From another forum: Fisher and Cut Bait...
As previously reported, Fisher went from bearish to fully
invested recently. Hard to believe he went fully long
without at least hedging some his bets but anyway even the
top pros are struggling with this market environment so
some of you might be interested in his "mea culpa". See
excerpt from client communique below.
Regards,
Phil
Subject: Fisher Investments, Inc. - Message from Ken Fisher
"Dear Fisher Investments Private Client,
First, let me apologize. Our recent performance has likely disappointed you. With all good efforts and intent, and with Jeff and Andrew, but led by me, we entered into a carefully considered decision that at this time can be
measured as either flat out wrong, or just way too soon. We will talk about both those below, but first, let me just say that I, too, am very disappointed in performance and sympathetic with your frustration. I'm sorry and I wish
the outcome had been different. The buck stops here and this time the buck started here as well.
In a long career, I've been mostly very fortunate. I've always said, "I always know I may be wrong." And I've been wrong a bunch, but most of the last 20 years I've been more right than wrong and sometimes lucky. In many columns
I've attributed a great deal of past success to luck. My name is Kenneth L. Fisher and, jokingly, I've often said the "L" stands for lucky.
Well, maybe I need to change my name to Kenneth M. Fisher where the "M" stands for mud because I'm clearly wearing it on my face now. A few of you have written suggesting that what we did was really dumb. Well, take comfort in the
notion that "Mud" spells "dum" backwards, and right now I'm feeling pretty backwards and appear to be pretty backwards. Somewhere between luck and the Great Humiliator I seem to have taken a bad turn here and that has impaired results, and I am sorry to you for that. I always try to do the best, to win. I'm very competitive. But this time, so far, the result has been different.
Now contrary to what we've heard from a very, very few clients--this was all in good intent. Many more of you expressed surprise that we would move as fast as we did. Actually, we have continually said throughout the period we were bearish that when we turned bullish we would likely equitize far faster than you could envision. We never suggested it was likely we would do it slowly.
Often in client seminars when asked about that I said we might do it as quickly as a few hours. As it turned out, we just did it in the wrong few hours.
Quite rightly many of you have asked for further or different explanation of how we made the decision and what went wrong and how things look to us now. Fair enough. More than fair enough. You certainly deserve that and more.
Well, first it happened basically as we described it in our last e-mail to you. If you have lost that, then contact your Investment Counselor and he or she will gladly re-send it to you. But let me re-cap. In the first week of May,
the market sell off that began in early March reached a point that surprised us. Several things that we use to measure overall demand for stocks hit lows that are rare.
One in particular that we fashioned some years ago, that we refer to as the Run Strength Indicator, has a good history and is a good overall demand measure and got to levels that are exceptionally low. Because demand bounds within the
bandwidth of our collective human emotion, when it gets too low, too long, there is a tremendous tendency for it to soon bounce back towards its mean, causing the market to rise as demand does, even if only temporarily. Seeing the
late April, early May market drop cause so much apparent drop in market demand, to levels that are too low, we saw that as a sign the end was here or close at hand.
When these things have happened this way before, our research shows that the subsequent big bounce has begun sometime between immediately and 38 days. That isn't very long. At the risk that it might happen immediately we pushed ahead because we decided there potentially was more to lose from waiting. Turns out we were wrong, particularly in the short term. As one client wrote, we are now 23
days into the 38 days and so that means there are 15 days left for the rally to begin and us to be vindicated, sort of. Well, sort of. In the past, 38 days was the longest it took for the rally to ignite. But there is always a longest
and a shortest. And any time next period will always be the newest and could be new shortest or longest. There is no reason this time might not end up being the longest yet--at, suppose, 41 days, and that wouldn't be very different
from the basic principle we were laying out. Not optimally satisfying, but not very different.
It isn't clear at all yet that the basic analysis will prove to be wrong a few months from now. We told you then that stocks could continue to fall in the short-term. We just didn't particularly think they would, or so far.
So, where are we now? Well, for starts, I'm in the late stages of writing my next Forbes column for submission on Monday. Because I put my best prose into Forbes, I rarely say anything better than I do in Forbes. To sense my
thinking let me simply quote for you the beginning of my draft of that next column:
"It is finally time to get fully invested, although maybe only temporarily. Investors have dug down into pessimism too far for stocks not to pop upward nicely. My shift may surprise recent readers, who have seen me unremittingly
bearish. But bear markets only last so long. Why now?
