity, there’s so many positive trends, but the news flow is often so negative. It’s hard to get kind of around. And you actually had a great quote in one of the books I think or tweets and said, “You know, there’s an old saying where there are great investors and old investors, but almost no great old investors. Why? My sense is watching octogenarians age, there’s 99% more often doom and gloomers as an essence overcomes them and their world head-view is increasingly doomed, even the most seemingly vital.”
So, you know, we had Ric Edelman on the podcast and he was saying, “You know, you need to have younger investors that have kids or whatever, you should prepare them to live to 100, 120 years old.” Well, why do you think that as investors age, you know, they become a little more pessimistic, that by definition means most of them are probably gonna tilt away from stocks? Is that a behavioural challenge to kinda work with, with your older clients, and particularly older ones that are having children that may outlive even, you know, us by a 10, 20, 40 years?
Ken: So A, I like Ric Edelman a lot. He’s a great guy. Secondarily, I’m not sure what Ric did or didn’t mean in those statements, but I don’t think the world works quite like that. I think the way the world works is when most people are very young, like in their 20s, let say, they tend to have a very short time horizon. And we could go back and we can talk about that.
As they age, their ability to comprehend and their appreciation for longer-term grows until they hit an age and then it starts to shrink. It’s a form of a bubble curve. And the shrinking doesn’t really start accelerating until you’re in your later 70s, and your vitality’s going away from you, in my opinion. Your real-time horizon is shrinking but your emotion about that time horizon is shrinking faster because you don’t feel as good, and therefore you feel more depressed.
I mean, you know, when I was in my 20s, like awful lot of people when they’re in their 20s, I just pretty much got like I was invincible physically and I could bounce around, jump off things, and do this, and do that, and that’s great when you’re young. But then when you get older and older, everything takes longer to heal. And you know, when you’re in your 70s and you injure yourself, it takes forever and things ache, and there’s this and there’s that. And so you get more and more depressed.
And then when you transition into your 80s, it gets much more so. And I think that just carries over into their perception of the future, the future of humanity, their world is actually collapsing and they feel it, not everyone, not all, but most. When you look at old, great investors, they tend…and are there other exceptions? Yes. Old great investors for the most part over enter, pull in their horns, they tend to become less assertive, they tend to take less risk, and…anyway.
I just wanted to be clear that I think that it’s more…it’s not a continuous trend where you become more prone to avoid the longer-term as you age. Young people avoid the longer-term. I mean, look at young 401(k) holders. And then to another point of what you alluded, you said earlier in relation to something else, that nudge phrase. And with all due respect to Richard and Shlomo, and I like Shlomo a lot, and I’ve known him for a long time. I’ve known Richard a hair’s whisker, but I’ve known Shlomo a long time. He’s a great guy, but I don’t like the nudge part.
Nudge kind of implies you kind of give them a little nudge and then they’re off on their own. I believe in trying to take a client of my firm, and having our people sort of train their psychology and come with them to manage their psychology for their best interest. Not nudge them, manage them for their best interest. And if you do that, you’re helping them, and helping them is, in my realm of endeavour, what it’s all about.
Meb: And when you say manage, do you mean mainly just educate? Is that kind of the general foundation?
Ken: Yeah. But let’s think about education for a second. You take your average student. Your average student is a C-student. Most students aren’t A-students. So an A-student kinda gets it pretty fast, worked pretty hard, studies it going back to the Latin origin of the word student, studio, studere, meaning to be eager, is eager, wants to learn, pushes themselves into it. You don’t get that many of those in life.
When you’ve got a lot of clients, most of them are gonna be kinda average. Some are gonna be below average, some are gonna be above average, there’s gonna be kind of a bell curve there, kind of a normal population distribution. And in the process of that, what do you get? In the process of that, you need repetition. I mean, you take an undergraduate degree in almost any curriculum.
There is so much repetition in that undergraduate degree specifically because if you don’t do that repetition, the C-student, you know, what does a C-student do? He gets 70 on a test maybe. She gets 70 on a test, then what happens after that? Well, you get 70 on a test, and that means you missed 30, so now you go back and you kinda take the course again as a junior, and then you take a different version of it as a senior, and you go from 70 up to, up to, up to, up to, and finally you kinda have enough knowledge that you’re generally considered sort of knowledgeable on the field.
