How to be a contrarian. Firstly, neither follow the herd, nor go against it
Kenneth Fisher is one of the longest-running columnists in Forbes
magazine and a self-made billionaire. With 1,000 people in one campus in Washington, 600 in California and 400 in the five other continents—mostly in Western Europe—Fisher runs a huge fund management business, managing over $68 billion belonging to 100 institutions and thousands of individual investors. He ranks 240 in Forbes
’ list of billionaires, with an estimated net worth of around $3 billion. Ken’s father was the legendary value investor Phil Fisher, a contemporary of Benjamin Graham. Most of Fisher’s books have been reviewed in this magazine. This is his 11th book. His speciality is debunking many investing myths. His latest book, Beat the Crowd
, is as fascinating as the previous ones, even though many facts in are similar to his Debunkery
or Only Three Questions that Count.
Why do so many people lose money in the stock market? “Few truths are self-evident, but here’s one as close as they get: in investing, the crowd is wrong much more often than right,” says Fisher. Most people follow the rest of crowd, go by popular opinions which steers them the wrong way. So, should you go against the crowd, given that they are almost always wrong? The way to make money in the market is not to always go against the crowd. The true contrarian neither follows the herd nor goes against it. He, or she, is an independent thinker steering clear of the many myths and misconceptions that lead people the wrong way. But, to think independently, you need access to enormous research that can separate the myth from the fact and continuously test new evidence and hypotheses. With hundreds of researchers, Fisher is able to test out every bit of useful and useless information round the year. Gems from that rich research are available in each of Fisher’s books. This one is no exception.
One of the gems of this book is that the market does not care for anything that is less than three months for the short term and more than 30 months over the long term. In other words, what happened yesterday is pure noise, as is what will happen the next week or month. Similarly, long-term forecast that goes beyond two-three years is pure bunk. Too many factors could change in between and unseen factors could emerge. So, focus on the market and economic climate, the three-to-30-month timeframe.
Fisher, who popularised the price/sales ratio to select undervalued stocks, believes that the market is somewhat efficient. It is, indeed, continuously pricing in all available information. The book tells you what you should not be worried about, because they are already ‘in the price’. If everybody else is worrying about something (Greece or China), you don’t have to because they’ve done it for you; and it’s been priced into the market. This does not mean that the market is perfectly priced. He gives examples of how, apart from bulls and bears, there are elephants in the market that reflect great opportunities or bad risks. Most investors overlook the huge elephants ‘hiding in plain sight’.
Fisher, who has been writing the ‘Portfolio Strategy’ column for Forbes magazine for more than 30 years, has done extensive statistical tests of different popular investment notions and found them of dubious value. On the other hand, he has discovered several contrarian investment themes that have worked well, so far. For instance, value stocks and small stocks do well early in a bull market while growth stocks and big stocks do well late in a bull market. Also, companies with very fat operating profit margins are strong late-market performers. For decades, people have completely forgotten about that. This is an elephant in the room.
Fisher has consistently pointed out that most investors get negative too quickly because they forget the past and pay attention to the media chatter which enjoys scare-mongering. He gives a long list of supposed events, assumed to be negative for the market but aren’t. This is an Indian edition and priced reasonably. A must read.