Debunking 5 Common Investor Dilemmas

FORBES | 2/13/2013

Hundreds of investors ask me questions each year about the dilemmas they confront. Their worst problem? Uncertainty. They are traumatized and become emotional or confused to the state of inaction. Even worse, they try to solve a short-term problem in a way that hurts them financially in the long run.

My solution is to keep it simple: Buy the stocks of great companies at reasonable valuations.

Here are five everyday investor dilemmas and my easy stock solutions.

Dilemma: You need cash flow, but it’s a scary world. A ten-year Treasury pays just 1.8%. If you are prepared for some risk, junk bonds pay about 5%, but they tend to get whacked when interest rates rise. Same with lower-yielding but higher-quality corporate bonds.

I have long advocated a safer approach if yield is what you crave. Buy big-cap stocks. I like America’s largest wireless carrier, Verizon (VZ, 44), which has a 4.75% dividend yield. With Verizon, you can expect single-digit growth from a diversified group of consumer and business offerings, plus a boost from added wireless spectrum.

Like any stock, Verizon isn’t immune to short-term volatility, but in the long term it will deliver. It’s cheap at 1.1 times annual sales and 15 times my estimated 2014 earnings. Beats T bonds by a mile.

Dilemma: The Federal Reserve is printing money, and the country’s going to hell. Your daughter just got a nose piercing and a facial tattoo. The prospect of inflation has you terrified. How can you invest in the ugly realities of neo-America?

Not with gold—it doesn’t actually do anything, and during 85% of its long history it has lost money. Do you flee America? Poland is doing great, but the language is difficult. Mexico? Better take your gun.

The solution, of course, is to diversify globally, and one of the best ways I know to stave off inflation is buying in Deutschland. The Germans have little tolerance for inflation. I like Germany’s fast-growing SAP (SAP, 80). It’s the global market-share leader in enterprise software for business operations and customer relations.

Crowd-think sees faltering growth due to competition. That was also the view one, three, five and ten years ago. Don’t fall prey to the doubters—the stock sells for 20 times my estimate of 2013 earnings with a 1.2% dividend yield.

Dilemma: Your other daughter—the good one, from wife No. 2—is adorable, just 7, and you want to put away something for her college years that she will appreciate.

In a decade we may think back on Facebook as a great fad, but Coca-Cola KO +0.11% (KO, 38) is a stock with staying power!

It’s truly one of the original global buys, but it’s as American as apple pie. It should continue to grow at low rates until long after your daughter proudly gives you grandkids. It sells at 16 times my 2013 estimated earnings with a 2.6% dividend yield.

Dilemma: You’re intrigued by exciting, fast-growing emerging markets, but you’re also worried about terrorists, drug dealers, corruption and lousy roads.

Buy Ecopetrol (EC, 61), one of the largest petroleum companies in the world, based in Colombia. But don’t worry about Colombia’s narco issues. Ecopetrol is an experienced local operator. I last recommended it Sept. 21, 2009 at $26, but it should continue to prosper. It sells at 13 times my estimated 2013 earnings.

Dilemma: how to find another great stock despite a well-diversified portfolio.

Buy Walt Disney DIS +2% Co. (DIS, 55), the world’s largest media firm by revenue. It’s big and easy to understand. Slow growth, but superbly managed and diverse in its field, and by definition fun! It’s just 13 times my estimated September 2014 earnings with a 1.4% dividend yield.

Money manager Ken Fisher’s latest book is Markets Never Forget (But People Do) (John Wiley, 2011). Visit his home page at www.forbes.com/fisher.


http://www.forbes.com/sites/kenfisher/2013/02/13/debunking-5-common-investor-dilemmas/

Ken Fisher: The Only Three Questions that Count: Investing by Knowing What Others Don't

The Only Three Questions that Count: Investing by Knowing What Others Don't is a book on investment advice. It was released in December 2006 and spent three months on The New York Times list of "Hardcover business bestsellers" .^[1] It was also a Wall Street Journal and a 'BusinessWeek best seller.^[2]

In the book, Fisher says that because the stock market is a discounter of all widely known information, the only way to make, on average, winning market bets is knowing something most others don’t. The book claims investing should be treated as a science, not a craft, and details a methodology for testing beliefs and uncovering information not widely known or understood. The book’s scientific method consists of asking three questions:

1. What do I believe that’s wrong?
2. What can I fathom that others can’t?
3. What is my brain doing to mislead me?

The first question addresses common investing errors, the second shows how to try and find bettable patterns which others may misinterpret, and the third deals with behavioral finance, pointing out cognitive errors such as overconfidence and confirmation bias.

Other issues covered include high P/E ratios; debt; the federal budget, trade, and current account deficits; the U.S. dollar; high oil prices; emerging markets; gold; and the U.S. economy.

Book reviews have also appeared in the Financial Times, which stated "you get the impression that its author, Ken Fisher, does not often find himself short of things to say. The stream of consciousness that flows through the book can be distracting but it is impressive and certainly never dull."^[3] Forbes Magazine which said "Fisher's key insight is that investment is not a craft that can be mastered by merely accumulating information."^[4] and Canada's National Post which says that the book " dispels more than a dozen ... myths".^[5]

From Wikipedia, the free encyclopedia

References[edit]

1. Jump up^ The New York Times list of "Hardcover business bestsellers"
2. Jump up^ BusinessWeek best seller
3. Jump up^ Financial Times book review
4. Jump up^ Forbes Magazine book review
5. Jump up^ National Post book review

Kenneth L. Fisher on How to Time the Market

Kenneth L. Fisher on How to Time the Market

"There is no end to the lengths people go to try to find the magic key to the stock market."

"At best, one can hope to be right about the stock market perhaps half the time. At worst, one is apt to be wrong most of the time. Stock market seers run hot for a couple of years. Then most embarrass themselves."

But there's more. Even if you COULD predict the market's major moves, Fisher says it wouldn't be worth it. He studied how an investor would have fared had he correctly called every 100-point move of the Dow Jones Industrial Average for the 5-year period ending Dec 31, 1982.

Such an investor (which of course, probably doesn't exist) would have earned a compound rate of return of 51.5%. That sounds great, but according to Fisher, it's no better than the return you could generate by buying a super stock.

And in the perfect-market-timing scenario, you also would be jumping in or out of the market 11 times during that span, resulting in significant trading costs. Plus, since the vast majority of those 100-point swings occurred in less than a year, you'd be taxed at higher short-term gains rates. Super Stocks make their gains over a three- to five-year period, generating long-term gains that are subject to lower tax rates.

Fisher does, however, offer a solution for how to time the market. His two rules:

1. When a company is selling at a (sufficiently) low PSR (Price-Sales Ratio) - BUY it.
2. If you can't find companies selling at (sufficiently) low PSRs, DON'T buy stocks.

Of course, this isn't exactly market timing in the way most people think of it, because it looks at specific stocks rather than the entire market. But whether you call it market timing or not, it's certainly a lot better plan than those used by most investors who try to time the broader market's movements.

Source: Kenneth L. Fisher, Super Stocks, reissued edition (NY: McGraw-Hill, 2008)