And you know, even when you go onto graduate school, there’s a lot of repetition there. And my perception is that people need a lot of repetition. They need to have it brought at them a lot of different ways. They need to have it in writing, they need to have it verbal, they need to have it in pictures, they need a lot of…it is education, but it’s the management of their psychological attributes and the trade-off between what effectively is rational reality and emotions, because in the end there’s, you know, and everybody seems to know, emotions are hugely important. People need to be relatively comfortable in capital markets with things that are otherwise uncomfortable.
Meb: So kinda tying in the emotions, there’s nothing that gets investors more charged with regard to investing than thinking about the general political climate. And so, you had a great tweet early in January 2017, which to your credit, you said, “All anyone wants to do these days is talk politics. Those folks will likely miss another fine year of global prosperity and stock gains.” And so to your credit, this was right after the surprise election of Donald Trump. And I don’t know if anyone would have forecasted the first calendar year in history of 12 up months for the stock market. That was pretty incredible.
But maybe there’s kind of two parts to this question. One goes back to the debunkery topic of that people should expect average returns in the stock market, which you’ve written a lot about. And second, is maybe you could talk about after this 15 months in a row in the stock market, kinda how you guys see the market right now? So maybe the combination of a couple of those concepts and let you take it from there.
Ken: Well, at my age, by the time I get finished talking about the first part of that, I probably would have forgotten what the second part was.
Meb: I’ll remind you.
Ken: I appreciate that, Meb. Thank you very much. It’s a great tactic to avoid a topic but that’s neither here nor there, tactic on my end. So anyway, let me just say, there’s a couple of things that I think people miss. A, average doesn’t occur very often in the market, and that’s the point you alluded to. I’ve written a lot about the fact that the average returns of the market in history are made up of the average of extreme returns, and that returns around the average as a percentage of history happen pretty infrequently.
The markets tend toward extremes, and people say that but generally people don’t appreciate fully the degree to which that’s true, and that it’s much more common to have a negative year or a big up year than it is to have the long-term average, which on a nominal basis, you know, depending on what index you look at and, you know, what time period you take can be pushed around to be, you know, someplace between something that might look like 5 on the low-end and something that might look like 12 on the high-end.
And you know, there’s a lot of different people that are gonna slice and parse those data different ways, and that kinda unimportant. The point I think that’s important is that, approximately, bull market returns tend to be two-X the average because the average is made up of the positives and the negatives and the bull market is mostly an extended period of excessive positives. And so, if you recognize that you’re in a bull market while you still can have volatility and should, you should expect a lot of that volatility is volatility, the happy kind as opposed to the unhappy kind, and you get these big returns.
Going back to President Trump for a moment, since people talk way too much about President Trump for good and for bad, and I don’t wanna go into the good or the bad because I don’t do that. The sociology is for the other fellow. I don’t know what other fella, but everybody seems to wanna do it. When you look at presidents and you look at market history, I believe it’s abundantly clear that the American system gives the president much less power than people think the president has in ways that would impact markets, and that while presidents do have impact we tend to make way too much of them.
This president in particular, for good and for bad, people tend to make way, way, way too much over because he’s, by any definition, not an archetypal, traditional president, but the reality is the U.S. Constitution is set up in a way to limit the power of the president, limit the power of Congress, limit the power of the courts, and to turn it all into sort of a slow-moving thing that makes it hard to get a lot done in a big hurry.
And once you’re in a bull market and you recognize you’re in a bull market, unless you can actually identify the bull market ending, the normal thing would be to see returns that are markedly above the average. That would be more normal than not. And normal returns aren’t…the line I use, and the line I use in debunkery, and the line I used in my “Only Three Questions” book is, “Normal returns are extreme. Average returns are made up of the average of extreme returns. You’ve got to like extreme.”
Meb: I think that’s a great…we’ve actually used that quote attributed to you, “Normal market returns are extreme.” And for listeners, just to give it a little context, and I’m rounding here to make it simpler, because I like rules of thumb. But, basically, if you think a stock market, 20% plus years happen about a third of the time, it’s a little more, but 0% to 20% about a third of the time, and negative almost a third of the time. Again, it’s a little bit less, but a year of that kind of 0% to 10%, which is really what everyone expects most years, is pretty rare. It only happens 14% of the time. So, I think that’s a great example.
