Learn How Markets Really Work from Ken Fisher

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Learn How Markets Really Work from Ken Fisher

By Brad Shorr | May 16, 2008

We are all victims of financial pornography. Mainstream media does a horrible job of explaining what’s going on in the economy, why it’s happening, what the impact will be, and what’s likely to happen next.

The is bad news for investors (and that includes anybody with a 401(k) or similar retirement plan) and non-investors alike. How can you make good financial decisions for yourself or your business if you don’t have accurate information about finance and the economy?

Ken Fisher, a highly esteemed professional investor with an impressive track record, wrote a book called The Only Three Questions that Count. It’s a great read. His purpose is to show people how to invest intelligently. In the process, he explodes myths I’ll bet most of us, including myself, have always taken as gospel. For instance, he demonstrates –

Why stocks with a high price-to-earnings ratio are not inherently more risky than stocks with low ratios
Why being a contrarian is just as risky as following the herd

Why a growing GDP does not necessarily lead to higher stock values
Why high oil prices will not destroy the economy
Why deficit spending is not bad for the markets
Why reducing the national debt is bad for the markets
Why a weak dollar is not bad for the U.S. economy

Interesting stuff not everyone will agree with, but he makes a convincing case. The point is, if you want to be truly informed, you have to get off the beaten track and seek out information that is designed to educate and written by authoritative sources. In turbulent times like these, it’s too easy to make a mistake and too costly if you do.

How do you find reliable information on the markets and financial issues?

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4 Responses to “Learn How Markets Really Work from Ken Fisher”

Andrew Heaton Says:
May 16th, 2008 at 6:46 am
Back when I was 17 and more interested in trying to make millions from my $50 per week part time job than I was in my schoolwork, I remember trying to read the business press and understand all about the economy and stock markets.

It was a most frustrating process, primarily due to business journalists targeting a financial literate audience.

Personally I became somewhat financially literate via my year 12 Economics text book.

I would not personally believe that a high price-earnings multiple is necessarily a bad thing. A stock price is determined by (amongst other things) expected future profits and dividends, the perceived riskiness of the company and interest rates. The ‘earnings’ part of the price/earnings ratio represents current earnings.

Higher price earnings ratios mean that the stock is ‘expensive’ relative to it’s current profits. A company with a high P/E ratio will have to perform significantly better in the future than company’s with low P/E ratios in order to be a good investment.
But there is a flip-side. Often, company’s attract high P/E ratios because investors are confident about their future prospects. Companies in high growth industries, or those which have a strong track record often have higher than average P/E ratios - you have to pay for quality.

So, by paying more, you may be buying shares in a higher quality company.

I would be interested in the assertion that reducing national debt is bad for the markets. This is perhaps a little technical, but I would have thought that by reducing their debt level, the government would be helping to keep interest rates low. (which in turn helps to demand for shares as it becomes cheaper to obtain finance)

The cost of anything (including credit) is determined by the demand and supply. By reducing their debt level, the government, I would have thought, would be helping to reduce the level of national demand for credit, thereby helping to reduce the price of credit - i.e. interest rates, thereby stimulating demand for shares.

Anyhow, no doubt Mr. Fischer’s book will make an interesting read.

Cheers

Andrew
Brad Shorr Says:
May 16th, 2008 at 7:41 am
Hi Andrew, thanks for sharing your ideas here. I could not do justice to Fisher’s arguments in defense of budget deficits, but he is very big on supporting his conclusions with fairly straightforward statistical correlations. To my surprise, U.S. markets (and I believe this holds true in other countries), market returns are stronger when deficits are high, over a long period of time. Fisher’s ultimate point, I think, is to show us how to think for ourselves when it comes to finance and the economy by asking the right questions. Whether or not you agree with his conclusions, he definitely forces you to do your homework to refute them.
Andrew Heaton Says:
May 16th, 2008 at 3:19 pm
Hi again, Brad.

It sounds like an interesting read. It doesn’t do any harm to read books which challenge your assumptions every now and then.

I wonder if the correlation between government debt and market performance holds for other markets in other parts of the world as well.

Cheers

Andrew
How to invest in stocks Says:
May 20th, 2008 at 3:04 am
This is really good information. Thanks for taking the time to make this post.