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Exclusive Interview with Ken Fisher: Bull Market Euphoria is Three Years Away

Legendary investor Ken Fisher isn’t afraid to be wrong. In fact, he’s gotten quite used to it in his 35-plus years building Fisher Investments into a powerhouse financial firm with

Legendary investor Ken Fisher isn’t afraid to be wrong. In fact, he’s gotten quite used to it in his 35-plus years building Fisher Investments into a powerhouse financial firm with nearly $60 billion in assets under management and over 27,000 clients around the world to where it is today.

While he’s certainly on the right side of a trade much more frequently than he isn’t, it is precisely that kind of humility and disciplined market approach that has made him easily one of the most influential money managers in history.

Fisher preaches a winning philosophy of objective analysis, both internally and externally, when investing in the market. Readers of his many best-selling books or his monthly “Portfolio Strategy” column on Forbes—whose 30-year run is the third-longest in the publication’s history—are familiar with his principles.

We had the privilege to speak with Ken Fisher, who will be delivering the keynote address at the inaugural Small-Cap Stars Conference at the NASDAQ MarketSite on December 18, 2014. In the interview, the CEO and founder of Fisher Investments shares some great insights on the current bull market, the unfair criticism of millennials, and the best opportunities in the market right now. Most importantly, he teaches us how to handle being wrong. This is part one of a two-part interview. Read part two with Ken Fisher here.

EQ: The S&P 500 is up almost 200% since the start of the current bull market, which is still pushing along into its sixth year. During this time, a lot of investors have sat on the sidelines watching the market move higher with skepticism. Is this typical behavior for self-directed investors?

Fisher: Yes, but let me expand on that. The now long-deceased, legendary investor John Templeton famously said that, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” Fundamentally, my research tends to indicate that the transition between skepticism and optimism is about halfway in time through a bull market. It’s not halfway in magnitude, but halfway in time. It’s at approximately 40% to 60%.

That’s evidenced by everything that you can see around you in terms of headlines regarding concerns about market volatility, and people this year that were waiting for the correction (a decline of 10% to 20%) in the last month. Despite all that, we still never quite got to 10% on the decline. Then the market rocketed back up. All of those things that I cited and more are evidence of skepticism. I believe we have a long period of bull market still ahead, and that, of course, is great for equity owners.

EQ: What will help the market sustain this prolonged run?

Fisher: Part of it will be fueled by people that have been too skeptical finally getting into the market later. In fact, in that euphoric phase even after the peak of the market, the very last portions of buying, could be defined in a generic sense as “the greater fool.” You don’t buy on the greater fool theory, but bull markets end with a greater fool getting in, deciding that now he or she can see clearly off into the future just before market goes through the floor. The fact is, the skepticism is a good thing to see.

Another point I want to make is that since 1946, there’s never been a 12-month period after a midterm election that was ever negative. It’s a simple fact. Every single 12-month period after a midterm election has been positive.

EQ: That frequency of advance for stocks is certainly a promising historical trend for the bulls.

Fisher: A point that we have made at Fisher Investments and that I have written about in my Forbes columns is that the fourth quarter of midterm election years are positive 86.4% of the S&P 500’s history. But miraculously by coincidence, and likely never repeated again, the first calendar quarter after a midterm election—January, February, March—is also positive 86.4% of its history, and the second calendar quarter—April, May, June—is positive 86.4% of history, something that I have never seen printed anywhere other than our research. It’s a simple fact, but that consistency of three quarters in a row—purely by coincidence being 86.4%—that will never happen again, because this time it’ll be something different, which will throw the numbers off.

I’ve dubbed this the 86.4% miracle. But again, this is a statement about consistency, not a statement about magnitude. It is archetypal of what I expect equity holders to be able to benefit from as you move ahead. In addition, with very few exceptions in history, the third year of a president’s term, which is overlapping the first and second quarters of the year following a midterm election are also overwhelmingly positive.

EQ: You mentioned earlier that based on the market’s sentiment, we’re at about the halfway mark for the bull market. How much longer do you think this run could last?

Fisher: We’re in a period where skepticism is likely to turn to optimism, which fuels the next leg of the bull market before you actually get to the euphoric phase. So from here, we’re maybe two to three years away.

But if you buy my argument, which many people will not—I mean, good arguments are rarely accepted when it comes to markets—then Templeton’s concept of “bull markets are born on pessimism, grow on skepticism, mature on optimism, and die of euphoria” tells us that this will be a really long bull market.

That argument’s our common wisdom, which is priced into the market. The tradeoff between skepticism and optimism happens about halfway through time in a bull market, and that’s about where we are right now.

EQ: What could potentially throw off the market during the next two to three years?

Fisher: I’ve said in my Forbes column that only two things kill a bull market. One of them is the euphoria. The other is a big, unexpected negative that knocks at least 3% to 5% off of GDP growth globally. Big and unexpected. Markets are discounters of all known information, and that includes all the things people have worried about for a long time. They’re already priced into the market. But a big thing we haven’t talked about, thought about, known about, nor had any ability to price into the market and that can hit GDP growth hugely, can effectively do what I call the “vector effect.”