Ken: If you bracket that 10 number that people look for with 5 to 15, that tends to occur about 15% of the time. And yet if you look for an example, and I’ve ragged on this a lot for a long time, for a couple of decades, if you look at what professional forecasters forecast, they always tend to forecast, not all of them but most of them, in a bell curve-like pattern, that which occurs rarely, that they forecast that 15% as what they think is gonna happen this next year, and yet it only happens about 15% of history.
So why should they expect that it’s going to happen over and over and over and over again as opposed to banking on, we’re more likely to get a big up year or a negative year, to your point or to my prior point? I mean, if you take that 5% to 15% that people look for, and that professional forecasters tend to forecast, it doesn’t happen very often.
Meb: And we’ve gotta a couple of questions off Twitter, in the similar vein where they’re asking about, you know, “Hey, do you think this is euphoria stage of the bull market?” But one was referencing, I guess, some work you had done on bull market statistics regarding the last third on maybe how you should position yourself or kinda what happens in the end.
Is there any kind of general…I mean, it seems like we might have been having a little bit of euphoria towards the end of the year, but February seems to have cleared some of that out. Is there any comments you have on like what tends to work best near the end of bull markets? I mean, if you knew that they were happening, but is there some historical stats on that?
Ken: Yeah. Trend is overwhelming, and you can define it in certain simple characteristics. As you’re in the late stages of a bull, and again, as soon as you say late stages in a bull, a lot of people go, “Ooh, ooh, ooh, that means we’ve got to be ready for the bear,” and that’s not what I’m talking about. I’m talking about in the late stages of a bull, the things that tend to do best could be characterized as the thing…and this sounds sarcastic, and in a sense it is, but they could be characterized as things that are appealing to the person who was too afraid to own any other stocks just a little while earlier.
Big, easy things they know, things they feel really comfortable with, categorically big and perceived as high quality with real confidence of growth, whether the growth is at a high rate or a not terribly high rate. So, normally, late in bull markets, and I’m gonna come back to make some amends to this, but normally late in bull markets, it’s big that does better than small, it’s growth-y things that do better than value-y things.
It’s quality growth over historical actual growth rates, the perception of growth. So it would include quality tech, it would include usually late in the cycle, and again, this is not only true domestically, this is true globally. It would include pharma, it would include high-quality consumer staples, but not low quality. Quality’s really the emphasis as opposed to the sector per se.
The kinda thing where when somebody says, “I was too afraid to own anything, but now I’m feeling a little better,” what’s the first thing I might buy? Well, I might buy stock in a company I work for. I might buy stock in a company my spouse works for, or my brother works for, or my next door neighbour who works for, or that big global high-quality company that’s based two towns away, and that I can feel comfortable I’m not gonna lose my shirt on. And increasingly, as that bull market moves into its latter phases, it’s those characteristics that tend to work.
The time, for example, for small cap is bouncing off the bottom of a bear market as a bull market begins in the first third. It’s the exact reverse, and even there, that’s ultimately the time for a small cap value where you get low-quality small cap, which is the version of the things that people in the bear were so afraid would absolutely die if things ended up being as bad as people previously feared, that when they’re not quite that bad, you get this huge upward relief bounce from.
Small value does best in the first early phases of a bull market, which is the kind of the data mine in the small cap effect. And I mean, if you take the first third of a five bull market out of the data series, you find big cap doing markedly better than small cap in the rest of history. It’s that part that nobody ever talks about is that which is unsaid. You know, going back to the [inaudible 00:38:33] principle.
And at the same time, I mean, fundamentally, it’s so easy to buy the big easy late in a bull market that a lot of people don’t wanna do it, so then they underperform. You know, a lot of people sit there and say, “Boy, you know, I ought to be doing something tricky.” That’s sort of a bull market. Find a needle in a haystack is an expensive game.
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Meb: A couple more topics I wanna kinda jump around to before we gotta let you go. A really quick hit that I think is interesting that you mentioned in debunkery, capital preservation growth is kinda an impossibility. And I think I tweeted about this. I think it’s particularly timely considering some of the market events in February. Maybe touch on that topic, maybe not too long on this one, but why you think that that phrase is not necessarily a good pairing?
