Thursday, December 2, 2010

Fisher, Debunkery

Ken Fisher’s Debunkery: Learn It, Do It, and Profit From It—Seeing Through Wall Street’s Money-Killing Myths (Wiley, 2011) is a welcome antidote to the intellectual pap, often laced with arsenic, that is regularly dished up on CNBC and in financial planning books.

The reader need not and should not agree with Fisher on every point. Nor should he merely store away talking points for cocktail parties or potential zings for his financial planner. Instead, this book should set the investor on a course of independent thinking, during which he honors Santayana’s oft-quoted statement that “skepticism is the chastity of the intellect, and it is shameful to surrender it too soon or to the first comer.”

Fisher debunks fifty myths, ranging from “retirees must be conservative” to “when the VIX is high, it’s time to buy,” from “so goes January” to “pray for budget surpluses,” from “stocks love lower taxes” to “consumers are king.” Here I’ll share two of his “debunkeries” as well as his thoughts on the usefulness of history.

Bunk 12: “Stop-losses stop losses!” Wrong, claims Fisher. “It would be more accurate to call them ‘stop-gains.’ In the long term and on average they’re a provable money loser.” (p. 51) The reason that stop-losses don’t work is that stock prices aren’t serially correlated: “What happened yesterday doesn’t have a lick of impact on what happens today or tomorrow.” He continues: “If stock price movements dictated later movements, you could just buy stocks that have gone up a bunch. But you know, instinctively, that doesn’t work. Sometimes a stock that’s up a lot keeps going up, sometimes it goes down, or sometimes it bounces along sideways. You know that. So why don’t people understand that correctly on the downside?” It should be clear that Fisher is no believer in momentum investing. As he writes, “momentum investors don’t do better on average than any other school of investors. In fact, they mostly do worse. Name five legendary ones. Or even one!” (p. 52)

Bunk 19: “Beta measures risk.” No, Fisher contends, “it measures prior risk. … It doesn’t measure anything about the present or future.” (p. 75) Fisher’s argument again hinges on his claim that price action is non-serially correlated “by definition.” And if price can say nothing about the future that’s exploitable, how could volatility (which is based solely on price action) be useful, academics be damned? It can’t—at least not in the sense that a low-beta stock implies low risk going forward and a high-beta stock implies high risk. But if used in a contrarian way in specific circumstances beta can be a profitable guide. In V-shaped recoveries “those categories that hold up better than the market during the beginning of a bear that then fall the most in back of a bear market (making them high-beta) bounce most in the early stage of the new bull.” Put another way, “Those categories with the best returns after the bottom had the biggest beta at the bottom. They had more volatility to the bottom and more volatility than the market in the new bull! But the way our brains work, we tend to think: When it’s down, it’s ‘volatile,’ but when it’s up, it’s ‘good’!” (p. 77)

Although Fisher readily accepts the notion that past performance is no guarantee of future results and, as we have seen, rails against those who seek patterns in past price action (or volatility) to shed light on future price action (or volatility), he nonetheless believes that history is the “investors’ lab.” Investing, he writes, is not a craft; becoming a master craftsman does not give you an edge. Instead, investors should model themselves on scientists. “In science, you develop a hypothesis, test, confirm, and retest—continuously. It’s a non-stop query session. While investors don’t have a traditional lab like biologists or chemists, they do have history.” (p. 135) By history he means the kind of stuff that happens in the real world and that is easily researched, such as whether gold is a safe haven and whether high unemployment is a stock killer. In this sense, “history is one important tool for shaping forward-looking expectations” (p. 136) and improving the probabilities of profitable investing results.

Debunkery may not be a core library holding, but it’s a fast, often provocative read.


  1. Stop losses are provable money losers and there is not a single legendary momentum investor? This must be chilling news to John Henry or Larry Hite or Salem Abraham or Louis Bacon or Richard Dennis or Bruce Kovner, etc. Someone should by Ken a copy of Market Wizards.

  2. I was just waiting to see who was awake!