With so many doomsayers taking center-stage with talk of recessions and bear markets, EQUITIES called our friend Ken Fisher, CEO of Fisher Investments, for his take on the situation. Ken’s been characteristically busy, having recently acquired half of Germany’s Grüner Asset Management (now called Grüner Fisher Investments). Regarding the U.S. economy, he lives up to his reputation as a contrarian: There is no recession, no credit crunch, and the mortgage situation is negligible. But there’s a tangible anxiousness in the marketplace, and like Warren Buffet famously said, when people are greedy, you should be fearful, and when people are fearful, you should be greedy.
People are fearful, and in this interview, Ken Fisher happily teaches us how to appropriately funnel our considerable greed.
EQUITIES: How did you get involved with
[Grüner Asset Management founder]
Thomas Grüner?
Ken Fisher: Thomas
started his own firm
some years ago. I first
interacted with him 11
years ago, originally by
email, and then we
met. We visited a number
of times over the years. He increasingly
came to try and think the way we at
Fisher Investments think about things.
After that, he wanted to try to build his
firm with a lot of the same concepts that
Fisher Investments has been built with.
EQUITIES: What’s been going on since the
acquisition was completed?
Fisher: We’ve been taking his employees
and structuring them into the parallel
kinds of functions that we have in
America. Since we completed the
transaction last year, we started doing
direct mail in Germany and found it to
work very well. We’ve hired our first
couple of salespeople there, operating
in the sales mode and the sales training
we use in the United States, and that’s
starting to work very well. Thomas had
operated in the past with what I would
view as account minimums that were
too small, and we’ve gotten him to increase
his account minimums up to
€250,000. It simplifies life because you
don’t need to get as many clients.
EQUITIES: How large was the company before
you took it over?
Fisher: It’s very small. Before we took it
over, it was about €40 million. It’s a little
bigger than that now, which isn’t bad considering
that we’ve had a declining market
since then.
EQUITIES: Does your support staff in the
U.S. work alongside them?
Fisher: We have a fellow here, who has been
with us for some years, named Thomas
Reyer. He’s a German-born American citizen—speaks, reads and writes German.
He’s been with Fisher for a long time and
he is the day-to-day liaison. He takes all of
the things we do here and injects them
into Germany. Personally, I put very little
time into this. I’ve started a weekly column
in Handelsblatt, which is Germany’s largest
financial publication.
EQUITIES: When you
write your column,
do you deal with
subjects that you’d
write about in
America?
Fisher: Not always,
but usually, because
I’m usually writing
from a global perspective,
but I’m
addressing it to a
German audience,
so I’m speaking in
German terms. For
example, I would
speak specifically to
the names of German
politicians, the
names of German
business people.
EQUITIES: What
makes Grüner
Fisher Investments
a better choice for
Germans than their
other options?
Fisher: That’s like
saying, “What are the options that a
human has that’s better than eating dog
food?” Most asset management on a
Euro-weighted basis in Germany is
what we would refer to as private banking.
The fees are opaque, broken down
into a myriad of pieces that are hard for
the consumer to understand, and they
total very high amounts that often the
consumer doesn’t understand. Fees can
be 5% a year, which makes it impossible
to actually get a good net return.
Outside of the banking system, the
menu offering in Germany is very small
and fractured. There is not a lot of leading-
edge money management in Germany.
EQUITIES: How do German
investors differ
from American investors?
Fisher: Germans tend to
be more loss-averse than
Americans, and they’re a little resistant to
trying something new, which is one of our
difficulties. But we’re optimistic. Our goal
and charter is to become the largest independent
asset manager in Germany.
EQUITIES: Are there other expansions in
the works?
Fisher: We have operations in Britain, and
we just completed a search for a CEO in
Britain and put him in place. We’re hiring
sales people at a reasonable clip and
ramping that operation up quite a lot. It’s
not what we have with Grüner Fisher—
it’s a wholly owned subsidiary. But to the
British citizen, it looks to be a completely
British operation. It’s based in London,
operated by British employees.
EQUITIES: Do you have the same approach
to serving each of these markets?
Fisher: Yes and no. The yes part is that the
marketing and sales are the same, the postsale
client service is the same, and the business models
that we operate with, in terms
of what our employees do and how they
interact with the client, are identical. The
difference, however, is that outside America,
categorically, taxes are more important
to investors than they are inside America.
Even if the tax rates aren’t necessarily that
different, non-Americans think they are.
Tax rates are higher in Britain and Germany
than they are in America, but British
and German investors think they’re much
higher. The other part is, because their
stock market is a smaller percentage of the
global market—and this is true in every
country outside of America—the customer
tends to be less comfortable with a
full global orientation.
EQUITIES: Nearly everyone we’re talking to
is using “recession” and “bear” to describe
the market. You’ve said that you’re
not as gloomy.
Fisher: Let me address that two different
and very simple ways. First, as Mr. Buffet
said a third of a century ago, when people
are greedy, you should be fearful, and
when people are fearful, you should be
greedy. It’s perfectly obvious that people
are fearful right now, so the right thing to
do is to be greedy.
