Personal Wealth Management / Expert Commentary

Fisher Investments’ Founder, Ken Fisher, Reviews Your Questions on Active Management, Equal-Weighted Index Funds, Velocity of Money and More

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher answers viewer mailbag questions about active portfolio management, the potential downsides to equal-weighted index funds and whether an increase in money velocity implies investors are turning to bonds. Ken offers his take on these topics and more in this month’s viewer mailbag.

Transcript

Ken Fisher:

Commonly known information: things we read about in the newspapers, talk to our friends about at a cocktail party, the guy that you're getting—that's waiting—on you at the diner can talk to you about—are all priced into securities. And thinking you're smarter than the next guy about those things doesn't make you money. That's what's called noise that's disguised as information.

Every month people mail in questions. Feel free to do so. Unless they're about how ugly I look, I probably have something I might be able to say about them. There's nothing I can do about how ugly I look. People criticize the clothes I wear all the time. I think to myself, if you don't got something better to do than criticize the clothes I wear, you probably shouldn't be focusing on investments too much. But, um. And fortunately, my wife knew I was ugly when she married me and going to get uglier as I got older. And it's been 52 years later and she still loves me, so there!

Anyway. One question this time is if information is already priced in, then how do active investment strategies work? I.e. how can you beat the market? So let me step back from that and give you just a simpler answer of how do you beat the market? In market theory and reality, commonly known information: things we read about in the newspapers, talk to our friends about at a cocktail party, the guy that you’re getting—that’s waiting—on you at the diner can talk to you about—are all priced into securities. And thinking you’re smarter than the next guy about those things doesn’t make you money. That’s what’s called noise that’s disguised as information.

Real information is that which we don't know about and talk about, but you find. Real information is something important somehow, some way that you know that other people don't know. It might be right in front of everyone, but maybe they're looking the other direction. But it's not your opinion about how the debt level or the fed is going to impact, because everybody is looking at the debt level, at the fed, everybody is looking at, at, at and those things are priced. The issue very simply is: What do you know that other people don't know that's important? That's hard to do. It's not easy.

That's what active management is supposed to be about. Finding something other people don't know that's bet-able. Whether it's of this type or that type—as long as it's legal, as long as it's ethical—finding something other people don't know that's important to the future of business or interest rates or currencies or or or or. It's non-trivial. It's hard to do, but that's what it's supposed to be about. And with that, there's one down.

Another one is thoughts on creating a 50-50 portfolio of a high dividend yield ETF and a growth-oriented ETF instead of just the S&P 500. So I don't really have a problem with that, but at the bet. Let me tell you about what the bet is. The bet is that it's not going to be as growthy as the S&P 500. It's going to be more dividend yielding, you know that. What does that do? Well, it's more of a move to value, less of a move to growth. It will also inherently, since value stocks on average have lower total size in market value than growth stocks do, it'll have a lower total market capitalization, so it'll tend to do better when small stocks beat big stocks than the S&P does. It'll tend to do worse than the market when big stocks do better than small stocks. It'll tend to do worse when tech stocks do better than non-tech stocks, because tech stocks are all going to be on the growth side not on the value side. It's going to do better when companies that are very low growth and very cyclically oriented—paying big dividends—are backed by an economy that's picking up and roaring. Not little, a lot. It's just a different bet. Is there anything wrong with that bet? No, but you have to be right about what's going on behind it, like you do with anything else.

Let me just give you a different example. You may not like this. But if you had done that for the last 1-, 5-, 10 years, because growth has done better than value over that period overall—particularly tech—and big has done better than small overall, you would have lagged. Might that lead in the ten years ahead? Yeah it might, but that's the decision you have to embrace.

There's another one that came in that's very close to this one. And this one is: I've seen some YouTube videos on these equally weighted index funds. What are your thoughts on equally weighted index funds? Are they worth the time? Should I investigate this? Does it matter?

Well, it kind of depends. Let me just tell you what happens when you equal weight. When you equal weight, you bring the—what is equal weighting first. Equal weighting is where you treat every stock the same in proportion to every other stock in its size inside the fund, like an equal-weighted portfolio. Not based on how big the stocks are relative to each other, like in a cap-weighted portfolio. The S&P 500 is a cap-weighted portfolio, an equal-weighted portfolio. Therefore, since it’s not based on the importance relative to the totality based on the size, but instead is equal weighted, puts just as much emphasis on the smaller stocks as it does on the bigger ones and therefore brings down the market capitalization of the fund or the index. What does that do? It means that in a period like this year, where big stocks do better than small stocks, you would lag. In a period where small stocks do better than big stocks, you would lead.

