In this blog post, we’ll explore why successful investors seek investment answers in history. Through Ken Fisher’s investment philosophy and examples of financial crises, we’ll examine how studying history provides insights for investment decisions.
Learn from History (The Importance of History Emphasized by Investment Legends)
2018 was a very difficult year for investors. In January, the KOSPI index broke through the 2,600-point mark to reach an all-time high, but subsequently fell day after day. As the U.S.-China trade war intensified, it eventually dropped to the 1,900-point range. Cryptocurrencies such as Bitcoin and Ethereum, which had attracted intense interest as new investment opportunities, also peaked early in the year before entering a steep downtrend. Investors were left twiddling their thumbs, unable to find a way to cut their losses.
In this chapter, we’ll examine why renowned investors—often called “investment legends”—emphasize that understanding history is key to success. Learning the investment philosophies of these titans—who consistently generated returns even during difficult market conditions—can help you keep your composure and remain calm in situations like those of 2018.
The Story of the Fisher Family
The protagonists of this chapter are Philip Fisher and Ken Fisher, a father and son both regarded as investment masters. Philip Fisher, the father, was an investor active in the mid-to-late 20th century. He is credited with founding the “growth stock” investment strategy, which involves identifying companies with high growth potential, investing in them, and then waiting patiently for their value to rise. His son, Ken Fisher, is a heavyweight investor who founded the asset management firm Fisher Investments on his own—without his father’s help—and remains highly active to this day.
In terms of financial success alone, the son has achieved far greater results than his father. Unlike his father, Philip Fisher, who worked alone in a small office throughout his life, Ken Fisher established a global asset management firm that invests in markets around the world. In 2014, he was also ranked 240th on the list of America’s wealthiest individuals compiled by the business magazine ‘Forbes’. The father and son have also achieved outstanding success not only in investing but also in writing. Philip Fisher published ‘Invest in Great Companies’ in 1958 and ‘The Conservative Investor’s Peace of Mind’ in 1975. Both books are regarded as seminal classics on growth stock investing. Ken Fisher has also authored numerous books on investing; ‘Beat the Market with Three Questions’, published in 2008, and ‘Contrarian Investing’, published in 2017, are considered his masterpieces.
Although they are father and son, their investment philosophies differ significantly. Philip Fisher thoroughly researched a small number of companies and selected only those he judged to have very high growth potential for investment. He also preferred to invest in a company once and then trust and wait for decades. Texas Instruments and Motorola are prime examples.
Philip Fisher began steadily buying Motorola stock in 1956. This was because, after meeting with the founder, the CEO, and various executives in person and engaging in lengthy conversations, he highly rated the company’s growth potential. The factors he considered particularly important when selecting companies to invest in were the passion and qualities of the management. When he first purchased Motorola stock in 1956, the share price was around $42. He sold his Motorola shares in 2000, some 40 years later, when the share price had reached $10,000. This is why he is called a legend of investing.
While his father, Philip Fisher, was an investor who trusted in the qualities of management and the capabilities of a company and was willing to wait, Ken Fisher is an investor who practices diversification based on the principle of “not putting all your eggs in one basket.” He invests in various countries and industries, and within those, he allocates funds across multiple companies. His philosophy is that, no matter how high a company’s growth potential may be, one should never invest more than 5% of one’s total investment capital in a single company. This is because he believes that even if losses occur in some investments, it is not a problem at all as long as the overall return remains positive. In his view, consistently outperforming the market’s average return by even just a few percentage points each year is, in itself, a tremendous success.
Reading the books by the Fisher family reveals that investment masters have their own distinct perspectives on the world, humanity, and history. Although classified as economics or investment books, they sometimes feel like philosophical works. As is true in any field, once one reaches the level of a master in investing, one’s perspective on the world becomes more important than practical skills.
Few fields require as deep an understanding of crowd psychology as the stock market—a market that has brought despair to countless people, is causing frustration for some even at this very moment, and will continue to unsettle many in the future. Achieving great success in the stock market also means having a deep understanding of the characteristics of human groups and individual psychology.
