The man with uncanny predictive powers

US money manager Ken Fisher "is everywhere you don't want him to be", says Andrew Feinberg in Kiplinger's Personal Finance. About two years ago he went on a "marketing bender". Now, his "junk-mail packets invade my mail box" many times a year and, "like an annoying jack-in-the-box", he pops up relentlessly when you log on to personal finance sites. This is a campaign that has "all the finesse and good taste of a late-night thigh-and-backside toning informercial". That said, Fisher really shouldn't be ignored. Why? Because he seems to have "uncanny" predictive powers. He turned bearish on tech stocks in January 2000 (two months before they peaked) and was negative on the entire market for much of its three-year decline (from December 2000 his clients held no stocks at all). He then went bullish again in July 2002 ("another good call"). The fact is that during his career "the three times he predicted bear markets we got 'em", says Feinberg. "When he favoured large company stocks over small you could walk it to the bank. Now, I'm a good investor, but I can't make top-down predictions like that." How does he?

Part of the explanation for Fisher's "rare ability both to select stocks and make astute market calls" can be traced to his family, says Edmond Jackson in The Sunday Telegraph. His father, Phil Fisher, "inspired Warren Buffet". Buffet has even said that "without altering his style towards Fisher's qualitative analysis of companies and managers he could never have made his billions". That said, "part of the attraction of investment is adapting to change" and Fisher is "careful not to get set in the same ideas mould as his father". So what are the key points of Fisher's successful strategy?

Be contrarian: When it comes to forecasting the market as a whole, Fisher's method can sound "frivolous", says Jonathan Davis in The Independent, but it isn't. The method basically involves taking a detailed look at the predictions of a wide range of influential market forecasters and "finding the holes in the range of outcomes". If past experience is any guide, says Fisher, "the one thing you can be sure about is that the stockmarket will not finish the year anywhere near where the majority predicts it will". This is not only a "well-founded matter of fact", says Davis, but even has some grounding in finance theory. If the forecasters really are influential, their confidence - or lack of it - will already be factored into the market, so it is impossible for their outcome to be correct at the end of the year. No wonder then that in most years "the consensus opinion is not even right about the direction of the market, let alone the scale of change".

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Be active: Fisher stresses that all shares - "growth, value, technology, small and big cap" - can all do well at any one time, says Jackson. But over time "they revert to a mean level of performance". This implies a need for a degree of active portfolio management and means that we need to overcome "the habit of becoming a collector": we all tend to over-favour one area of the market.

Benchmark: Fisher is very keen that you should assess your performance in relation to others. But while one can see the need for this among professionals, it surely isn't necessary for the private investor to justify their portfolios against the market. "I am only interested in the market should it offer depressed or inflated prices at which to trade."

Negatively correlate your portfolio: For effective risk management, you need diversification, and that means being exposed to different industries that trade in opposite patterns to each other. There is, for example, evidence that technology and pharmaceutical stocks are negatively correlated like this.

Use price-to-sales ratios: Ken Fisher pioneered the use of price to sales (P/S) as a stock-selection ratio in his 1984 book Super Stocks, says Edmond Jackson. This involves "selecting out-of-favour stocks largely on the basis of dividing a company's market capitalisation by its annual sales". If margins can be improved on big sales, it works wonders for profits and investors. P/S has now been largely confirmed as the "king of ratios" and would certainly have been the best tool to have been using for stock selection last year. But investors should be aware that the ratio is often attractive before a bear market but less so after one. It is also worth adjusting the ratio for debt: a few years ago Marconi appeared attractive on a P/S basis as its shares plunged, "but its debt meant the risk was huge".