In the long term, it's going to like—what's the long term? Well, maybe for you it's three years. Maybe for you it's five years. Maybe for you it's ten years. That's not for me to decide. But in the long term it's going to come down to what does better: big stocks or small stocks.

Now, if you can answer that question very correctly, you could just go buy an index fund of big stocks or small stocks. You could do that directly yourself. If you can't, equal weighting is just a decision to bring the cap down significantly and there's nothing wrong with that. But it's a bet. These things are always a bet. And with that, I bet you hadn't thought about the fact that equal weighting is just a way to bring down the market cap of the fund of the same stocks that you would have in a cap-weighted display of those stocks which would have a higher weighting. But it does bear on how your investment in it, whether it's the cap-weighted or the equal-weighted, will perform which is in this case all about size.

And then the final one for today is: The velocity of money is growing for the first time in 25 years. That's not true. It's been growing for a sustained period. It wiggles around. But the question is: the velocity of money is growing for the first time in 25 years. Is this because investors are turning to bonds? Can this be an inflationary risk that investors don't see?

Well, last question: can it be? The answer to "can it be" which is about "is it possible that." Any question that comes at you which is "is it possible that" is very hard to answer: "No, it can't be possible." I mean, yes, it can't be possible that I catch the flu from somebody that's never been, you know, close to me at all, physically or any other person that they gave it to. But "could it be that" the velocity of money is falling from people that are turning to bond funds. Yeah, it could be that they're turning to real estate. Yeah, it could be that they're turning to—but the world's not that simple.

It's not A versus B. That acts as if everything comes off of a, you know, everything's a trade-off of two things in one pile of money. The world is much more complex than that. Where are people putting money at a point in time? In the short term, that's not easy to measure. There's not an easy way to measure that. There's all kinds of attempts to do it. They're all imperfect. Secondarily, the velocity of money is a calculation, and I should have answered this beforehand. I apologize that I did not. The velocity of money, if you don't understand what that is, is just simply the money that exists. How many times in a year does it turn? If it's turning faster, the velocity is going up. If it's turning over or being used less fast, slower, the velocity is falling.

Now, the fact is, one of the problems with this is—and I've done videos on this before and I've written about this. When I was young, in the 1950s and 60s, money was a simpler thing to understand than it is today. Money was checking accounts, and savings accounts, and short-time deposits —like a savings account—at a bank.

The fact is, in those days, you went into the department store to buy whatever and you wrote a check. Not very many people do. There's still people who write a check. Not very many people do that anymore, you know. And in the early days of credit cards, when they became more and more popular in the 60s and then into the 70s they became very common with lots of different ones. And then you moved to digitization, and then you move to what is today an incredible array of near monies that may or may not be categorized in M4 in America —the broadest definition of what money is.

But all money really is is whatever we think of as something we can trade for goods or services. Used to buy, get when we sell. And the fact of the matter is that “used to buy” thing, which once upon a time was green bills and checking accounts. And then take money out of a checking account that pulled it out of a savings account. And then we got to money market funds and credit cards and and and and and.

Today, if you got money— I mean, when I was young, pretty much not very many people kept money at a brokerage account. They had certificates. You bought the stock, they mailed you certificates. When you went to sell the stock, you took the certificates into the broker. But in the 60s, people more and more started keeping them in the brokerage accounts. In the 70s, it became more. Today, almost no one ever gets a stock certificate.

But you could actually take your stocks, go to sell, have an account that's set for leverage, borrow against it and get the money like that. But it wasn't money. But you got money. And you think of it as "I could get money." So is that money or isn't that money? Because it's whatever you think money really is. Whatever you think you can use to trade goods and services.

Today it's so complicated to figure out what the size of that is, that the basic question is are they just doing bonds? They're probably doing lots of different stuff. And they probably think about lots of stuff they're not actually doing at a moment in time. Where could you pull money from? Where couldn't you pull money from? If I want to buy something tomorrow, what do I do? It's actually in everybody's brain pretty simple. But in aggregate, to figure it out, it isn't even very clear that the real velocity of money is falling, because it's very hard to figure out what the real quantity of money is.

And that's one of my complaints about the world today. It used to be simple to figure out what the velocity of money was and what the quantity of money was. And now the quantity of money is an abstract index of stuff that may not actually reflect what people use when they go to buy stuff, or what they get when they go to sell stuff. And therefore, I don't actually think there's a good answer to your question. I think it's too complex to answer with any real accuracy.

Thank you for listening to me. I hope these mailbag questions this month were useful to some of you somehow. I appreciate you wanting to put up with me as I go through these raves and rants. Thank you much.

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