Ken: It’s usually used to express confusion on someone’s part that they want upside but not downside. And the reality is capital preservation means the elimination of downside. If you eliminate downside, if you eliminate short-term volatility, you don’t get upside. And so the question is, how much? And that’s kind of the short answer to it.
Most people would say, capital preservation and growth, what they really mean is, I want upside but no downside, and you can’t do that. Therefore, it’s a kind of an oxymoron. And the person that believes in it is kind of a genuine moron. And the reality is, things that have higher returns in the real world and regular pricing are inherently gonna be volatile.
And therefore, there is a possibility of downside always. You know, that long-term history we’re talking about earlier of stocks is made up of that bull market part that’s kind of two-X the long-term average, and then all that negative that goes with it, and the blessedness that comes from owning stocks in the long-term includes all that volatility.
Meb: Yeah. The irony that I was mentioning earlier was that we saw a recently in February, a mutual fund company that managed, and I think in the billions of dollars, had a total wipe out of their fund, which was name of the fund is Capital Preservation and Growth in the name, and they were invested in a lot of these volatility products that lost I think 90% of their value, and so they shut down. But it’s kind of a sad example, but certainly it’s a good indicator that that phrase is, and in a Madoff sort of world, not something that probably is a great descriptor.
Ken: I wouldn’t get too carried away with the Madoff part. I mean, Madoff was a crook. I mean, you know, an intentional fraud is different than self-confusion, somewhat a different thing. You know, then going back to your February point, I think an interesting point after all this period where we didn’t have any real volatility, where we had below average volatility, is if you look at the global world, if you look at like the Morgan Stanley world, [inaudible 00:42:43] quite got to negative 10%. And yet people now kinda think that’s a big deal, which you know, in my lifetime like pretty much no deal at all.
And I can’t remember which books, but some of my books I’ve referred to 2% as, you know, what’s 2%? That’s Tuesday. And volatility is just…if you’re worried about what things are gonna be worth next week, next month, three months from now, you’re gonna make yourself way poorer 20 years from now. I mean, you gotta invest correctly for 20 years from now, that’s a different topic. But you know, volatility is your friend, it’s not your enemy if you use it correctly. And then this notion that you’re not gonna have downside over the next little bit and you want this growth without downside, that’s not the way the world works.
Meb: Yeah. I don’t think the media helps a lot you know, talking about there’s a lot of the headlines whether it be, “Dow down 1,000,” or, “Markets crashing,” and you say, “Wait. It’s only down 2%, 3%. This is the most normal. What are you guys even gonna talk about…5% isn’t even a crash.” So let’s get back to times where it’s been down 10% in the day. I mean, happened in Russia last week.
Ken: To your question about euphoria that we’ve never quite covered, just go back and look at the swing in media headlines in the last 10 days. And we cannot be in a period of euphoria now. If we are in a period of euphoria now, they’d be all kinds of things popping along that aren’t popping along, but the headline just in the last 10 days is in terms of going more negative has been breathtaking. I mean, you know, media, as you point out, is kind of biased on the negative, but that the swing in the last 10 days, it’s been stunning with no real bear there. Nothing important’s really happened.
Meb: Yeah. And to many, you know, people that what they’re…you talk a lot about this, but the events of the day often are not real risk because most of the market is pricing it in. It’s really the unexpected surprises, which by definition are usually impossible to forecast. We had a lot of people…I usually try to stay miles away from the Fed, but I don’t seem to…like I can’t help myself because so many people had been asking, wanting to ask you about central banks. And so, there’s a couple of Twitter questions were people were asking about as the central banks have gone from large the liquidity programs, can they reduce their balance sheets without asset prices crashing?
And in the same vein, people mentioned, “Ken often states our national debt isn’t a problem, but it may become a problem a certain level,” what about now? Our interest rate’s going up, is this gonna be a problem? And one of my favourite things that you published many years ago and updated more recently was this concept of a balance sheet of the United States. So, feel free to answer that question in any way you want. Is our debt a problem? Is there any risk to what’s going on in the Fed? And you can feel free to illustrate with the balance sheet as well.
Ken: Sure. So, first, you know, as William McChesney Martin famously kinda talked about, he was the longest running head of Fed ever, in the ’50s into late ’60s, and kinda famously said that, “When you become head of the Fed, you take a little pill and it makes you forget everything you ever knew and it lasts just as long as you’re head of the Fed,” which later became referred to as “Martin’s little pill” as a play on what used to be the famous “Carter’s little liver pills” that didn’t do anything.
