Kenneth L. Fisher

Investment Advice from Mutual Fund Companies

Mutual fund companies now offer a significant amount of investment guidance for clients. The authors report that most companies consider risk and return characteristics when giving advice, but the advice does not conform to the Markowitz mean–variance framework. Hence, most individual investors’ portfolios are not on the efficient frontier. Fortunately, the annual return deficiency caused by this deviation is small.

Cognitive Biases in Market Forecasts

Will the DJIA soar to 36,000 or plummet to 3,600? The desire to know the future is so strong that it blinds us to the fallibility of forecasts. The authors find that P/E ratios and dividend yields provide no help in forecasting one or two–year stock returns, and even ten–year forecasts are far from reliable. They trace the belief that P/E ratios and dividend yields provide reliable forecasts of returns to cognitive errors and discuss statistical and organizational remedies.

Sentiment, Value, and Market-Timing

It is easy, in hindsight, to conclude that all but a handful of investors were exuberantly bullish at the top of the market in 1999 and that all bullishness disappeared by 2002. But foresight is not hindsight, and todays promises of sure market timing are as misleading as yesterdays. Expectations of investors during the time of the bubble and its aftermath were different as reflected on Internet message boards, in the Gallup/UBS surveys of individual investors, and in the BusinessWeek surveys of Wall Street strategists. Yahoo postings show most investors were indeed bullish during the time of the bubble, but many were bearish, concerned about lofty valuations and wary of manipulation, hype, and insider trading. Bullishness subsided by 2002, but hope remained. Gallup surveys show many individual investors thought that the stock market was in a bubble in the late 1990s but most expected the bubble to inflate. By 2002, fewer investors thought the stock market was in a bubble, but fewer expected stock prices to inflate. BusinessWeek surveys show Wall Street strategists were more bearish than individual investors during the bubble, but when deflation of the bubble turned individual investors bearish, it turned Wall Street strategists bullish. By December 2002, individual investors expected a median stock market return of 5% in 2003, while Wall Street strategists expected more than 20%.