"Among the most basic market rules is that the market discounts all known information. To be bearish you must see bad things others don't. One and two years ago I could (see prior columns on my Forbes Web page). Now I can't. Simply agreeing with others about the world's evident evils won't
hack it.
"What is so horrific now? The global economy is no longer collapsing. Layoffs happen but have largely laid off. Corporate scandals abound and everyone expects more ahead-so that is discounted into pricing. And we know the
terrorists will be terrible-our government now guarantees it for us-so terrorism can't impact markets much. And everyone knows the market isn't statistically cheap,
so valuations won't impact pricing. What will? Something basic.
"Stock prices derive solely from shifts in supply and demand for stocks, nothing else. We can't think that way because our information-processing capability was
hard wired between the ears eons before stock markets. None of us arises daily, gleefully contemplating supply and demand. No, our psyches evolved to deal with hunting and gathering-and their functional replacements, like earnings
(rain), interest rates (wind), politics (tribes), trends (seasons), demographics (squalling kids), and demagogues (neighboring chieftains). We don't focus on supply and demand for securities. That's alien.
"In the short term, supply is heavily constricted, tied as it is to the regulatory processes associated with its creation. In the long term, supply shifts freely and is the prime price-setting force-and our brains can't and
won't begin to comprehend that (more on this next month). In the short term, since supply is constricted , it is demand's bouncing around that sets prices. Demand is a function of our collective emotion.
"Emotion only gets so gleeful or dour; when it is too extreme for too long, we regress toward the middle.
"Demand fell apart in May having imploded after a very long, lousy market. Lots of capitulation came with the last down-leg starting in March. Hence, with demand too low, it will rise and with it stock prices. How long? How far?
Uncertain. It may be an up move of only a few to 12 months-then rolling over again into more ugliness. Or, it may be a real, new bull market. Either way, it should last long enough to vaporize the emerging consensus that stocks can't
have a major up-move soon. Meanwhile, buy some stocks, make some money. Life is good. It just doesn't feel that way to everyone now."
End of column----
So, having given you my basic thinking let me stretch out a little on that. Either we were right in the basic intermediate term but wrong in the short-term and the bottom is soon, or we were simply wrong overall and the bear market has a long way to go. Obviously I don't believe the latter. Demand for stocks is just too low right now.
It has now been the longest bear market since World War II. It is hard to envision that the longest in a long time gets much longer. Few folks see much to give them hope. That's always a great time to buy. But life isn't that bad.
Many of you have been exposed to my often cited Rule 4 from my April 24, 1995 column entitled, "How to tell a bull from a bear". Let me quote you the rule:
"4) Never stay bearish longer than 18 months; 12 months in any but the most extreme situations. Most bear markets last about a year. If you are bearish and prices don't fall in a year, you are obviously seeing ghosts. If you do hit it right, and prices fall, force yourself back in after a year. You may not hit the bottom but will have missed plenty of the drop and won't miss the next bull rise."
Note, having been bearish 18 months, in among the most extreme of situations, we were on the right side of things for a long time. But this bear market is monstrously old and in my opinion going through its death throws right
now.
Recall our long-stated analysis, stated in every client lunch for years,
about
how the market only faces four possibilities at any time: up a lot, up a
little,
down a little, and down a lot. That's it.
(If you don't re-call that framework something is seriously wrong in the
communication process and rather than go through that again here you
should call
your Investment Counselor, have him or her contact your ICTL--see below
for
details on how to do this. And have your ICTL take you through the four
phases.)
But a basic rule of procedure is that when we think the market will be
up a lot,
up a little or down a little we want to be fully invested and simply try
to put
some distance on the benchmark we're managing against. The only time to
be
defensive, in terms of de-equitizing, is when we envision down a lot.
But after
having the market come down so much since March, 2000 it is hard to down
a lot
now.
Some clients have asked what do we mean by down a lot versus down a
little.
Well, normally in bull markets you have repetitive counter-trend
corrections of
more than 10% but less than 20%. And they are best avoided. They are
less than
a bear market. We have always said we would ignore corrections. They
are
short, sharp, come out of nowhere, and disappear as quickly. Well, we
think of
anything correction-sized or smaller as basically a sub-set of down a
little.