So the vector is on a predetermined direction, propelled by the skepticism, optimism and euphoria effect of the Templeton concept. It will stay on that course until it runs out of steam, or if the market runs into a wall. The wall that a bull market can run into is that big, bad thing that surprises us all.

EQ: So good news or bad news, as long as it’s something that the market has seen coming, it won’t derail us.

Fisher: Right. It’s not some little thing, and it’s not the things that we’ve been talking about for years. It’s not “America has too much debt,” which people have talked about close to forever. It’s not “Obama’s bad. The next guy’s good or bad.” Those are all things that are widely pre-priced.

It’s the big, bad thing that we didn’t see that gets us. So, without that, vector moves to Templeton’s logical conclusion, and right now, I don’t see that big, bad thing that would knock 3% to 5% off of GDP that nobody’s talked about. It might be out there and it might surprise us all, but otherwise, I’m waiting for optimism, and then euphoria after that. I keep looking for the big, bad thing, and until you see the big, bad thing, you keep riding Templeton’s curve.

EQ: Many people feared that the recent Ebola scare was going to be that big, bad surprise that could knock the market off its uptrend.

Fisher: Yes, that’s an easy one to disprove. I wouldn’t worry about it anyway. One of the things that people miss is that history gives you a great laboratory for seeing if things that you fear might knock the market or not. The first thing that I would always ask when you see something like Ebola is, “When there have been big pandemics in the past, have they knocked the market?” We actually have had a long history of pandemics and fears of pandemics. In fact, the biggest global pandemic ever was the Great Influenza of 1918, and there’s a documented history of that. It wiped out a huge percentage of the Western world and the stock market didn’t give a rat’s darned. It brushed it off as if it was nothing. In fact, most people seem to have forgotten about it.

Since then, we’ve had all these fears of things like swine flu and avian bird flu, and at the most, all those have done was take 5% to 10% off the market temporarily until people stopped worrying about them.

Pandemics do not take the market down.

EQ: Up until that point, the market was grinding higher without too much resistance, and investors seemed pretty complacent for the most part. That pullback was relatively average in magnitude, but it certainly startled the market. Considering the fact that it’s been over two years since we’ve had a real correction, do you believe the market became a little too comfortable for its own good?

Fisher: Let me answer that this way: Corrections come for any reason or for no reason at all at unpredictable times, and they usually leave as fast as they come. That’s different than a bear market, which is typically defined as a drop of 20% or more in the broad market.

When a correction comes, it ends with people getting fearful–usually with some crazy story that’s going to be about a terrible thing, like perhaps Ebola, but not always. Again, they come for any reason or no reason at all, and they go away as fast as they come. But nobody’s ever been able to consistently predict them, and trying to predict them is a fool’s errand.

Trying to time them is a bigger fool’s errand. By the time the market’s lost 5%, 6%, 7% and you decide you’re in a correction, there isn’t enough left in the correction to be worth getting out of the market before you have to get back in, unless you think you can time the bottom really precisely. The bottom of corrections is really short in time. So, it really is a fool’s errand, and people shouldn’t really worry about it.

EQ: If investors shouldn’t worry too much about corrections and market dips, what should they focus their concerns on?

Fisher: People should worry about bull market and bear markets, and leave the corrections to random chance. Sometimes you get two corrections in a year, and sometimes you get a correction a year in back-to-back years. Then sometimes you go years without a correction. It’s all really a question of how much skepticism the market has built into it at a point in time, which is a very hard thing to really know.

EQ: One of your best-selling books of all time was The Only Three Questions that Count. Those three questions have a lot to do with investors taking a good hard look at themselves and their approach to the market. Do you feel they are as relevant today as they were when you wrote it?

Fisher: I wasn’t trying to write a timely book when I wrote it. I wanted to suggest that there are simple concepts that are everlasting.

What do you believe that’s absolutely untrue? Of which, most people don’t think there’s anything, but the fact is most conventional wisdom that most people routinely accept is either untrue or most of it has already been priced. Many catechisms might be true in the real world, like something about how to avoid getting the flu, but when it comes to the markets, these things have most likely already been pre-priced in. Or, on the other hand, often what we believe is simply false. That book has a whole long list of catechism that people commonly believe that you can prove are false.

The second question is, “What can you fathom that others can’t?” That’s something that most people don’t even think to try to do, but as soon as you challenge yourself to that and you make sure that you’re not just mimicking someone else—which is what most people try to do—it leads you to thinking for yourself, which the markets reward.

The final question is, “What is my brain doing to mislead me?” That is all about behaviorism and learning to have self-control and discipline, and not fooling yourself. These things don’t go away. They’re everlasting issues.

Click here to read part two of our interview with Ken Fisher. To learn more about the inaugural Small-Cap Stars Conference, go to

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