Ken Fisher: Feel it in your bones

Ken is the son of legendary US investor Philip Fisher, a pioneer in the field of growth investing who often features in lists of the greatest investors of all time. Fisher senior was best known as the author of Common Stocks and Uncommon Profits, a guide to investing that has remained in print ever since it was first published in 1958. But advice from father to son was more practical. "My father always said to me: 'Keep two years cash needs in reserve, because you never know if you're going to be hit by a bus'," he says.

Having started his investment management career working with his father, in the early 1970s, Ken went out on his own, founding Fisher Investments and building it into the £21bn firm it is today, while writing a few best-selling investment books in his spare time.

So what has he learnt along the way? Investing is so simple, in fact that: "All investors make the same mistake".

Lifestyling is nonsense

What is this mistake? Is it being too adventurous with investments? No - it's being too cautious, particularly in retirement, when people tend to say: "I'm not working anymore so can't take risks with my money." Many of today's investors take the 'lifestyle approach' where a portfolio of equities is gradually moved into bonds as a person approaches retirement. But Mr Fisher thinks this is flawed because it doesn't take account of improving life expectancy.

Today's average 65-year-old investor will live another 20 years, but in Mr Fisher's view to be safe investors should be planning to live another 30 years. "You always have to bias on the note that you're going to live longer."

By the time today's 65-year-old reaches 95, life expectancy may have improved further. Mr Fisher cites his own experience: "When I was 25, if you'd looked at the insurance assumptions as to how long I'd live after I reached 55 and then the same assumptions when I actually got to 55, average life expectancy had gone up seven years. In a 30-year period in my lifetime, I got one year extended life expectancy for every four years lived."

Bearing in mind what you need your money to do over a potential 30-year retirement, Mr Fisher says that for most people the biggest concern is "to take care of me and my spouse for the rest of our lives". Factor in a younger female spouse, and your pot of money may have to work for 40 years or more. "I once wrote a column called wife haters - I wanted it to be called wife beaters - because if you leave your wife in poverty it's the worst thing you can do."

Stocks on top

Once you know how long you need your money to work, Mr Fisher suggests you look at stock market history. In how many rolling 20-year time periods have global stocks outperformed other assets? According to Mr Fisher, 1929-49 is the only 20-year time period when bonds did better than stocks. There are no rolling 30-year periods when bonds did better than stocks.

This has obvious implications for the investments you hold in retirement. "Even if you have low stock expectations, the average 65-year-old should be in stocks and have cash set aside for short-term needs," he says.

At Investors Chronicle, we've been looking a lot at annuities recently. These are the annual income that you purchase from an insurance company with the money from your pension - an income that continues until you die. If you're going to live a long time, an annuity takes away the associated worry of living to 100.

But if you're thinking of buying an annuity, Mr Fisher thinks you should "invest in a psychiatrist". He dislikes them first because the commissions for the insurance company are too high ("you're putting the salesman's kid through college"), and second because "they just take your money and buy underlying securities. You could do it yourself".

Instead of buying an annuity, he jokes: "Take a little bit of your money and a lifetime supply of heroin. This will make you feel warm and fuzzy. Take the rest and put it into stocks. The heroin will stop you worrying about market volatility."

But Mr Fisher is in no need of Class A drugs to feel comfortable in stormy markets. When most investors are worried about market prospects, as of now, Mr Fisher, is the opposite. "In this environment I feel great. It's a pretty world," he says.

He's certainly not worried about central bank interest rate movements. "There's nothing in history that shows short-term interest rates affect stock market movements. Yet everyone acts and talks as if it's a great worry." Our own Chris Dillow has also pointed this out - see ''

"What should you do when a central bank does X? You should yawn. What should you do when a central bank does Y? Yawn twice."

Markets are cleverer than you

Whether you are able to yawn is another matter - human nature is against you. And here we get into Mr Fisher's favourite territory of behavioural finance. "People repeatedly err in thinking they can outthink things. They think they have an innate ability to time the markets. They don't. Capital markets are discounters of known information, so everything that is known is already priced in."

If you think you can predict the bottom of the market, think again: "Our studies show 0.34 per cent of your readers would be lucky enough to get it right. Because they're right, they will then think they're smart. But next time they'll screw up."

So is there anything that investors can do to outperform? Yes, according to Mr Fisher, if you can adhere to the principle “Be fearful when others are greedy and greedy when others are fearful", a statement made by the great Warren Buffett.

Flintstone investing

Most investors, however, find it impossible to do this: "It's a simple guiding light but you can't accept it in your bones". I ask Mr Fisher what it is in human nature that makes this so difficult. He takes me back to the Stone Age when the battle for survival programmed humans to hate losses more than they love gains.

Stone Age hunters had to exert more effort to avoid pain (broken leg; inability to feed or defend family for a month; possible death) than to make a gain (kill gazelle; feed family today; go back hunting tomorrow). Learning what behaviouralists term 'regret shunning' (I had some bad luck today because lions frightened the gazelles away; so it's not my fault my family's hungry tonight) and 'pride accumulation' (it is my particular skill with the spear that led me to catch the gazelle) became matters of survival. Both regret shunning and pride accumulation motivate people to keep trying their hand.

It is this pattern of behaviour that still drives today's investors. For example, "I bought it and it went up; I had a method. I bought it and it went down; I had a row with my wife this morning so I wasn't concentrating properly."

As a result, Mr Fisher says the average American hates a loss about two and a half times as much as they like a gain. For the British, the ratio is 3.5 to one; and for Germans, it is 6 to one. "The Germans really hate losses," he remarks.

"For British investors, the process of the market dropping 15 per cent feels like the emotional equivalent of a market that is up more than 50 per cent," says Mr Fisher. "But put this into context. The market is down 15 per cent once every two years and was down 50 per cent only twice in the last century."