We don't think the market has anything like 10% on the down-side from
here.
Could we be wrong? Of course. But we've been doing this stuff a long
time,
have a much better record than most at sensing both up markets and down,
have
better but imperfect instrumentation (market science) than most of our
peers
(see below)--and I would be surprised as the dickens if there is another
10%
down from here. But a little later I'll talk about what that would
require.
SHIFTING GEARS #1:
Finance theory is quite clear that you can't make excess return in the
long-term
outguessing everyone else based on the same information everyone else
has. If
you try to you will sometimes be lucky, more often unlucky and overall
do worse
than had you made no decisions at all. That is what I'm referencing in
my
column draft, above, when mentioning that the market discounts all known
information. In theory to make long-term excess return you must know
something
others don't, which is hard to do. How would you do it? Most folks
don't even
think about it, which is the most basic challenge in markets.
If you have been to our client seminars you've heard me describe that we
strive
to do that through developing market science. Just as people didn't
know much
about how to make semiconductors 30 years ago compared to what they now
know and
don't know as much now as they will 30 years from now, we believe folks
know
little about how markets operate compared to what can be known 30 years
from
now. Our goal is to develop the market science or capital markets
technology
faster than others to try to address two basic types of questions
consistent
with finance theory.
The first question which I will call, "Type 1", is: "What are examples
of
everyone believing X causes Y, but we can prove it isn't true so when X
happens
and people move to bet on Y, we can bet against Y?"
The second question, "Type 2", is: "What are examples of no one knowing
that W
truly causes Z so when we see W we can bet directly on Z?"
Sometimes this is referred to as market science and sometimes the state
of
capital markets technology but our goal is to answer these two questions
faster
and earlier than others through basic research so we know some things
about how
markets operate that others don't know and thereby have the core basis
for
making long-term excess returns. In the last two decades we've answered
these
two types of questions many times. Each time we're building an arsenal
of
proprietary market science-something we own that others don't have and
don't
know how to use that gives us an advantage. Internally we link that to
our core
long-term business purpose which is to become the, "Globally Dominant
Developer
of Market Science Aimed at High Net Worth Asset Management". If you sit
with
any of our employees, they all have company pins which in tiny print at
the
bottom says, "GDDMSAHNWAM"--our mantra, which stands for, "Globally
Dominant
Developer of Market Science Aimed at High Net Worth Asset Management".
We
believe in this completely.
Personally I'm very proud of the work we've done over the years.
Ranging from
the development of the PSR 20 years ago, which is an example of a "Type
2"
question solved, to a variety of things we've never shown anyone yet--we
have
steadily pushed the edge of market science and see that as our prime
goal: To
push science to build practical technology. It is personally the reason
I still
do all this stuff. Because that is the fun and satisfaction of it.
A few examples of the many things you've seen us do over the years but
may not
have thought of in terms of developing proprietary market science and
technology:
Type 1 questions:
1) Everyone thinks high P/E markets generate below average returns but
we think
we've shown that actually market returns are relatively random
relative to
P/E levels and actually uncovered that theory says they should be
that way.
2) Ditto for all other valuation measures.
3) Everyone thinks market volume has predictive power-wrong. Our
research shows
zero effect.
4) Everyone thinks $10-20 billion cap stocks are big cap (they aren't,
we've
found that they act 10-20% as big as the overall market).
Type 2 questions:
1) Our very old, "Luck Runs in Threes" Presidential cycle research and
implications.
2) The shift from growth to value or vice verse is driven by shifts in
the yield
curve. No one gets this.
3) Sentiment Bell Curves as measures of market demand. Very
proprietary, basic
and big.
4) When big cap does better than small cap the 35 largest stocks do best
of
all-size effects are relatively monotonic-we juiced the late 1990s on
this
one.
These are just a few examples. But think about them briefly. Take
number two
of Type-2. While true, there aren't always shifts in the yield curve
going on,
so often that is something we know that others don't that simply does us
no good
at that time. Likewise, considering Type-1, number one, when folks are
phobiated about valuations, it becomes useful. But when they aren't it
isn't
very useful at all.
