REUTERS/Brendan McDermid
- Ken Fisher - the founder, executive chairman, and cochief investment officer of Fisher Investments - explains how he whittles away at the global macroeconomic environment until he feels comfortable enough to make stock selections.
- Despite his deep-digging approach, Fisher also buys stocks he hopes will go down in order to prove that his initial bets were right all along.
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In a world chock-full of investment strategies, choosing the right one can be an overwhelming, onerous task.
Luckily for us, Ken Fisher - the founder, executive chairman and co-chief Investment Officer of Fisher Investments, which oversees more than $100 billion - is here to offer up his strategy, which has stood the test of time.
That strategy is a top-down, global macro approach - and Fisher has built his career around its adoption.
"You first look at the whole world and you break it down into categories like US versus other parts of the world, simultaneously," Fisher stated on We Study Billionaires, an investment podcast. "So you break it down into sectors: growth vs value and big vs small."
He added: "Then you say, 'based on where we are now which parts of that should do best?' And then you look within those for your stocks to select from."
Fisher's approach is relatively straightforward. In effect, it's addition by subtraction. Eliminate as many possibilities as you can from the larger macro environment, and then keep whittling down until you have a much smaller cohort to choose from. After all, it's way easier to pick a winning stock from a bundle of 10 than it is to pick from 10,000.
Read more: These 10 charts from Ray Dalio prove the value of finding the perfect portfolio mix
Fisher provides a perfect example to back his thesis - and it's directly applicable to today's market environment.
"Traditionally in bull markets, as the bull market gets older and older and older, fewer and fewer stocks lead the market higher," he stated. "So you say to yourself: 'When you're at that stage where breadth should start narrowing, what should it narrow into? And you want to be overweight there."
In today's environment, breadth is certainly narrowing - and investors have piled into one cohort of stocks in particular: FAANG. This small group of stocks - Facebook, Amazon, Apple, Netflix, and Google/Alphabet - has been largely responsible for pushing the bull past its 10th birthday.
This market action provides a sound, real-time example of Fisher's thesis in action. If you were able to identify this early on, you would've been handsomely rewarded.
The logic behind buying losers
In addition to this top-down approach, Fisher also buys things he hopes does badly.
This may sound counterintuitive. After all, why would you want to buy something that losses money? But Fisher puts his money where his mouth is.
"They're like my insurance policy," he said. "I'll always want to buy some stuff that does badly, because if that stuff does badly, it means the things that I thought would do well, did do well. You got to always have some counterbalance."
Fisher isn't about to go all-in on a stock pick without having a safety net. He knows it's impossible to be right all of the time, and he's clearly not afraid to admit it, or bet against himself. This is valuable advice for an overconfident investor that thinks they can outsmart the market.
If the biggest, most influential investors are embracing diversification, you probably should too.