Debt Laden Stocks versus Debt Free Stocks
Stockerblog.com 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.
If you missed Part 1 of the interview, you can see it here, and if you missed Part 2, you can see it here. Also check out Part 3 and Part 4.
Stockerblog.com: In your chapter, What Do I Believe that is Wrong, you had a nice list of myths which is pretty interesting, especially the High PE ratio myth, and you had a lot of statistics to back up all that. One of the myths, actually a couple of them, Government Deficits are Band and America has Too Much Debt, what about stocks that are heavily in debt, do you have any opinion on that.
Fisher: Franco Modigliani got a Nobel Prize for demonstrating there is no 'there' there. If you go back to Franco Modigliani's original work, it shows that as a class, that doesn't tell you anything. Individually, it may or may not; that is, a levered company that knows what the hell it's doing, that's doing something really nifty, it's obviously got a lot of upside and things are going to go well for it. The levered company that's badly run and doesn't have anything proprietary and getting its rear end chewed off by its competition, is going to go down the tubes, and its going to be nada, which itself doesn't tell you anything. I would refer people back to Modigliani's original work.
This goes back to my notion of screening, and leverage versus non-leverage, and see if you can get a different return dispersion, and the answer is, on a risk adjusted basis, no. Another way to say this is, if you did, is all you had to do to make money is buy the ones that aren't leveraged and short the ones that are leveraged, and you could generate alpha. The fact is that you can't.
That characteristic by itself means nothing, all it does is increases both the risk and the reward. Another way to say that is, if we had perfect knowledge, we would be rewarded by leveraging the hell out of ourselves. The problem is, we don't have perfect knowledge. This goes back again to the fundamental issue, if you know something other people don't know, and if you really know something other people don't know, the risk is going to work your way. And this is true whether you're investing in the stock or whether you're running an operating company.
Stockerblog.com: Do you think an average investor is better off not paying attention to many of the market commentators and analysts' opinions, and just do the research on the industries and the stocks themselves?
Fisher: Well, what I told you before, the average investor is just better off going passive, and going passive of course does imply not listening to any of these people. Let's put it another way, if you assume what I assume, and I think history is pretty clear on this, the average active investor lags the market, then the average active investor would be better to go passive because he can stay even with the market.
Now that isn't to say that there aren't things the active investor can do to become a better active investor. But a long time ago, I was called in to a pension plan, a municipal plan, to render to them advice on how they could go from being measured by some peer group they were being measured by, in the bottom 20% of all municipal plans, to doing better. My first response was, you've had all these managers you've hired, all you've got to do to be above average is to go passive. Because almost all these people are 100% active and they're all hurting themselves, so all they needed to be above the 50th percentile is to just be passive, because they are all lagging the market. That's a really hard concept for people to get.
Stockerblog.com: Well I know there are a lot of people out there, for example retirees, who have maybe $25 thousand up to a million dollars, and they just like to pick and choose their own stocks and do their own thing. So if you tell them they would be better off in an ETF or an index fund…
Fisher: They would lose the entertainment value, and I think that is a perfectly valid point. Then the question is, what price are you prepared to pay for entertainment. You can think of that as, I'm going to take my money and be passive and I'm going to take half the money I'm going to save from that and spend every third weekend in Las Vegas. It’s just a question of what you want to do with your time.
Sure there's a lot of people who will be active investors and there's a lot that active investors can do to improve themselves, and what that involves is self educating. So then you sit there and say well what are the things they don't know and those are the things they need to put time in self-educating on. And that can be from history to reading stock market books. It's unlikely to come much from the current opinions of commentators since the opinions of commentators tend to bounce all over the map, and an awful lot of it is just drivel. But, to a large extent, the way an active investor becomes a better active investor is work harder and educate yourself more.
End of Part 5 of the Interview – Stay tuned for future segments of the interview over the next several days, where Fisher discusses the importance of CEOs, favorable sectors and much more.
Fisher obviously didn't provide any stock recommendations for the interview, but many of the stocks he has favored in the past can be found in his previous Forbes columns. For example, CF Industries (CF), Merck (MRK), Veolia Environment (VE), and and Sara Lee Corp. (SLE).
His book, The Only Three Questions That Count: Investing by Knowing What Others Don't, which would make a great gift for any investor, is available at Amazon.
Author does not own any of the above mentioned stocks.
Interview by Fred Fuld at Stockerblog.com