What I can't decide right now (and regularly can't) is if there is
something
fundamentally big and bad going on right now that I can't see and that
most
folks can't see, in which case all the rules stated above about why
down-a-lot
is unlikely go out the window--or, if there is just enough going on to
make our
Run Strength Indicator, which is simply the most recent example we've
shown you
of a Type-2 question, answered, take longer than normal to work. I
think the
latter but can't be certain because the former is based on something I
can't see
and so how would I know about it.
**********************************************************
Speaking of what I can't see or know, I can't know all your questions or
concerns. Later in this memo there is a long description of how to
address your
concerns so they may be heard all the way up to the top of Fisher
Investments,
but I'd like to make you a simpler offer first. I've described here the
basics
of my thinking right now as best as I am able. If you have specific
questions
I've not addressed to your satisfaction which is both likely and
reasonable,
e-mail them to me or to your investment counselor in the next three days
and
I'll respond next week (probably Friday) with another e-mail answering
all the
questions all of you have submitted. Please try to keep them short and
precise
so I can get to them all, but if you can't, do what you can. And if you
don't
ask, I can't know you're wondering.
**********************************************************
SHIFTING GEARS #2:
Next, whether tied to this recent activity or anything else, it is
important you
know how to express and feel comfortable expressing your concerns and
complaints
to us and getting them taken care of when they haven't been resolved to
your
satisfaction. One part of what we do is managing money. But we must
deliver
service also.
A lot of our activity is like being an airline. We know pretty well how
to get
the planes to your specific destinations with overall safety, but there
is a lot
we can't control and sometimes we're late, have the equivalent of severe
weather
problems and equipment problems, and suffer a lot that is way beyond our
control. Still, we need to try to make you as comfortable during the
flight or
the wait-at-the-gate as possible. There isn't any excuse on our end for
inadequate service, although it happens sometimes. We regret that. I
regret
that.
You know you have two normal, principal service relations in the firm.
One is
your Investment Counselor (referred to internally as an "IC"-we want our
service
machine to hum like a computer and computers are also built of ICs--it
is a kind
of internal symbolism since we link a lot of internal concepts of
capital
markets to market science which is parallel to computer science).
Your IC sits in California, in front of the computer screen and is a
service
person for you--your primary, day-to-day contact, and should be fully up
to
speed on your account.
Then comes your Outside Service Person (known internally as an OSP), who
resides
in your area or comes to your area regularly and can meet with you on a
sit-down
basis, face-to-face, if you desire. Usually, this person is the person
with
whom you initially signed your client contract and took you through the
discussions that made you a client. If that OSP left the firm for any
reason or
you came to prefer someone else, another OSP was assigned to you.
You know your IC and OSP commonly and probably feel pretty comfortable
with
both. If you don't know both these people something is wrong. Then,
you should
ask the one you do know about the other one and get to know both. They
both can
be useful to you in their individual ways.
But suppose you talk to these two and you have a complaint or concern
and don't
feel it has been handled to your satisfaction. What should you do?
You can directly communicate your concerns all the way to the top of the
firm,
which is me, but that probably isn't necessary. In fact, I'm always
very
disappointed when it is necessary. Let me explain.
The best way to proceed if you're not happy with answers coming from
your IC and
or OSP is go up the IC hierarchy toward higher levels in the firm.
First, ask
your Investment Counselor to speak to his or her "team leader".
The Investment Counselors all operate in teams overseen by one of seven
Investment Counselor Team Leaders (referred to internally as an ICTL).
Routinely
you should feel free when unhappy with what you're receiving from your
IC to ask
to speak to his or her ICTL because effectively that is your ICTL. An
ICTL has
no magic powers relative to the ICs. For example, the ICTL can't adjust
your
fees or change your portfolio. But the ICTLs have been around longer,
are more
experienced and may be able to either understand your concern better,
communicate back to you better so you understand our sometimes
convoluted views,
or communicate to others in the firm better, acting as your liaison, to
get your
problem solved promptly. One specific power the ICTL can deliver for
you is to
commence the process of getting you a new IC if that relationship has
bad
chemistry or just doesn't seem to work. Still sometimes none of this is
enough.
Then go to Matt Cook.
