Human nature doesn’t fundamentally change, and thus neither does investing, says Aaron Anderson in ‘The Making of a Market Guru’ (www.wiley.com). There will be differences to be sure, but the differences will undoubtedly be outweighed by the similarities, he adds.
The book is a celebration of the monthly contribution of Ken Fisher in ‘Forbes,’ over the last about quarter century. “Ken’s columns have included his views on investments, the economy, market misperceptions, specific stocks, financial planning, the news, politics, and politicians – anything and everything impacting capital markets,” the intro informs.
Tech intrigue
Most investors make a big mistake when investing in small growth companies, rues Ken in a piece dated July 16, 1984. “They get intrigued with technology. What a hot little gadget those guys have! It’s not the hot gadget that puts small companies over the top but hot marketing.” The prizes, says Ken, usually go to the company that finds a need and fills it. These are words that continue to be apt in current times, you’d agree.
Leading-edge technology is not critical to successful investing, emphasises Ken in an essay titled ‘high-tech checklist.’ The really critical factors are not technological, but a low stock price and good marketing, he guides.
“One risk-reducing marketing-oriented sign to look for is high relative market share. It helps, too, if there are no heavyweights trying to muscle into the market. The champ is a lot safer when up against lightweight competition, and so are you. It’s about as close to monopoly power as society allows.”
Market share mantra
Frets Ken that investors often get this backward, buying low-market share and figuring the company has nowhere to go but up. Possible, but a risky strategy, he cautions. “A company with high relative market share will usually be the low-cost producer, because it spreads its costs over many more units… In tough times it can drop its prices lower than the competition and still make money.”
An instructive tip Ken offers is that hotel, restaurant and supermarket chains, along with distributors, insurance companies and airlines, are just a few of the areas in which regional segmentation has paid off as a means for little guys to build up good-size business without suffering at the hands of bigger, more powerful national competition.
Investing in regional segmentation has additional advantages for individual investors, he discovers. “You can check them out at home. What are the kids lining up for in your area? What burgeoning local products have you been buying that didn’t exist five years ago? No New York-based security analyst is likely to beat you to such bargains.”
Small is beautiful
Among the articles that Anderson has included is one titled ‘pint-sized powerhouses,’ which debunks the common belief that institutional investors have all the advantages. The institutions can’t touch most of the stocks available to the little guy, avers Ken. Institutional managers tend to avoid stocks whose market caps are less than the amount of money they manage, he reasons.
Yet, the tragedy is that most small investors pass up this advantage, thinking that smaller capitalisation stocks have more risk than do bigger ones. Buy unpopular stocks of sound, well-financed and fundamentally strong companies, regardless of size, Ken urges, therefore.
Slowly their quality will be seen by others, and their popularity will rise, and with it the stock price, he assures. “Additionally, with small cap stocks, you can avoid the up-and-down volatility of the stocks that are subject to institutional stampedes in and out.”
Reading list
Gurus have gurus, and so does Ken. He acknowledges the wisdom of the greatest investors of all time in a piece titled ‘gifts of the gurus.’ His reading list begins with ‘How to Buy Stocks’ by Louis Engel (1953), which is ‘deep enough to cover most of the lingo you will ever need.’
An older book is ‘Reminiscences of a Stock Operator’ by Edwin Lefevre (1923), which ‘conveys the futility of in-and-out short-term trading.’ Much older is ‘Extraordinary Popular Delusions and the Madness of Crowds’ by Charles Mackay (1841), which can make you feel ‘nothing really important has changed in centuries.’
For a chronicle of ‘the investment lives of nine legendary post-war investors,’ try ‘The Money Masters’ by John Train. Get relieved of ‘your reverence for Wall Street pros’ by reading ‘The Contrarian Investment Strategy’ by David Dreman. ‘The Templeton Touch’ by William Proctor is ‘a little-known gem,’ counsels Ken.
Fatal errors
‘Don’t be too smart for your own good,’ is the title of an article dated July 1, 1985. And it opens with a wry statement: ‘The way most people end up with $1 million in the stock market is to start out with $2 million.’
Why so? Because of three common mistakes, says Ken. “They overpay, buy businesses they don’t understand and neglect to take a long-term approach. These three fatal errors account for most stock market failure.” The best way to avoid the treacherous trio is to keep things simple, he advises.
On the contrary, Wall Street is sceptical of simplicity, notes Ken. “It prefers complex rationalisations for gains and losses. The Wall Street kind of mind seems instinctively to reject the simple explanation and to seek something more devious or complicated – insider wheeling and dealing. But in the long term, insiders can’t drive a good stock down, or a bad stock up.”
To those who wonder how to be simple, the lesson is straight: ‘Don’t do things you don’t understand.’ And that could include things that sound complicated, circuitous, or the least bit fast-buckish. “Let some other sucker tackle it and learn the hard way.”
Whom to call
Before buying a growth stock, whom would you call: Your broker, your banker, a stock analyst, the company’s president, or the president’s secretary? Posing this question, Ken provides the answer that it is the final option, the president’s secretary, because she always knows who is the best person to answer your questions and has the clout to motivate him or her to help you.
Sample this opening that he narrates: “Hello, My name is Ken Fisher. I handle investments out here in California. I’ve become interested in your company, and am hoping you can put me in contact with the right person to answer some questions and help me beef up my knowledge.”
That should work for someone running an investment firm, not an investor, you may grudge. Well, you handle investments, too, cheers Ken. “The truth is, in the decade I have used this technique, no one ever asked how large my firm is or even if I have a firm. The secretary usually likes to help and virtually always puts me in touch with someone having more answers than I have questions.”
Start in the back
‘When you read an annual report, start in the back, with the footnotes to the financials. Then move forward,’ reads an insightful investor lesson that Ken learnt from his father, Philip Fisher, described by Forbes as ‘one of the seminal figures of modern investment thinking.’
The back of the report, the footnotes, is where they hide the bad stuff they didn’t want to disclose, but had to, warns Ken. “Whether it’s in a limited partnership, an initial public stock offering prospectus or just an annual report, they bury the bodies where the fewest folks find them – in the fine print.”
He recommends the reading of Abraham J. Briloff’s ‘Unaccountable Accounting’ – a classic for anyone wanting open eyes! “Just because a company adheres to ‘generally accepted accounting principles’ (GAAP), that doesn’t mean its audited financials even resemble reality.”
Ken concedes that careful analysis is a lot tougher than just buying stocks on stories or on a superficial look at the numbers. But if you are not willing to do the analysis, you shouldn’t be investing on your own, he argues.
Imperative study for any serious investor.
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