Ken Fisher Talks Dollar Devaluation, Timing the Market, Private Credit Markets and More

Transcript

Ken Fisher:

But when one currency goes up relative to another currency, the other currency is going down. Well, one currency goes down relative to other currencies, the other currencies are going up. And in reality, the world's stock market is trading off all those against each other. And the totality of it is a net zero sum game.

So, this first question says, "I believe we are currently in a time like the dollar devaluation in 1974. How can this not end badly, especially as many people do not own any, or a sufficient amount of assets? Will we soon drown in a massive debt devaluation?"

Well, mind you, you know, in that period we're coming off of the gold standard. And in 1974, you were already in the depths of a major global recession. Not depression, but recession. We're clearly not there right now. We're not in a global recession. We're weeks away from having had all-time highs in the stock market. In the latter part of 1974, we're two years away from highs in the stock market after a major bear market. And so, it's—I don't agree with your premise, but I will say that the dollar has been weak this year. And then I will say that— and as I've said this many times in the past— people put too much emphasis on currency.

Let me help you with that in a couple of ways. And again, I said, it's nearly impossible for me to answer these questions quickly. This is one that's nearly impossible for me to answer quickly. The quick answer is, a single currency’s movement tells you nothing about what will happen to the stock market. It just doesn't. Let me help you with that. A dollar falling means non-dollar currencies around the world, compared to it, must be rising. It is also true that all currencies, collectively, will suffer the value degradation of inflation. But when one currency goes up relative to another currency, the other currency is going down. Well, one currency goes down relative to other currencies, the other currencies are going up. And in reality, the world's stock market is trading off all those against each other. And the totality of it is a net zero sum game. Since the totality of is a net zero sum game, it doesn't really impact the direction of the stock market.

You do have a high correlation of different countries' stock markets going the same direction. Some a little more, some a little less. But global stock markets tend to move with a significant positive correlation. Market is going up. Most countries tend to go up. Market going down. Most countries tend to go down. The reality is the currencies always end up being a net zero sum game as currencies against each other. So, if you're positing a falling currency relative to other currencies, you're looking at one side of a coin, not the totality.

"You say, 'time in the market is more important than timing the market.' Does this mean investors can just buy any stock, sit on them and get rich?"

Well, of course not, because some stocks are stocks of companies that are going to end up going bankrupt and the stocks become worthless. And the reality is, the answer is something as simple as buying any stock and sitting on it to get rich is ridiculous. On the other hand. If you, as Warren Buffett has said, buy a passive array of the stock market and hold it in the long term, you tend to have a pretty good long-term return, with volatility along the way. A true passive investor who buys the whole stock market— and my definition of the whole stock market would be the whole world stock market—passively, in some, for most people, index-like format. But you know, the S&P 500 could be seen the same way. In the long term, it tends to work out. Why? Because in the long term, people tend to envision the fears and things that could go wrong in the here and now and not anticipate and price all the new discoveries that will come along in the future down the road, two, three, four, five years.

And while stocks have volatility and you've run into periods over time where the stock market falls, historically about three out of four time periods, the market's rising and eventually that pays off as an investment. Does that make you rich? Well, no, it does not make you rich. But on the other hand, if when you're relatively young, you start saving and you invest in the stock market and you keep doing it and you keep doing it. And I wrote about this in my 1987 book, The Wall Street Waltz, it's pretty easy to figure the compound interest of the stock market, and I end up being relatively rich.

"You've said it's hard to time the market, so you don't trade in and out of stocks over short periods of time. So how then do you decide when you buy and sell? Do you take sentiment into account when buying and selling?"

You know, I cannot answer quickly all the things that you need to know, to know how to buy and sell and when to buy and sell and what to do. The reality is, yes, sentiment is included in thinking about all of this. But what you're really looking for is a stock that, in terms of its future, is not adequately optimistically thought of. And then the timing of it is a tricky thing. And you buy it with the thought to hold it until it is more fully appreciated. And then the selling of it is a tricky thing. And in the context of these short answers, I can't really give you a complete description, but the most basic concept is to look for companies that are better than what they're thought to be, and hold them until they're realized to be as good as they are.

"What is your opinion on private credit markets in a possible financial crisis, due to what some say, 'poses risks to financial stability' because of its opaque lending standards, illiquidity and excess leverage?"

So, I'd like to think that my response to that is somewhat nuanced. I don't think private credit, which is way more popular than it's ever, ever been, and it's become kind of fatty. I still don't think it's big enough to cause what the question suggests. Let me go a different direction. In a time period of a classic business cycle recession and the bear market that precedes and accompanies it, there are many sectors that end up doing badly. The next time we have one of those, I think private credit will do badly.

The collection of them can have a huge effect. I don't think private credit, in and of itself, is big enough to be like a bubble that pops, like people talk about. But I do think it has the potential to be negative, because I do think it's overly appreciated, too popular, and too many new people without a lot of experience in it have gotten into it in recent years, and a lot of money has been raised for it. It's also a product that's more sold than bought, so therefore, there's a lot of holders of it that don't really understand what they're holding.

Warren Buffett has created in his lifetime some of the most memorable lines, and one of his wonderful lines is, "You don't know who's swimming naked until the tide goes out." And the reality of private credit is it's probably one of many in the water that are somewhat naked, and you don't really know that until the tide goes out.

And the last question, for now, is, "Can you explain the price-to-sales ratio?"

So, people use the price- to-sales ratio pretty commonly. I created it over 40 years ago. If you go and do a historical search on it, you'll find my writings are the first writings on price-to-sales ratio to go into any detail about it. It is simply where you otherwise would think of a price- to-earnings ratio, use the sales of the company instead of the earnings. That's easy to calculate. You could take the market cap of the company, price times total number of shares, and divide it by the annual revenue of the company. Or you could take the price and divide it by the sales per share of the company— because the math is the exact same either way. And what that does is gives you a sense of how valuation changes relative to abnormalities of profitability. Because if earnings are too high, the PE may look low, when it kind of isn't. And the price-sales ratio can help you see that. When earnings are too low, the price-to-sales ratio can also be more effective.

When I created this, I did not create this as a market timing tool. Some people try to use it as a market timing tool. It won't work as a market timing tool. I'm just saying. I created this. It's not a market timing tool. It doesn't work for that, even though some try to associate it with that. Why? Valuations on the broad market are exceptionally widely known, priced into the market very efficiently. Valuations as a whole are not good timing tools. Never have been. For every level of valuation that you can find where the stock market did a certain amount of good return, you can find the exact same at that valuation where it had just exactly the reverse return. Therefore, it's not a good timing tool.

But when value stocks do better than growth stocks, the price-sales ratio is very helpful for finding stocks that will do better than value stocks as a whole, because it allows you to look into companies that have their earnings temporarily depressed, value them and see what their level of earnings and/or price-to-book would be if earnings were to return to a more normal level. And in fact, my first book, Super Stocks, was about nothing but this topic. And still today, if you go back to a revised version of Super Stocks, it'll take you through the whole "kitten caboodle."

Thank you for listening. Tune in again next month. Every month I get these questions. Every month I enjoy answering them. I hope to see more questions from you next month, and I look forward to being able to answer them and being with you. Thank you much.

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