Wednesday, August 27, 2008 Exclusive: Interview with Ken Fisher – Part 3

How Ken Fisher's Investing Style Differs from Jim Cramer, Bill Gates, and Warren Buffett 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. I noticed that Jim Cramer wrote a forward to your book, and I wanted to ask a Cramer versus Fisher question. I noticed that you have a couple major differences in investing techniques. One is Jim Cramer says you shouldn't have more than five stocks, you say that you shouldn't have more than five percent in a stock, which works out to 20 stocks minimum or I think you mentioned in your book up to 60 stocks if you own foreign stocks in your portfolio.

Fisher: I wouldn't mind owning hundreds. That's was you're trying to accomplish. Do you think for the average investor that that is still reasonable?

Fisher: Well let's think this through for a second. Anything I say is not meant to be a criticism of anything Jim Cramer says; but by definition, the average investor isn't very good, and therefore the average investor should probably just be passive. The average investor is going to do better if they're just passive than if they have stocks because one of the things we know is, in most of history, most active investors lag the market. So if you're an average investor that lags the market or you're worse than average you would improve your performance by going passive.

The requirement that I point out in my book, in finance theory and reality, to do better in the market, is to somehow know something that other people don't know. Now if you really do that, and if you really know a lot, and you're really confidant you know a lot, you concentrate that in a few stocks. The history of people who have done concentration has been very mixed, from person to person. It's not like the people who concentrate do better and the people who don't concentrate do worse or vice versa. That dilemma is in the knowing something.

So if you really know something - so lets' go in a different direction. Bill Gates didn't get to be Bill Gates by being diversified. So if you really know something, just go start a business. Just own one stock.

Warren Buffett is often thought of as an advocate of concentration. My father was an advocate of concentration. Now I want you to think about Warren Buffett correctly because there's only two ways to think about him. One, the guy who owns one stock, and that's Berkshire Hathaway (BRK-A), or two, the other way, what does Berkshire Hathaway own, a bunch of public stocks, and a bunch of private companies that he owns lock, stock , and barrel. He's actually got a very large number of companies, a lot more than five stocks, a lot more than ten stocks, a lot more than twenty stocks. So he's either diversified or he's one stock and not diversified at all. I'm not suggesting that either is good or bad.

My point is, it really comes down to the fact that the average investor is probably not going to do very well being an active investor. The average investor doesn't have the time. Now if you don't have much time, and you need to know something about what you're investing in that people don't know, you will end up with fewer things. On the other hand, if you buy five things that you don't know much about, your getting real random.

Let me go in a different direction. I run a lot of money. If I'm going to take a lot of money, and let's say put it into smaller stocks, that means I'm going to own more stocks. People never get these things the way I would have them get them. They would say 'Gee, at your size, you can't do small cap?' If you think about it, which most people don't, and if I was much bigger than I am, I could do negative market caps if I wanted to. Because you could by any stocks you want, and then you could put your cap above them or below them if you wanted to. It's real easy to create synthetic market caps and drive that into your portfolio by simply taking the stocks that you own and then you sell short a bigger cap index, and that will drive your cap down.
Technically in a portfolio engineering, and I don't think enough people think in terms of that engineering quality, it's not impossible at all, not that you necessarily want to, to put your market cap through the roof and to the floor synthetically. Do you do much or any shorting for your clients?

Fisher: Rarely, but will, to get the market cap where I want it to be when it's different from the stocks I own.

End of Part 3 of the Interview – Stay tuned for future segments of the interview over the next several days, where Fisher discusses 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 July 21 issue, he favored Dow Chemical (DOW), Rohm & Haas (ROH), Franklin Resources (BEN), Ball Corp. (BLL), and Merck (MRK).
His book, 100 Minds That Made the Market, 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

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

No comments: