Kenneth L. Fisher - Markets Never Forget (But People Do): How Your Memory Is Costing You Money-and Why This Time Isnt Different

Contents

FISHER INVESTMENTS PRESS

Fisher Investments Press brings the research, analysis and market intelligence of Fisher Investments research team, headed by CEO and New York Times best-selling author Ken Fisher, to all investors. The Press covers a range of investing and market-related topics for a wide audiencefrom novices to enthusiasts to professionals.

Books by Ken Fisher

Debunkery

How to Smell a Rat

The Ten Roads to Riches

The Only Three Questions That Count

100 Minds That Made the Market

The Wall Street Waltz

Super Stocks

Markets Never Forget (But People Do)

Fisher Investments Series

Own the World by

Aaron Anderson

20/20 Money by

Michael Hanson

Fisher Investments On Series

Fisher Investments on Energy

Fisher Investments on Materials

Fisher Investments on Consumer Staples

Fisher Investments on Industrials

Fisher Investments on Emerging Markets

Fisher Investments on Technology

Fisher Investments on Consumer Discretionary

Fisher Investments on Utilities

Fisher Investments on Health Care

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Library of Congress Cataloging-in-Publication Data :

Fisher, Kenneth L.

Markets never forget (but people do) : how your memory is costing you money and why this time isnt different / Ken Fisher with Lara Hoffmans. 1st ed.

p. cm.

Includes index.

ISBN 978-1-118-09154-8 (hardback); ISBN 978-1-118-16760-1 (ebk); ISBN 978-1-118-16761-8 (ebk); ISBN 978-1-118-16762-5 (ebk)

1. Investments. 2. Portfolio management. 3. Finance, Personal. I. Hoffmans, Lara. II. Title.

HG4521.F5848 2011

332.6dc23 2011037193

To Bob HopeThanks for the memory.

Preface

Hope Springs Eternal

Bob Hope (19032003) was huge when I was young. Funny, funny, funny! Whether in the Road to ... movies with Bing Crosby (Hope was in 52 major flicks), with the US armed forces overseas wherever conflict occurred at his own personal danger, on TV, doing stand-up, etc., Hope was everywhere. And every performance since 1938 included his anthem, Thanks for the Memory (words by Leo Robin, music by Ralph Rainger and first recorded by Hope and Shirley Ross). Hope was huge and beyond great. And hope springs eternal. Then and now! But sadly, our memories arent so functional. Fact is, our memories are beyond terrible when it comes to economic and market realities.

People forget. So much! So often! So fast! Stuff that happened not long agoand more often than not. And it causes investing errorspretty commonly humongous ones. Maybe Hope should have been singing, Pranks for My Memory . Because for a fact, our memories play pranks on us in markets, and always have and we never learn.

We forget facts, events, causes, outcomes, even feelings . And because we forget, we tend to be hyper-focused on the here-and-now and immediate pastbehavioralists call it myopia . We tend to think what we see is new and differentand significantwhen pretty often, weve seen the exact same thing before or something very close to it and history is littered with similar examples.

This species-wide tendency to myopia isnt accidentalits evolutionary. Humans evolved over millennia to forget pain fast. If we didnt, we wouldnt do crazy things like hunt giant beasts with sticks and stones or plow our fields again after drought, hail, fire, what-have-you destroyed our crops. And for sure no female would ever have more than one kid. But we do forget, and fast.

Forgetting pain is a survival instinct, but unfortunately, that means we also forget the lessons. Then, too, though people individually forget, markets dont. History does not, in fact, repeatnot exactly. Every bear market has a distinct set of drivers, as does every bull market. But human behavior doesnt changenot enough and not very fast to matter. Investors may not remember how panicked or euphoric they were over past events. They may not remember they had the exact same repeating fears over debt, deficits, stupid politicians, high oil, low oil, consumers spending too much, consumers not spending enough, etc., etc., etc. But markets remember very well that details may change but behavior generally doesnt.

For decades, Ive heard otherwise intelligent business folks express (as fact) opinions about current phenomena being extreme, when history shows theyre not extreme or even unusual. Examples are plentiful and throughout this book. But if you point out to someone that his opinion-stated-as-fact is actually false, you will run into a brick wall because he simply wont believe it. They know . They read it in the media or online. Their friends agree. Its a fact to them. It may also be a false fact and one easily known if we didnt simply forget so easily. But because we forget as individuals, we do so as a society, too.