20/20 Money E-Book

Michael Hanson

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Fisher Investments Press
• Sprache: Englisch

Seitenzahl: 451

Veröffentlichungsjahr: 2009

Beschreibung

20/20 Money: See the Markets Clearly and Invest Better Than the Pros

To be a more successful investor, you need to see the investment landscape more clearly. 20/20 Money—from Fisher Investments Press—can help you achieve this goal.

Designed to help you think differently about your investing choices, this reliable resource addresses new ideas and challenges widely held conventions. With 20/20 Money as your guide, you'll quickly learn how gaining a firm understanding of various concepts—from stock market and systems theory to neuroscience and psychology—can help you begin making better investment decisions. Along the way, you'll also discover some of the most successful strategies for thinking and learning, and how they can be applied to your investing endeavors.

To become a better investor, you have to have the discipline to make tough choices—choices that may not always be in line with tradition or commonly accepted invested wisdom. But the approach outlined throughout these pages can help you gain the vision to begin making better-informed investment decisions.

Leseprobe

Table of Contents

FISHER INVESTMENTS PRESS

Books by Ken Fisher

Title Page

Copyright Page

Dedication

Acknowledgements

Introduction

ASKING THE RIGHT QUESTIONS

Chapter 1 - INVESTING IS A SCIENCE

APOLLO’S ARROW SHOT CROOKED

DIONYSUS—MORE THAN JUST A GOOD VINTNER

USE THE METHOD, NOT THE DOGMA

CAREFUL WITH CATEGORIES

COULD MATH BE WRONG?

REDUCTION: WHY YOU CAN’T QUANTIFY EVERYTHING

Chapter 2 - INVESTING IS A DISCIPLINE

DISCIPLINE, DISCIPLINE, DISCIPLINE

SAGACITY: SEEING ISN’T BELIEVING

UNDERSTANDING AND BEING CURIOUS

Chapter 3 - HUMAN BEHAVIOR

BRAIN BASICS

BRAINS ON THE MARKET

MY, WHAT A TERRIBLE MEMORY YOU HAVE!

BAD BEHAVIORAL FINANCE

BEHAVIORAL MISCELLANY

Chapter 4 - SENTIMENT AND THE MEDIA

SENTIMENT BASICS

NEWS AND THE MEDIA

WHAT’S THEIR MOTIVE?

TIPS AND TRICKS TO NAVIGATE THE MEDIA

METAPHORS WE INVEST BY

Chapter 5 - HOW STOCK MARKETS REALLY WORK

CAPITALISM BY ANY OTHER NAME

IT’S COMPLICATED . . . A CRASH COURSE IN CEAS

THE NEW GOLDEN RULE

OLDEST AND STILL THE BEST: SUPPLY AND DEMAND

Chapter 6 - FORECASTING, PART 1—THE PRINCIPLE OF PROBABILITY

FORECASTING IS STRANGE ALCHEMY

TYPES OF PREDICTIONS

PROBABILITY THEORY, OR HOW MARKETS ARE NOTHING LIKE COIN TOSSES

THE BIGGEST PROBLEM OF THEM ALL

INVESTING LESSONS FROM PROBABILITY

LOOKING AHEAD . . .

Chapter 7 - FORECASTING, PART 2—RECOGNIZING PATTERNS

A PATTERN BY ANY OTHER NAME

STOCK MARKET PATTERNS

PATTERNS THROUGH THE NOISE

IT’S A GAME OF RELATIVE EXPECTATIONS

BACK TO THE FUTURE: USING HISTORY TO FIND PATTERNS

THREE BIG DRIVERS

AN OPTIMISTIC NOTE ON FUTURE PATTERNS

Chapter 8 - PRACTICAL PORTFOLIO MANAGEMENT

THE VIRTUES OF HEURISTICS

GOAL SETTING

PERSONAL GOALS

PORTFOLIO GOALS

THE TOP-DOWN PHILOSOPHY

MISCELLANEOUS HEURISTICS

Chapter 9 - THE NATURE OF RISK AND NAVIGATING MARKETS IN TROUBLED TIMES

RISK AND UNCERTAINTY

FINANCIAL RISK, OR WHAT HAPPENS WHEN YOU ASSUME

IN TROUBLED TIMES

PARTING THOUGHTS

NOTES

SELECTED BIBLIOGRAPHY AND FURTHER READING

ABOUT THE AUTHOR

INDEX

FISHER INVESTMENTS PRESS

Fisher Investments Press brings the research, analysis, and market intelligence of Fisher Investments’ research team, headed by CEO and New York Times best-selling author Ken Fisher, to all investors. The Press covers a range of investing and market-related topics for a wide audience—from novices to enthusiasts to professionals.

Books by Ken Fisher

The Ten Roads to RichesThe Only Three Questions That Count100 Minds That Made the MarketThe Wall Street WaltzSuper Stocks

Fisher Investments Series

Own the World

Aaron Anderson

20/20 Money

Michael J. Hanson

Fisher Investments On Series

Fisher Investments on Energy

Fisher Investments on Materials

Fisher Investments on Consumer Staples

FISHERINVESTMENTSPRESS

Copyright © 2009 by Fisher Investments. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

Photo credits: Corbis Digital Stock.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Important Disclaimers: This book reflects personal opinions, viewpoints, and analyses of the author and should not be regarded as a description of advisory services provided by Fisher Investments or performance returns of any Fisher Investments client. Fisher Investments manages its clients’ accounts using a variety of investment techniques and strategies not necessarily discussed in this book. Nothing in this book constitutes investment advice or any recommendation with respect to a particular country, sector, industry, security, or portfolio of securities. All information is impersonal and not tailored to the circumstances or investment needs of any specific person. The strategies contained herein may not be suitable for your situation. Consult a professional where appropriate. Investments in securities involve the risk of loss, and investing in foreign securities involves additional risks such as losses related to currencies and other securities markets. Past performance is never a guarantee of future results.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Hanson, Michael J., 1979-

20/20 money : see the markets clearly and invest better than the pros / Michael Hanson. p. cm.—(Fisher Investments Press)

Includes bibliographical references and index.

eISBN : 978-0-470-49372-4

1. Investments. 2. Investment analysis. 3. Portfolio management. 4. Speculation.

I. Title. II. Title: Twenty, twenty money.

HG4521.H2384 2009

332.6—dc22 2009000841

Then, they were Mom and Dad, and they taught me everything I neededto know by example of their own principled lives. Today, they are Loreeand Cary, two of my best friends. That is wondrous good fortune.

ACKNOWLEDGMENTS

Of all the professional gifts I have been given, learning how to think—how to see the world and make one’s way in it—is the best one I can imagine. It’s been my great privilege to serve and learn under Ken Fisher, Andrew Teufel, and Jeff Silk—the three members of Fisher Investments’ Investment Policy Committee. From them, I have obtained skills and lessons that will remain with me the rest of my days. In some sense, I owe everyone at Fisher Investments a debt of gratitude, for if it’s true that we are only as good as those we choose to work with, I am humbled by the thought.

It’s also true that hard work and desire mean nothing without opportunity, and in that spirit I owe a great deal of thanks to Andrew Teufel and Fabrizio Ornani—two who gave me more chances than I probably deserved and believed in me to achieve when there was often little reason to.

Then there is Lara Hoffmans. Good writing, even investment writing, is about clarity, intelligence, daring, freedom, and energy. None of that exists without her presence and influence on Fisher Investments Press. And that is especially true of this book and the daily work we do at Fisher Investments’ MarketMinder.com website.

Anyone who’s ever written anything knows first drafts are always terrible. It’s in the editing process a manuscript goes from dreadful to serviceable, eventually becoming something worthwhile. I owe Dina Ezzat, Ashley Muth, and Evelyn Chea much thanks in that effort, and also Jason Dorrier and Carolyn Feng for their honest opinions when I needed them. The same goes for the team at Wiley, especially David Pugh and Kelly O’Connor—their expertise and guidance, on issues large and small, always made a big difference. And Marc Haberman and Molly Lienesch deserve enormous credit for making Fisher Investments Press a reality.

Last, investing books aren’t much without data. So the help I received from the Fisher Investments Research Department was invaluable throughout the process, and the same is true for the folks at Thomson Datastream, MSCI Inc., and Global Financial Data for providing the data for our research.

INTRODUCTION

We need a new investing lens. Most investor mistakes come from blindness about the basic ways markets work and the best strategies to invest. This book is designed to be a set of glasses to help you see the markets more clearly. Having 20/20 investing vision means making more money, and that’s my ultimate goal for you.

Sight is by far the most important human sense—life as we know it is more or less impossible without it. But the notion of sight is also one of life’s most important metaphors. We often talk about sight when we really mean understanding. We have “visions” about the future, we “see things clearly,” we have “points of view,” and so on. To see, in other words, is to understand.

Too many investors are blinded by conventional investing ideas that don’t work. This book is about seeing the stock investing landscape clearly—investigating new ideas and challenging widely held conventions. I wrote this book to tell investors the things I wish they knew about investing, to give them a clearer view and thus make better decisions.

I’m no investing guru, but I work for one. For years, I’ve been an analyst working under Ken Fisher. In that time, I’ve learned his methods and have also studied the methods of many others. One day, just a few weeks into my career at Fisher Investments, Ken addressed a group of employees. He said, “If you want to be any good at investing, you have to go out and learn about the whole world and how it works.”

That will stick with me forever.

“Learning how the world works” is a tricky thing. Most investors will attack the problem by seeking “the rules.” People crave conventions, laws, systems . . . predictable order. The fact is, there is no “black box” or rule set you can follow for successful investing. If there were, we’d all just do so and be trillionaires by now. If there’s one thing I’m sure of, it’s that there is never “enough” learning about the world because the world is always changing. Investing successfully is closer to “being along for the ride” than coming to some grand conclusion or final wisdom.

So this book is not a manifesto. Often, it will raise more questions than it answers—and that’s a good thing. It’s designed to make you think better about your investing choices, not give you some set of rules to blindly follow. I want you to see clearer. This is a series of observations and thoughts about markets and investors in my time as an analyst. If you want rules, go somewhere else. My aim is to allow you to see things in a different way than the consensus—to help you think differently. Often, a mere shift in perspective is all it takes. The world is a changing, dynamic, evolving thing. So to learn how the world (and specifically, investments) works, it’s vastly more important to learn how to think about them.

Often, investors believe it’s impractical to spend time on flighty or abstract issues like how to think or to understand a concept more fully. In my view, it’s the most practical thing possible for investors to pursue—getting that part right underlies all else, saving time, angst, and, importantly, money. Amazingly, few ever learn how to think! Not in college, high school . . . not in exams . . . nowhere! So a lot of this book is going to seem unorthodox simply because similar content is relatively sparse.

Chess players understand this intuitively: There are tactics and there are strategies. Tactics are what players do on a move-by-move basis, but strategy is what drives the logic of those moves and the shape of the game—and, ultimately, success. No standard set of moves can always win because eventually your opponent catches on. But a well-defined strategy will help you make real-time decisions to beat your opponent in a constantly changing environment (the composition of the chess board).

Similarly, investors (and I’m talking about professionals, too) overwhelmingly focus on details like economic data, valuations, trading techniques, tax efficiencies, and so on (all important things, no doubt), without ever really having a fully developed, well-tested, and appropriate philosophy to help drive their decisions. Mounds of data and tactics, but no real comprehension or strategy! Instead, they use a hodgepodge of theories and methods that often unwittingly conflict and contradict . . . and then later wonder why their portfolio results are subpar. It’s like using reading glasses to gaze at the stars or a telescope to read a book! The lenses are distorting the views.

The way I see it, successful stock investing over the long term is about two things:

1. Thinking about investing problems the right way to make the right choices in an always-evolving market environment.

2. Discipline and self-knowledge.

I’ll be blunt: Neither of those is easy to achieve. Learning to see the world correctly and finding self-discipline are not short paths—they’re long roads requiring time and experience and hard work to master. (Well, no one ever truly masters them—you just keep learning.)

I’ll refrain from evoking that old cliché about giving a man a fish and you’ve fed him for a day, but teach a man to fish and you’ve fed him for a lifetime. (Ok, I just did it.) But that’s how it works in investing. Wall Street is full of data and ideas and perspectives, and you could spend your life reading every analysis you get your hands on and never sift through even a fraction of what’s out there! No one can know everything, so learning successful investing means learning to focus your limited time and attention on what matters and interpret those issues correctly.

ASKING THE RIGHT QUESTIONS

I have a question for you: Why are you an investor?

I think you should know that about yourself before we get started. Otherwise, a lot of this book may not make much sense to you. I can’t answer for anyone but myself: I think investing is one of the noblest things to be done with money. This is often not a popular view. I can understand why the professional investing community is often seen as greedy and evil. There are charlatans and crooks in every industry, always. On the whole, I believe allocating capital from where it’s plentiful to where it’s needed is good for the world and its development; that wealth is created and not just divided; that it’s a virtue to use money in a way that helps others grow while also enriching the investor.

I believe deeply in those ideas. Frankly, I think it’s difficult to be an investor otherwise. Economist Johan Norberg says it well: “Believing in capitalism does not mean believing in growth, the economy, or efficiency. Desirable as these may be, those are only the results. At its core, belief in capitalism is belief in mankind.” Stock investing is one of the primary mechanisms of capitalism and, in my mind, a very worthy endeavor. But also one where folks make a lot of mistakes.

Ever noticed how investors clamor for the methods of legendary investors, yet few ever bother to learn how legendary investors’ minds actually tick? People seek answers without ever knowing what the right questions were! I’ve spent my years as an analyst focusing on learning how to ask the right questions and letting the answers ensue.

Where does the learning come from? Everywhere! That means much of the wisdom of this book comes from places and minds far outside the narrow realm of investing. Most of the great investors loved to learn—they were extremely (often obsessively) curious about the world and saw new ways to understand investing in just about everything they did. They sought the why as well as the how.

Second, and maybe this is obvious, investors are humans. Humans are jumbled amalgams of experience, emotion, instinct, reason, and perspective. At any given time they’re blinded by biases and foibles, often leading to regrettable decisions. And it’s not just “they;” it’s you and me, too. All of us. I’ve fallen prey to most all the mistakes outlined in this book at one time or another many times.

We simply cannot be successful investors without gaining an explicit understanding about how our minds and the minds of others work. It will tell you a lot about how markets function and will also help you personally. This is part of the discipline of investing: Train yourself to self-assess and understand when your natural thoughts are leading you astray.

It’s going to be a strange trip. In this book, you’ll learn to:

• Study the investment world like a scientist, yet also avoid the pitfalls many scientists fall into.

• Discover the power of self-awareness and self-observation to build discipline and avoid common investing pitfalls.

• Use current discoveries in neuroscience to understand how our perceptions and natural emotions are often contradictory to our best financial interests.

• Learn how to navigate the media and gauge investor sentiment—not only to get the information you need, but also to ignore the daily noise.

• Understand the stock market and economy as a complex, emergent, adaptive system (CEAS for short). The CEASs reflect all well-known information via the mechanism of prices. We’ll explore this seldom cited but powerful way of understanding markets at length by looking at other natural systems—everything from ant farms to how a simple strand of DNA becomes a person!

• Forecast stock markets in terms of probability. We’ll see how the only way to reasonably predict the future must be via probabilities.

• Explore stock market forecasting using pattern recognition.

Experts call them a million things—drivers, indicators, valuations, and so on—but in the end all attempts to use past data to predict the future are forms of pattern recognition.

• Use all these observations and ideas to create a framework (or set of heuristics) to approach stock portfolio management in a practical way that can achieve long-term goals.

• Study the nature of risk in its many forms (from psychological to mathematical) and discuss how to avoid common mistakes during turbulent times like bear market panics.

Along the way, we’ll also dive into some basic strategies for thinking and learning and how those can be applied to better investing. For example, what are the benefits and pitfalls in using logic and theory versus historical market observations? Or how does associative learning help achieve a better perspective?

I come from a firm that believes in teaching people. That probably sounds mundane, but it’s a pretty radical idea in my industry—that an analyst would go out and deliberately use his time to teach clients. Aside from being a stock market analyst, each year I have the privilege of speaking to folks around the country about investing—how forecasting works, how to understand global economics, proper portfolio management, and so on.

Helping people learn to make better investing decisions has been one of the most fulfilling parts of my job. Most in the financial community won’t do it. In a roundabout way, that attitude presupposes wealth cannot be made—only divided. Maybe the only reason you’d need investing secrets is if you believe your slice of the pie can be diminished by giving knowledge away.

That’s wrong. I believe wealth is created, not divided—and the more investors can gain the vision needed to make good investments, the more they gain for themselves and also help markets and economies become more efficient . . . ultimately enriching everyone.

1

INVESTING IS A SCIENCE

Seek simplicity, and distrust it.

—Alfred North Whitehead

. . . but somebody said, “I don’t believe it,” and we had an interesting conversation because I said, “You don’t have the option not to believe. Believing is not optional. If you accept that this is replicated science, then belief is obligatory.”

—Daniel Kahneman1

If we want to see investing clearly, one of the first things we must do is view its foundations—the ideas investing is supposedly built upon. This first chapter is going to be a doozy. In it, we’re going to take a careful look at science and mathematics—two subjects that serve as the foundations of modern knowledge, especially for investing—and debunk them. Well, not fully debunk, really. More like cast serious doubts on them both as panaceas for investing knowledge.

Math and science are, at their core, philosophies. They are ways of seeing the world; they are not some rules about the world we’ve discovered. I realize that will sound blasphemous to many. But as we uncover the inherent limitations—and benefits—of math and science, much will be uncovered about how exactly stock markets and investing work.

APOLLO’S ARROW SHOT CROOKED

In the Greek Pantheon, Apollo was the god of reason. He represents light and the sun, truth and prophecy. He carries a bow and arrow—a master archer—and shot straight and true. He is an oracular god—the bringer of truths and clear vision.