And the fact is, Milton Friedman would have told you when I was a boy, that central banks are just bat shit crazy. And they’re gonna be bat shit crazy. And if you expect them to be anything but bat shit crazy, it’s wrong, and we always have, and we’ve had from ever, fear of losing the great head of the central bank that we have until we get the next one, and then the next one, and the next one, and they all do stupid stuff.
And central banks in the developed world outside of America, central bankers do stupid stuff. And the notion that they can fine-tune the economy through interest rate wiggles, Milton Friedman debunked again, you know, before I was old enough to read him. And the fact is, that was true then, it’s true now. Things are a little different now than they were then, but said simply, there’s the Fed on the one hand and then there’s the other issue, which has nothing to do with the Fed per se, which is debt.
And you know, debt comes from fiscal policy, and then there’s private sector debt, and then you can build a balance sheet out of all of the data of public and private sector debt, and America’s very far from over-indebted and most people don’t think of debt in a finance term. As I’ve written endlessly. Most people think of debt as bad, more debt’s worse, too much debt should go to hell, and too much debt and you do go to hell. But you’ve gotta actually think of debt in aggregate as a financial set of instruments used against the non-debt assets that we have as a total package that helps deliver a return for our society. And you say to yourself, “What’s the return on assets? What’s the burden, the carry burden of the debt?”
And so for example, if you look at U.S. government debt, which is the one almost everyone always talks about, most people aren’t sitting there worrying about how much debt does Amazon have, when you look at government debt, interest payments on government debt as a percent of GDP or as a percent of tax revenue, currently because interest rates are relatively low, are very low, are running half, literally half of what they were in the second half of the ’80s and the first half of the ’90s.
And part of that is that the debt’s higher both in an absolute sentence and its percentage GDP, but also it’s partly true that they’re not as much higher as people think they are. And it’s also true that the interest rates are lower. And to the question that was asked, yeah, interest rates are higher but they’re not nearly higher enough to cause a problem. You gotta get interest rates up across the yield curve spectrum more than one full percent from where they are before you’re gonna ever begin to even contemplate a potential problem. And that, when you think about how much of the extant debt schedule is fixed at a point in time, that’s gonna take years to do. I mean, can it happen? Can we have a problem with debt? Absolutely, we can have a problem with debt. But the mild up-tick in long rates that we’ve seen so far is a little bit like somebody spitting into a lake.
Meb: It’s really interesting because almost universally, this is an investment, economic, whatever you call this financial position, that I think is almost universally on the opposite side, where most people think of debt…almost everyone thinks about it in terms of their own personal sort of construct, where debt is bad, and if you have too much debt you’re gonna go bankrupt, and yada, yada. But it’s kind of a different scenario for the government. And the way that Ken presents it, listeners, I think is really useful, where you think about returns. And you know, if a lot of the assets, you know, the U.S. is producing, and capitalism is earning, you know, outstrip a lot of the costs, it’s a positive carry, and quite a bit of a positive carry as well.
Ken: If you think about that return on our equity or the return on our total assets including debt based on normal accounting, of which of course normal accounting is not terribly accurate, they’re double-digit returns. Where the interest rate is the numbers you know. To get double-digit returns at 2%, 3% rates across the [inaudible 00:50:13] spectrum is that…I mean, that’s a great trade-off. It’s the same conundrum people have…in my “USA Today” column this week, I talked briefly about the stupidity of the senate, democratic senate bill that was introduced, SB2605, where, you know, they would like to eliminate the ability of public companies to be able to buy back their own stock in the marketplace.
And the fact of the matter is, they do that on the basis they but think that the money should be hoarded and used instead for wages and infrastructure development and capital investment, da, da, da, da, da, da, da. But the fact of the matter is, they kind of missed the point that if you take a triple-B rated bond and you think of that as a pre-tax cost, and you take the inversion of the PE and you think about an after-tax cost, and you borrow long-term money and buy back your own stock and destroy the shares, it’s effectively 100% mark-up in moment one. And that 100% mark-up is free money to the corporation.
