Market Never Forget - Ken Fisher

In average, people misunderstands commonly about the stock market based on confirmation bias. In the book ‘Market Never Forgets’, written by Ken fisher, an American financier and founder of Fisher Investments, refutes to the common errors that market thinks by showing actual market history data. However, Ken Fisher indicates that all of these explanation based on past data cannot explain the future of certainty or possibility, but can provide various probabilities that investors can select.

The book consists of 11 chapters:

1. Fooled by Averages

2. Normal Returns Are Extreme Not Average

3. Getting Average Returns Is Hard Really Hard

4. Volatility Is Volatile

5. Stocks Are Less Volatile Than Bonds?

6. Never a Dull Moment

7. Secular Bear? Secular Bull

8. Debt and Deficient Thinking

9. Long Term Love and Other Investing Errors

10. PoliTicking

11. It’s Always Been a Global World After All

This time is different

Ken Fisher accentuates the idea of ‘This Time is Different’ is always wrong. “The four most expensive words in investing are: 'This time it's different,” said Sir John Templeton, the legendary investor and mutual fund pioneer. Various economic phenomena (ex. economic downturn) are somewhat different, but not very unlike from those experienced in the past. Investors have to bear in mind and evoke the history of the market, which is to find similar events in the past and learn the lesson from it. It will let investors have ability to recognize and respond the uncertain environment better in near future.

Errors: New Normal / Recovery without employment / Double dip fear

During Covid-19, analysts and economists feared of double dip, which did not happen yet. People think that when the unemployment rate is high, the economy can be stagnant, which is usually false. (Unemployment is economic lagging indicator) People usually misapprehend that the economy needs to grow before the stock price rises, which is another false presume. Usually stock prices rise first since it is a leading indicator. 

Don't be fooled by the average

The market average rate of increase is just average. In the actual bull market, the stock price rose much more than the average. Therefore, if investors cannot adhere to the strategy while entering/exiting the market at the wrong time, the outcome is relatively negative. In the beginning of the bull market, especially, the initial trend should not be missed because the rate of increase exceeds the market average. However, many people feel anxious at this time and delay their investment. Conversely, about 2/3 of the entire falls occurs at the end of the bear market.

In the stock market, the author indicates that the average rate of return is not important. It is to buy the dip during the entrance in bull market. However, it is very difficult to determine the timing of seize a chance. Even if investors miss the beginning of the bull market, they should not give up their investment since double dip is unlikely to happen. There is no such thing of limit on the share price hike allowed in a bull market. The market cannot predict even one inch ahead, and this is very normal.

Volatility is normal

The stock market is fluctuating now, has been, and will be forever. Investors may think that the recent volatility has increased and it is painful and difficult to bear. However, the investment gurus are not worried about the daily fluctuations. For novice or people who is deeply affected by his or her atmosphere, TV and Internet should be turned off during the day which will reduce wrong decision making and lead to improved performance by reducing useless trading. Anything traded in a free market economy carries the risk of loss in itself. To overcome it, investors need to train themselves to withstand volatility. If the investment strategy is long term, the worries of volatility is diminished regarding the market will recover in the longer run.

Fear of debt

It is not a surprising news that the government debt crisis has emerged. The debt cycle has been repeated and will recur the same way in the future. It is often thought that an increase in government debt or fiscal deficit will negatively affect to the stock market, but the data is more often reversed.

Intelligent investor will deeply consider of what is likely to happen in the future. They find out that fiscal deficit is not a real problem since the government is boosting the economy by releasing the money. In contrast, when austerity is set by government, then the money in the market will be absorbed and investors won’t be easy to borrow. Most people think deficit can lay negative impact, which is absolutely false.

As long as the debt is at a manageable level (for emerging countries which have massive dollar debt), the ratio to GDP has nothing to do with the stock market. Even defaults are common in emerging countries.

Why stocks

Investors may think gold and real estate can be safe-haven. However, it may not be practically safe assets. And sometimes investors think that stock market can be risky. However, the book disputes about it. History tells that small-cap stock prices rise larger in the section right after the bottom of bear market. Growth stocks such as information technology sector stand out when the short and long-term yield spread (gap) narrows, and value stocks rise when it widens. (When interest rates are low, then it is good for growth stocks since it can strengthen the competitiveness of companies by reducing funding costs.

Political ideology

There is a content that socialist policy is not good for capitalism. Yes it is true, however, some people make bias which is very bad for their investment. When a specific policy comes out, it is necessary to objectively distinguish between the industries that will benefit or suffer according to the policy, not just negatively because the ideology is different. Discarding ideology in decision making must be implemented. No matter which political party does president belong, there is no significant effect on long-term stock market returns.

To think globally

Expanding portfolio globally is one of the most significant. In a global world, all countries are connected to some extent despite the movement of de-globalization. Investors should take a good look at the economic situation of other countries than United States. There might be sudden rise on stock market in individual market when the government reveals its policy including tax cuts. However, there is more chance for intelligent investors to have global insights since cycles circulates internationally. 

The past never predicts the future, because it is about probability not possibility. If investors study the history of the market regularly, they can see the world more accurately and lower the probability of failure. Investing is a game of probability, not certainty, and investors somehow have to work on calculating rational probability.