Ken Fisher is a money manager, Forbes columnist, and is one of the Forbes 400 richest Americans. He is also author of several books, including his two latest, The Ten Roads to Riches: The Ways the Wealthy Got There (And How You Can Too!) (Fisher Investments Press) and How to Smell a Rat: The Five Signs of Financial Fraud (Fisher Investments Press)
Ken Fisher Interview Part 5 - Interview took place on Friday, September 25, 2009
Stockerblog: Let's talk about another kind of rat, the Enrons, the Global Crossings, the WorldComs. Is there any way the average investor can spot those?
Fisher: I think those are very, very hard for the average investor to spot. The average investor doesn't have the training. One feature about those types of things like Enron, is that when you actually go into their financial statements, they always have very convoluted accounting. If you eliminate convoluted accounting, you eliminate most of those things most of the time.
The irony of Enron is that the chairman of the audit committee was former Dean of the Stanford Graduate School of Business and lifelong accounting professor and he couldn't figure it out as the head of the audit committee on Enron. Accounting being so convoluted is a 'pea in the shell game', where you get so confused that you can't figure out what all this complicated stuff is. You don't see the forest from the trees; you don't see the nature of 'there's not the reality there'.
But I do believe it is very, very tough for someone who isn't heavily trained to spot those type of things and this is another reason to diversify and not put too much of your money in something. It's another reason why the kinds of people who were working at Enron that tend to take all their money and put it in the 401k were so vulnerable, because these were people who were invariably working in parts of Enron that were actually totally legitimate parts. They didn't see anything wrong, and they put their money into Enron thinking the totality was OK, and they ended up with little or nothing.
This is basically the most simple enough concept: diversify, diversify, diversify.
Stockerblog: And it's not only the average investor, a lot of professional investors got burned by the Enrons.
Fisher: Absolutely. But your question was in reference to the normal investor, and I don't think the normal investor has any basis for seeing through that accounting.
Stockerblog: So the normal investor can far more easily spot a money manager rat than a publicly traded corporation type of rat.
Fisher: Absolutely. The beauty of the Madoff Ponzi scheme rat artist is that if you separate custody from decision making, if you make sure they don't have returns that are too good to be true if, as I talk about in my book, if they aren't selling forms of exclusivity, like you should become an investor because Kevin Costner is. If what they claim they do is simple and easy to understand, whereas everyone of those ratzo people inherently come up with such a complicated saga of what they do, you can't possibly understand it. You either conclude that they are a genius and you don't ask questions. Lastly, if you do ask questions, and you do your own due diligence, that will usually motivate a rat to not invest with them. They don't want you asking questions, they don't want you to become persistent about asking questions. Those five things will keep anyone from having a Madoff thing happen to them. It's much harder to avoid the occasional Enron type of circumstance.
Stockerblog: In the beginning of your book, in the acknowledgements, you said that writing is one of your three hobbies. Did you want to share what your other two hobbies are?
Fisher: I basically have three things that I spend my non-work time on. One of them is writing, the second one is a wide variety of activities that relate to redwood trees and forests, their history, their science. Third is things that relate to my family.
Stockerblog: What sectors or industries do you like now?
Fisher: Let me, before I answer that, give you a general principal that is not well understood by most people. When we've had a big bear market, categories that did relatively well compared to the market in the first more or less half of the bear market but then got absolutely killed in the back half, tend to lead the next bull market. So that, today, would include the following kinds of categories: materials stocks, industrials, consumer discretionary, emerging markets, and to a lesser extent, energy.
It would avoid or under weight things like consumer staples, utilities, healthcare. It would also avoid the most developed markets. So you want to be focused on places like Asia ex-Japan, Central and South America. You want to be focused on things like materials, industrials, consumer discretionary.
People have a very hard time understanding this because at a time when the economy isn't strong, they say 'Why would something like consumer discretionary do very well." And the answer is the market is thinking six to 24 months out. It's thinking about how that depressed stock will behave in a world down the road where the economy will be better and it prices that now.
End of Part 5 – Stay Tuned for Part 6
If you missed Part 1, you can check it out here.
If you missed Part 2, you can check it out here.
If you missed Part 3, you can check it out here.
If you missed Part 4, you can check it out here.
By Fred Fuld at Stockerblog.com
Copyright 2009. All rights reserved. Reproduction of this interview prohibited with out permission. All opinions are those of Ken Fisher, and do not represent the opinions of Stockerblog.com or the interviewer. Neither Stockerblog nor the interviewer nor the interviewee are rendering tax, legal, or investment advice in this interview.
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