And they moan about corporations buying back their own stock. The one is a form of capital investment done on borrowed money, it doesn’t deplete at all from the company’s ability to use operating profits and/or other borrowed money to do capital investments or to pay employees or to spend money on research, or, or, or, or. And when they do that buy-back, the money doesn’t disappear. It goes right back out into the system and gets re-circulated to the people who sold the stock, who then spend it on something else, and you either get the concept how capitalism works and relative rates of return and trade-offs and free will in free markets or you don’t.
And that 2:1 ratio of today’s earnings yield versus a triple-B bond rate adjusted for taxes is such a compelling argument that people have a hard time with the rationality of it. And of course, then you extend that, as you said, to the public sector and they can’t quite get it all because of the, you know, traditional notion from the 1980s of the $500 hammer that the government buys. The government can do all the stupid stuff it wants, but the moment it does that stupid stuff with the money, the money goes into the hands of some relatively normal person who spends it five more times that year in relatively normal ways, buying things for their kids or investing in something, or, or, or, and it’s not as good as if that money was spent the first time by a really smart borrower from a bank with a really smart expenditure, but they only get one stupid spend before they lose control of it. And then you get a multiplier effect.
Meb: I was having a really hard time with this, trying to, you know, come to grips with just how much of a fundamental misunderstanding there is of lawmakers and politicians but the general media as well views buy-backs. And I mean, it’s really a Finance 101 topic. And so many people, they’re like, “We need to outlaw buy-backs. And I was just shaking my head. And I said, “Well, you’re you gonna outlaw dividends as well, because generally, they’re pretty similar? Or are you going to incentivize companies to issue shares?” And so then you’re just…what are you trying to do to incentivize companies to force them into certain ways of using their capital? And going back to…and they say, “Well, no. We need to force them to do more investment.” I’m like, “Now, you’re starting to talk about socialism.”
And it’s like the old joke. I don’t know if it’s a real story, but the Milton Friedman, when he was driving by a group working on, I think, the railroad and they were using shovels instead of modern machinery. And he asked, “Why are these guys not using modern machinery?” And they said, “Well, we need to encourage a lot more employment.” And he said, “Well, why not use a spoon then?” And so, I think I wanna be an optimist and say, these politicians have good intentions.
Ken: Of course.
Meb: But it’s so such a fundamental, poor amount of understanding of basic corporate finance. So many of them said, “Well, no. We need to control CEO pay.” And it’s been empirically shown, you know, that buy-backs may target a higher EPS in the short-term, in the very, very short-term, but that’s actually a board issue, that the board should come up with a better compensation structure than tying it to EPS in the first place. Anyway. You’re kinda catching me on a rant, on a hot topic for me because it drives me nuts.
Ken: Well, you’re 100% correct though. I mean, CEO pay should be dealt with based on supply and demand factors for the kinda CEO you got there, which is a very specific thing. And I don’t believe boards often handle that well. I think they often handle it badly, but some boards are gonna handle it well. And that’s a different thing to deploy this as a tactic to try to deal with CEO pay or to deploy this as a tactic hoping that it’s gonna impact wage rates is a little bit like, you know, saying, “We’re gonna fix broken bones with a hammer.”
Meb: Politicians are gonna politic. So, a couple more quick hits. I’d love to keep you all day but I’m sure you’ve got some other things to do. Recent “USA Today” piece, you talked about housing. And this is probably of the individual investors I talked to, almost across the board, they universally believe that housing is one of the best, if not the best, investment. Maybe talk a little bit about that, about your article recently in “USA Today.”
Ken: So actually, those two articles that I did on housing, two weeks apart, got more clicks than any “USA Today” columns that I’ve written, by a lot. And the commentary and other responses were 95% hostile and telling me what an idiot I am. And I already know what an idiot I am, so I don’t really need education on that. Or maybe I’ve got that wrong because I’m idiot.
But the fact of the matter is that very few people, almost no one fully account for the full cost of housing. They all tend to think sort of like, “I bought the house for this on a mortgage. I paid this, and now I’m selling it for that. And see, it’s way up above from where I bought it so it must have been a good investment.” And the first one that I wrote wanted to make the point that you really need to account for the full costs. All of the features including home insurance and taxes and, and, and, and, all that stuff detracts from your return.
And when you put those all in, it’s actually much lower than you wanted. And then I didn’t articulate well. I used the county that I came from originally that I was raised in, which is one of the hottest markets in America, over the 10-year time period. And I said, “You know, here’s the return.” And then people thought I cherry-picked that because it was a low return. In fact, I cherry-picked it because it was a high return but I didn’t really explain that very well.
If you actually look at lots of the places in America, returns over long periods haven’t actually been that good once you fix in the cost. And there’s all kinds of websites you can go to, to approximate what those total costs are. And then there’s a point that nobody wants to accept, which is that there’s actually hard data on all 50 states on ownership versus comparable home rental rates.
And in fact, it is always vary state-to-state of course, but it’s always much cheaper to rent a home than to buy that same home. And then people say, “Ah yeah, but when I buy the home I’m not paying the rent.” Well, the average homeowner in America owns their home for 10 years. And in the first 10 years, approximately 15% of your payments ever go to principal, 85% are almost exactly the equivalent to rent, and particularly now in the post-new tax law for most people. And so when you look at that, people say, “Oh no, no, no, no, no, no, I couldn’t possibly…I mean, you couldn’t rent my house. I mean, gee, not my house, not my house, not my house.”
And then they’ll say, “Well, then, why is it that people buy houses to turn around and rent them out?” And the answer is, because they don’t fully account for the costs when they do that, and what they’re hoping for is appreciation, and they may get that appreciation, which may be a little or a lot but it’s always a lower return than…not always, almost always a lower return than they think they have once they have it to they didn’t account for the full cost. And really, the first one that I get was just trying to urge people to do full accounting. I mean, why fool yourself?
Meb: Yeah. It’s easy to forget about the…we just had to…I’m a renter, but we just had to move out of our house for four months for a back-to-back termite then black mold sessions. So I think that cost the landlord probably $10,000, $15,000 I imagine. But a lot of people don’t think about those things and costs.
Ken: People responded to my first column saying, “I bet you own your own home,” which is actually within the second sentence of the column saying, “Look at what I fool I am, I own my own home. As an investment, that’s a silly idea.” But why do I own my own home? As I said in the piece, “Because I can afford to.” I don’t think of it as I’m doing it for an investment purpose. I’m doing it for a convenience purpose just like I own my desk. I don’t think of my desk as an investment either.
Meb: I think Jason Zweig had a good comment, maybe his article about something like, you know, a home is an asset not an investment. Man, he’s kind referring it to not necessarily as a financial asset, you know, a place where you can make a lot of memories, and you build a family and have a home base, and all the wonderful warm, cosy feelings, but not necessarily optimizing on pure investment return as the main reason to buy one, which I think is pretty, pretty solid advice.
Ken: Jason Zweig almost always says great things. And he’s a great guy. And until he did that piece in your book, I didn’t appreciate his childhood experiences. He’s a very unusual guy. And I’ve known him a little bit for a long time. And, it’s rare that whatever Jason says isn’t pretty right on.
Meb: He’s great. And another common friend we have, which made me think when you’re talking about all the comments because I do my very best, it’s hard to, but not read the comments on Twitter and message boards and everyone else, but our friend Barry Ritholtz says, “You should never read the message board in the comments because that’s where intelligence goes to die.”
But it’s interesting you say that about the react-o-meter on the housing piece because it gives pretty good insight on to the sentiment, and that’s a pretty widely held universal belief that housing is this phenomenal investment. The only comment I will make is the possibility of housing, if someone, if he keeps them…if it’s automated and it keeps him from doing something dumber with that money, and it’s an automated way for them to save that they otherwise would spend, may be a good idea.
Ken: Absolutely. And that’s just parallel to, for example, the Dalbar studies that show that people that invest in load funds do better than people that invest in the same firms comparable no-load funds. Why? Because the people that buy the load funds feel imprisoned by the load and so they don’t in and out of them. The people that buy the no-load funds treat them like trading vehicles, and you know, the holding period is much shorter, and they’re in and out of them at all the wrong times.
So even though the no-load funds do better than the load funds overall, the holders of the load funds do better than the holder of the no-load funds because the people that hold the load funds hold on for so much longer. And they get the delivery of the bad medicine and they swallow the bad medicine, bad tasting medicine that’s good for them, whereas the no-load folks just don’t hold it down that long and they wretch it back up. And I don’t differ that for some people, a house might be a good investment because they might hold it for 30 years. The average older holds it for 10 and even then 10’s more than most people hold most investments for. And a home’s a wonderful thing.
