As the son of the first expert who focused specifically on growth stocks, Kenneth Fisher grew up in an investment environment.
But his ambition lay somewhere else, namely in forestry.
Yet due to family pressure Kenneth opted to work for his father’s company. At the time, his father was quite rigid in his approach, which was difficult to deal with for the rebellious Kenneth.
And so Fisher Investments was born, amidst the forests of Woodside, California. This was not only because of his love for forestry (Fisher is one of the world’s leading logging experts in the 20th century), but also due to the isolation.
Fisher did not believe in the groupthink of the financial community. According to him, it is the original investment ideas that are most rewarding. As soon as the market hears about a successful strategy, it doesn’t take long for the profitability of the strategy to disappear.
By now, his company has three locations, all in a wooded area. Currently, Fisher Asset Management globally manages an impressive sum of $ 47 billion.
Fisher’s personal capital is estimated to be worth $ 2.7 billion.
But how did he ever earn such a huge amount of money?
The price / sales ratio
Characteristic of the investment strategy of Fisher is his focus on the price / sales ratio. In his book “Super Stocks” (1984), the emphasis is primarily on this indicator.
The reason for looking at the price / sales ratio instead of the price / earnings ratio, he says, is because the P/E ratio is too dependent on coincidences. Big investments, changes in accounting policy and large R & D expenditures can cause the P/E ratio to be unrepresentative for the company.
This can be avoided by looking at sales instead of profit.
In addition, a company with a low price / sales ratio can make a big jump in profits with just a slight margin improvement. In his search for the best stocks Fisher makes a distinction between different sectors.
Basic industries (steel, cars, chemicals, paper, etc.) almost never have huge profit margins and therefore the price / sales ratios should be a lot lower than, for example, companies in the technological or medical sector.
In addition, Fisher also found the following:
- Larger companies tend to have a lower price / sales ratio;
- Positive surprises usually come from companies with a price / sales ratio below 1;
- Negative surprises usually come from companies with a relatively high price / sales ratio.
Diversification in value stocks and growth stocks
Of course, the price / sales ratio is not the only thing Fisher looks at for the selection of his shares. Further on in this article, we’ll come back to the other indicators he uses. Here, we explain how Fisher ultimately select stocks in which he actually invests from a set of suitable shares.
Fisher states that different periods require different investment styles. He splits the appropriate shares in value stocks and growth stocks, after which he again divides these groups into large, medium and small businesses. This creates six different groups of stocks, out of which he selects the four best performing groups in the current market situation.
In case he would misjudge the market, the risk that he is wrong in four of the six groups is much lower than if he had selected only one group. When selecting the four groups Fisher looks at the international yield curve, the gross world product, and inflation.
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To assess Fisher’s current performance we can look at the Fisher Asset Management fund. This fund has delivered a return of 73.7% over the past 15 years. This is lower than the 86,4% return of the S&P 500 over the same period.
This underperformance was mainly due to the past four years.
During these years the annual average return of the fund was 9.5% less lower than the S&P. Of course, this does not automatically imply that the results were negative for Fisher Asset Management. Apart from the year 2011, it has made positive returns since 2009.
Despite the underperformance of Fisher Asset Management, we cannot immediately blame Fisher as an individual investors. It is clear that the size of the fund ($ 47 billion in assets under management) causes that possible great stocks with a small market capitalization cannot be bought. Something which is possible with his private capital.
The stock picks in his column on the Forbes website did significantly better than the fund; it outperformed the S&P 500 by a whopping 24% in 2010, and 5% in 2009.
Click here to see Fisher Asset Management’s current performance and positions.
If you are very interest about this investor, you should definitely read his book “Super Stocks” or follow his columns on the Forbes website.