Second, in my 36 years in this industry,
as well as in my study of history, I
have never seen a market peak that
turned out to be the peak of a bull market,
where three or four months after,
people were commonly talking about a
bear market and recession. In my mind,
this correction is very reminiscent of the
1998 correction. This is not the psychology
of a bear market in a recession. This
is the psychology of a correction.
You’ve got all
these people that are
pessimistic. If we
are to have a recession
in the United
States, there will be
a recession outside
of the United States.
You can find no example
in modern
history where the
U.S. has decoupled
from the non-U.S.
Our global imports
and exports have
both been growing
as a percent of
GDP for 10 years,
so we’ve been becoming
more coupled,
not less. If we
were really going to
have a global recession,
emerging markets,
which are
dependent on developed-
market purchases,
would get
killed. The fact that
emerging markets are actually doing better
year to date than developed markets
tells you that this is not the thing everyone
fears. That’s one of the most powerful
single statements that I can make.
EQUITIES: What about the mortgage
situation?
Fisher: You hear a lot of talk about
mortgages and structured-investment
vehicles that have defaults associated
with them. Take the maximum amount
that anybody says might default—the
biggest number I see anybody talking
about is half-a-trillion bucks. If you
look at the bank injections—not just of
the Fed but of all central banks since
last summer—they’ve already cumulatively
injected more than that.
This isn’t about money. It’s about fear.
Housing is still less than 5%of U.S. GDP.
If it falls by 20%, that’s still only 1% of
U.S. GDP. And U.S. GDP is only a quarter
of global GDP, so we’re talking about
a quarter of 1% of global GDP. Therefore,
we’re not going to have a huge
nightmare in a world where global GDP
is otherwise growing at something like
4%. It’s just too small to matter.
EQUITIES: What is the fundamental difference
between you and all the pessimists?
Fisher: They react to the things they read in
the paper, but I react to what I see in them.
EQUITIES: Where are you looking right
now in your investments?
Fisher: In my mind, this is a period like
1997, 1998, where the biggest stocks do
best. And when I say biggest, I mean humongous—
we’re talking about the companies
typically with market caps over
$80 billion. We’ve entered a period
where the biggest do the best.
We don’t really have a credit crunch.We
have a credit reallocation from low-quality
borrowers to high-quality borrowers, and
the high-quality borrowers, for the most
part, happen to be the biggest companies.
So when a Wal-Mart, a Pfizer, a Merck, an
IBM, a Microsoft, when it borrows to buy
Yahoo, those are all AAA- to A-rated companies
who are finding more access to
credit in this market than they ever had before,
and they are actually borrowing more.
This is a world where we’re starving the
many for the benefit of the few.
EQUITIES: Are there any particular stocks
you like?
Fisher: In 1997 and ’98, statistically, we
had a world where U.S. companies were
doing better than non-U.S. companies,
so if you looked at the S&P as a reflection
of U.S., and you looked at the
EAFE as a reflection of non-U.S., you
could have beaten either simply by buying
any half of the stocks whose caps
were bigger than the average of the
U.S. market or the foreign market. You
didn’t have to be a stock picker. You
didn’t have to be an industry-picker.
You needed to know one thing: own
huge. When you look at the world
today, the dollar-weighted average cap
of the market is about $80 billion, and
there are 80 stocks that are bigger than
that. If you buy any 30 of those, I
think you’ll beat the market.
Traditionally, you guys cover quite a lot
of small-cap stocks. One of the things
that your readers could think about doing
in this environment is think of a package
where they’re both long and short at the
same time. That’s not for everybody, but
for some people who would otherwise belong
in short, this might actually be the
time to think about owning super-caps and
shorting out micro-caps. This is a time
when someone can actually take their otherwise
small-cap stock-picking capability
and turn it on its head into a stock-shorting
capability. If I’m right that super-caps
or mega-caps lead, then most stocks will
lag, and you can augment returns by buying
and shorting at the same time.
EQUITIES: You’ve mentioned Citi as a
good buy.
Fisher: When you take their total writedowns
last year of non-cash losses, it totals
about $30 billion. Their reported earnings
are $3.5 billion. A write-down isn’t an operating
loss, so their operating earnings last
year were $33 billion. The stock doesn’t
have a $120 billion market cap. It’s selling
for less than four-times operating earnings.
Then somebody says, “But they might
write-down more.” The answer is, “Yup,
they might.” If they write-down another
$15 billion this year, earnings are going up,
right? And then their earnings end up being
something that looks like $18 billion. And
people say, “Yeah but it’s going to go down
at less than four-times operating earnings?”
Then people say things like, “But with
all these write-downs, they’re not going to
be able to meet their reserve, so they’re
not going to be able to make loans.”
Now this is just utterly ridiculous because
reserve requirements are not done
on GAP accounting—they’re done on
cash. The media seems to have missed
this point.
EQUITIES: What do your assets under management
look like?
Fisher: Forty-four billion.
EQUITIES: What kind of person does it
take to be responsible for $44 billion
of other people’s money and be able to
sleep at night?
Fisher: Well, I don’t really know that it’s
very hard to figure. First, it takes
somebody who’s done it long enough
that they’ve had some tired nights, so
they learned to sleep. But I’ve been
doing this stuff all my life, so I’m used
to it. Second, it takes someone who
doesn’t get caught up in the emotional
mood of the moment. When people
are freaking out, that’s when I don’t
freak out.
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