The ICTLs report to Matt Cook, one of our two Assistant Directors of
Client
Services. So, if you don't like what the ICTL says or does for you,
buck it up
to Matt. Matt does have powers the ICTLs and ICs don't have. Actually,
you
shouldn't really need to ask for Matt because the ICTLs should know when
Matt
needs to be pulled in (when there is something they can't get done for
you)-and
the ICTLs should sense that and pull Matt in own their own. But, still,
if they
don't or you're not happy with the ICTL's actions, grouse to Matt.
You're
getting close to the top.
Above Matt is Luis Gutierrez, Director of Client Services. Luis can
bind the
firm, adjust fees, flat out fire employees on a moment's notice (or
resign the
relationship with you if need be), jerk almost anyone around, and do
pretty much
whatever he darned well wants. But he is a very reserved and controlled
kind of
guy and whatever he darned well wants is always pretty darned rational.
Anyway, all of Client Services operating in California reports to Luis,
including a lot more than what is described above. Luis is a senior
officer of
the corporation reporting directly to our three person Office of the
President--which you may recall is made up simultaneously of Jeff Silk,
my
partner of 19 years and our two Assistant Presidents, Steve Triplet and
Andrew
Teufel. They operate interchangeably and are the operational power of
the firm
in all regards. Anyway, if you aren't satisfied with what Luis can do
for you,
contact Steve, Andrew or Jeff.
After that, if you still have not found satisfaction, contact me.
Ultimately
the buck stops here. But I am less able than they at operational
functions and
service always. I will do what I can but if Jeff, Andrew and Steve
couldn't
make you satisfied, I am not likely to be able to do it either. And that
is
exactly why I get disappointed when I have to take a client
complaint-because I
know we probably won't be able to make the client happy and that is our
goal, to
make you happy with our service.
So, to summarize that:
First talk to your IC and OSP
Next the ICTL
Next Matt Cook
Next Luis Gutierrez
Next Andrew Teufel, Steve Triplet or Jeff Silk
Finally me.
Anytime you have a complaint, you can e-mail or call 800-550-1071. That
will
get to all of us including your IC. Your IC can give you the e-mail
address for
anyone. If you don't know who your IC is e-mail me and I'll let you
know.
If for some reason you decide to skip the ICTL and Matt and go straight
to Luis,
Jeff, Steve, Andrew or me--fine. But I warn you, we will simply loop
the others
back into it. Why? Because at that moment we may not know anything
about what
has gone on in your servicing other than what they tell us or you tell
us. To
deal with almost anything there is a bunch of background leg work that
must be
done and we will get them to do it. So we have to go back to them to be
brought
up to speed. Usually, in most standard problems we become superfluous
anyway and
they just fix it. And if it is fixed, you're happy.
Finally, let me re-iterate that we have for years had a steady stream of
client
seminar lunches which you are welcome to attend. We do these all around
the
country, doing three a month on average, covering the countries' 35
largest
cities in the course of the year and thereby within a two hour driving
radius
98% of the American population and overwhelmingly most of you. In our
last
review we gave you the schedule for the back half of 2002. I'm doing
most of
them. Andrew Teufel and Deglin Kenealy (to whom all the OSPs report) are
doing
the others together--coming next week to the mid-west.
You are welcome at any and all client seminars. Many of you are close
to
several. For example, next week there are four in the mid-west. If you
really
prefer Chicago over Milwaukee or vice versa, that is fine on this end.
We think
of you as naturally closest to one city, but that may be a bad date for
you, and
these two are just a short car ride apart.
Ditto for seminars in east and west Florida, for example. Or Los
Angeles and
San Diego. Or Washington, D.C. and Baltimore (early July). Even
London, if you
like, in November. We don't know where you may be because you may be
traveling
or go on vacation or whatever.
But we've given you the schedule for the year (you got it last in last
quarter's
written review). You are welcome to attend any or many of these--as you
chose.
You're routinely invited to the one closest to you. But if you want to
go to
any of the others just pick up the phone and call your IC and he or she
can make
that happen. If you've lost the schedule, pick up the phone and call
your
IC. I've heard a few clients say they thought they weren't welcome.
Wrong! You
are and if you get any sense from your IC that you're not I'd like to
hear about
it personally.
Anyway, thanks for putting up with this very long-too long--diatribe.
I'm looking forward to the next month and the rest of the year."
Ken Fisher |
