Saturday, August 23, 2008 Exclusive: Interview with Ken Fisher – Part 1

The Price Sales Ratio had the pleasure of recently interviewing Ken Fisher, head of the $45 billion Fisher Asset Management, a very long time Forbes columnist, and author of the books Super Stocks, The Wall Street Waltz, 100 Minds That Made the Market, and The Only Three Questions That Count: Investing by Knowing What Others Don't.

He is also coming out with a new book in the Fall, The Ten Roads to Riches: The Way the Wealthy Got There (And How You Can Too!), published by Wiley. Talking a little about the Price to Sales Ratio, which you discussed extensively in your Super Stocks book, and mentioned in your latest book, Only Three Questions That Count , that it isn't as useful, how did you happen to find and utilize that ratio to begin with?

Fisher: In a world a long time ago, long before there was wide access to computing, I used to try to look at companies that were hemorrhaging badly that had everyone scared to death of them and losing lots of money. I would, in those days, go looking through the Wall Street Journal, looking at was then a very broad display of earnings reports, showing company revenue and profit or loss per share. So I would look for companies with huge losses and then I would sort around among them and then I would look at ones that had low market values in relations to sales, as a way to see upside leverage, to see if they could turn their operating loss condition around.

The fundamental question was, if the company is losing money, if it made X profit margin, what would its P/E be today, and that kind of led me to the price sales ratio as a way to normalize that. It was all in a world where any form of screening was difficult to do whereas today most forms of screening are quite trivial to do. Now I know you say that the PE ratio is no longer an indicator for undervalued stocks …

Fisher: I didn't say that. I said it's not nearly what it once was. I didn't suggest that there is no utility to it; in fact, in my Forbes column, I'll say company X sells at a PE of X and Y times revenue and Z yield as a way to get perspectives on the same issue.

That realm of the profitless company, 30 years ago was no man's land, and there was tremendous inefficiency there. In a world where most paid attention to PE and where, by then, the ravages of inflation had already made prices to book hard to compare company A to company B because inflation distorts book value, the price sales ratio appeared to be a current way to get a sense of how big is the stock compared to how big is the company, and that you could extrapolate from that in the future, profit margin Y, what the PE would be. Do you think the PS can still be used today to compare companies within an industry or within a sector?

Fisher: It's not as useful as it once was because , one, screening is so easy, that there is less value from screening as there once was and, two, the price sales ratio today is a well known concept, so because it's a well known concept, people use it so it has less value then that which is unknown. So it's built into the market now.

Fisher: I wouldn't say completely, because, it's still true, and it's verified by all kinds of behavioral studies, there tends to be a natural behavioral tendency for people to overreact to problems as well as overreact to successes. So when a company is losing money, and hemorrhaging badly, people tend to be overly scared away from it. So there's still something there but not as much as there once was.

End of Part 1 of the Interview – Stay tuned for future segments of the interview over the next several days, where Fisher discusses his thoughts on education, how his investing technique differs from Jim Cramer, stock market myths, favorable sectors and much more.

Fisher obviously didn't provide any stock recommendations for the interview, but many can be found in his Forbes column. For example, in the May 19 issue, he favored Banco Bilbao Vizcaya Argentaria (BBV), with a PE of 7, a PS of 1.87, and a PEG of 0.42; Novartis AG (NVS) with a PE of 10, a PS of 3.06, and a PEG of 2.17; Royal Dutch Shell plc (RDS-A) (RDS-B), with a PE of 6, a PS of 0.49; and Sara Lee Corp. (SLE) with a forward PE of 12, a PS of 0.73, and a PEG of 2.

His latest book, Only Three Questions That Count, is available at Amazon. You can also check out the review of the book .

Author does not own any of the above mentioned stocks.

Interview by Fred Fuld at

Copyright 2008, All rights reserved. Reprinting without permission is prohibited.

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