Meb: I laughingly talked on this podcast a number of times about a mutual fund that I would wanna start where, you know, it’s a simple asset allocation or stock fund or whatever it maybe, but a good solid investment methodology, but you have a 10-year lock up. And it’s a declining load where in year 1, some obnoxious amount like 10% fee because people are always saying they have a long-term horizon but they really don’t. So, say, “Look, you need to lock this up for 10 years. And if you panic and wanna exit year 1, you’re gonna pay a 10% load, and then it declines each year all the way to 10 where its 0%.”
So you have the penalty side of the equation, but on the benefit side is you actually return that as a dividend to all the other shareholders who stayed in the fund. I think that’d be a really impossible fund to ever market but I think it would probably generate some good behaviour. So, if Fisher Investment wants to start that fund, feel free. I think we would get sued too quickly if we did it.
Ken: I don’t know about the sue part but I think you’re right about that it would be nearly impossible to sell, and on the other hand, take advantage of the fact that people are inherently too myopic.
Meb: All right. Two more questions, real quick ones, because we’ve already held you longer we said we would. So, question we asked everyone for the past year, Ken, what is your most memorable investment? First thing that comes to mind over your career, it could be good, it could be bad, it could be heart-warming or heartbreaking, what comes to mind?
Ken: My very first stock was a Florida land developer called Tolam [SP] Properties. It was a 10 to 1 shot on the wrong way. It basically lost 90% of its value. I couldn’t see what’s going. It was a great learning experience. The amazing thing is, I think that on average, it is probably true that people who have their first stock that they really think they’re decent to do badly but then they continue in the realm probably do better than people who have their first stock do wonderfully and then they continue in realm. The spread being, how eager are you to learn from your mistakes?
Meb: We often say, and we we’ve had a similar response from a lot of old-timers on the podcast, that you know, almost every, to a T, trader has had that real, visceral, big loss. At some point, hopefully early in their career, because if they have the opposite experience where…and a lot of young millennials right now, as an example, there’s a lot of surveys say they expect over 11% returns because they’d never really experienced a bear market or really losing money. Hopefully you have that experience when you’re young and not a lot of money, the pain of a big loss because it can certainly colour, I think in a good way, your investment education and career going forward. Last question, thinking you still play “Red Rooster” on guitar. When was the last time you picked up a guitar, Ken?
Ken: I haven’t played guitar in a long, long time, but I’m sure I could play a “Little Red Rooster” with my eyes closed. I don’t know how well I would play it, that’s a different topic. And it would be a question of what tuning I was in. I used to play mostly in D or E open tunings slide and bottleneck. And as you’ve discerned from checking out my back pages, “Little Red Rooster” was just about my all-time favourite. And I basically loved blues, blues-rock, and particularly, you know, what I did was slide. And you know, I have great memories of that. But everything’s age-appropriate, and I don’t really see myself at my age as running around playing slide guitar anymore.
Meb: Yeah. Well, I listened to it for the first time yesterday. It was great. And we’ll get Jeff to add a little snippet to the…
Ken: You’d never heard “Red Rooster” before?
Meb: No, not in…and I think I listen to the Dixon version, is that right?
Ken: Yeah. Well, Willie Dixon wrote the song. But you know what you wanna do, it’s been done so many times by so many great people, but literally, this is an opinion of course, I don’t think it’s ever been done in a way that really moves more people than the Stones version. I mean, Keith Richards’ rhythm guitar on “Little Red Rooster” is just to die for.
Meb: I’ll check it out.
Ken: Check out the Stones doing “Little Red Rooster.” Whether it’s one of their recordings of it or whether it’s them doing it live, I mean, it’s a great performance of a great song.
Meb: By the way, listeners, Ken and I are both speaking at the IMN [SP] conference down in SoCal in June, so come on out and say a hello. Ken Fisher, it was so much fun today. Thanks for taking the time out to chat with us.
Ken: Thanks for having me on, Meb. It was fun.
Meb: Listeners, we’ll add show notes to the podcast at mebfaber.com/podcast. You can always subscribe to show on iTunes, Breakers, Stitcher, all those other good sites and apps. We’ll add show notes, links to Ken’s books, links to Ken’s articles, everything as well. Thanks for listening friends, and good investing.