Markets Never Forget (But People Do): How Your Memory Is Costing You Money—and Why This Time Isn’t Different Hardcover – November 8, 2011

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Q&A with Author Ken Fisher

Author Ken Fisher

You start the book with Sir Templeton’s famous quote, "The four most expensive words in the English language are, ;This time it’s different.'" Is "this time" ever different?
History doesn't repeat, not exactly. And the past cannot predict the future, but it is one good tool in determining if something is reasonable to expect. Investing is a probabilities game, not a certainties game. Nothing is certain in investing—all you can do is determine what a range of reasonable probabilities are.

In the same way, it's not a possibilities game. It’s possible the world gets hit by an asteroid and destroys life as we know it, but the far greater probability is no such terrible thing happens.

You can't develop a portfolio strategy around endless possibilities. You wouldn't even get out of bed if you considered everything that could possibly happen. Instead, as I show in the book, you can use history as one tool for shaping reasonable probabilities. Then, you look at the world of economic, sentiment and political drivers to determine what's most likely to happen—while always knowing you can be and will be wrong a lot.

You say bull markets are inherently above average. How so?
I interact with a lot of investors. And, amazingly, even many professionals don't get this—bull market returns are inherently above average. Most people get that long-term, stocks average between 9% and 10%. But that’s an average and bakes in big up years and big down years.

I show in the book annual bull market returns on average have about doubled the market’s long-term annual average. And early bull market returns historically have been even bigger. All that means is long-term investors can and should expect to experience downside. But if you’re long-term growth oriented and remain disciplined to a good strategy appropriate for you, downside gets swamped by the bigger and longer periods of market upside.

Stocks rise much more than they fall—I show this in the book. Yet people focus much more on downside, so they forget.

You say "ideology is deadly" in investing, but don't a lot of people prefer one political party over another?
Sure. Personally, I don't cotton to either major party. But most people do tend to have one party they like. That’s fine and normal. Where it becomes problematic is letting your party preference color your market views. Then, too, there are some profitable patterns investors may miss if they are blinded by ideology and don’t use history to overcome that.

One example, in 2012, we either re-elect Obama, a Democrat, or newly elect a Republican. If you have a strong alliance to one party or the other, you likely think it's good if your guy wins, but bad if the other guy wins. But if you check history, you know either outcome has typically been good for stocks. When we re-elect a Democrat, stocks have averaged 14.5%, but when we newly elect a Republican, they average 18.8% in the election year. I explain why in the book.

People's ideology blinds them. And because they don't remember even recent history, they don't remember this major pattern happening right in front of them.

Right now, many fear the next 10 years may end up looking like the 2000s, overall pretty flat. What do you say to people concerned about a "lost decade"?
They are fearful of something that’s never happened before in the US, not once. Those are bad odds to bet on.

First, making a forecast for a 10-year period ahead is close to impossible. In the book, I explain why. But briefly, in the near term, demand is the primary driver of stock prices because supply doesn’t move enough to matter. Longer term, supply shifts swamp everything else. And you can't make a 10-year forecast unless you know something about where stock supply will head 8, 9 and 10 years from now. I've never seen anyone even begin to address that.

Most important, flat or down 10-year periods for US stocks are historically rare. Then, too, every single 10-year period that followed was not only positive, but strongly positive. Can you get two back-to-back negative 10-year periods? Sure—but you better have a darn good reason why the period ahead will so strongly buck the odds. And you better have some new technology for forecasting 10-year returns because I’ve never seen one that has worked consistently.

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Why do so many investors make the same mistakes repeatedly—being too bullish or too bearish at just the wrong times? Because they forget. Forgetting pain is an instinct—humans have evolved that way to better cope with the problems of survival. But for the complex and often counterintuitive world of investing, it causes serious errors.

"This time it's different" are the four most expensive words in the English language (according to investing legend Sir John Templeton). Yet many investors routinely fall into the trap of thinking "now" (whenever "now" is) is different somehow. In Markets Never Forget (But People Do): How Your Memory Is Costing You Money—and Why This Time Isn't Different, four-time New York Times bestselling author Ken Fisher shows readers how their memories play (often costly) tricks on them—and how they can combat their faulty memories with just a bit of history.

This isn't to say history repeats itself perfectly. It doesn't—but a recession is a recession. Some are vastly worse than others—but investors have lived through them before. Credit crises aren't new, nor are bear markets—or bull markets. Geopolitical tension is as old as mankind, as is war and even terrorist attacks. Understanding how investors have reacted to similar past events can help guide investors in shaping better forward-looking expectations. The past never predicts the future, but it can reduce guesswork about what's ahead.

In this book, Fisher takes aim at some major market memory mishaps—like the idea stocks have become inherently more volatile or that wildly above- or below-average returns are abnormal. He shows how, early in every recovery, investors don't believe in it—often at a huge cost. And he shows how, in investing, ideology is deadly. Most important, he teaches how you can use history as one powerful tool to help begin reducing your error rate and help begin getting better investing results.