Ken Fisher, in particular, has persuasively articulated his original perspectives through his writings. Reading his books, one sometimes gets the impression that he is a very cynical and sarcastic figure. At least when it comes to the mass media and so-called expert circles, he makes no secret of his cynical outlook. Consequently, his writing frequently features blunt and provocative language.
Why Should We Learn from History?
Reading Ken Fisher’s books provides an answer to the question of why we should learn from history. Most people learn history in school, but they rarely have the opportunity to think deeply about why they should study past events. In ‘Contrarian Investing’, Ken Fisher introduces dozens of classic works that help readers understand the history of economics and finance, and he briefly summarizes the key points of each book. Just glancing at the list of books reveals the depth of his interest in history. So why does a successful Wall Street investor take such a deep interest in history?
The reason Ken Fisher introduces numerous historical works in his book and repeatedly cites past examples can be summarized in a single sentence as follows.
“No matter what major crisis strikes, you can find similar cases in history and the methods used to overcome them, so don’t panic or act rashly.”
When a crisis strikes, people tend to panic and act irrationally, as if what they’re experiencing were the most serious problem in the world. The same was true during the 2008 global financial crisis. Ken Fisher points out that while the global media at the time stoked fear as if the world were coming to an end, a look at 20th-century history alone reveals that there have been several financial panics of a similar scale. A prime example is the Great Depression that began in 1929. At that time, the market capitalization of the U.S. stock market plummeted by a staggering 80% over the course of about five years. To draw a parallel with South Korea, it was a shock comparable to the KOSPI index—which had risen to 2,600 points—plummeting to around 500 points.
In fact, even more recently, in the early 2000s, there was a massive financial crisis known as the dot-com bubble. In Korea at that time, the KOSDAQ market—which had opened in 1996—soared to 2,800 points in the early 2000s. In 2000, Saerom Technology, which had been listed on KOSDAQ for only three months, even surpassed Hyundai Motor Company in market capitalization.
However, as the bubble burst, the KOSDAQ index plummeted to around 300 points in just two years. This illustrates just how severe the shock to the stock market was at the time.
Ken Fisher has repeatedly pointed out that the impact of economic crises was magnified because investors—whether institutional or individual—as well as the media and experts, lacked an understanding of historical precedents. Despite enduring numerous crises—such as the Great Depression, the oil shock, the dot-com bubble, and the global financial crisis—the world economy eventually recovered and continued to grow. He argues that while the damage could have been mitigated if people had responded with a bit more composure, the situation worsened as everyone was gripped by fear and fell into a state of panic.
The 2008 global financial crisis is the prime example Ken Fisher cites. He argues that if people had responded with just a little more composure at the time, the crisis would not have escalated to such an extent. He also presents a view on the causes of the financial crisis that differs from the commonly accepted interpretation. He does not believe that the default on subprime mortgages—non-prime home loans—or the greed of the financial industry were the core causes of the crisis. Rather, he argues that the real cause was the U.S. government’s hasty revision of accounting laws, which changed the valuation standards for assets held by financial institutions.
Reading Ken Fisher’s book naturally reveals the mindset he has used for investing. His perspective can be summarized into three main points.
First, he urges readers to carefully reexamine whether what most people believe to be true is actually correct. We generally do not question or attempt to verify facts that those around us take for granted. In his book, Ken Fisher asks whether rising government budget deficits truly have a negative impact on economic growth, and whether rising oil prices necessarily have a detrimental effect on corporate growth. While it is commonly believed that expanding budget deficits and rising oil prices are detrimental to economic growth, he explains—based on statistical data—that this is not always the case.
Second, he urges us to ponder what facts we alone know that others do not, and to constantly explore ways to uncover such facts. He has evaluated companies’ growth potential using his own unique analytical techniques. Reading his book offers a glimpse into how one can gain insights into such analytical methods. It also helps us understand why he was able to successfully exit the stock market before the dot-com bubble burst. This is because he used his own analytical methods to detect signs of market overheating before anyone else.
Third, he argues that the human brain still retains instincts from prehistoric times, and that these sometimes interfere with rational judgment. His argument ties into the concept of the “lizard brain” from evolutionary biology. This theory posits that although humans have evolved from reptiles to mammals, we still retain some of our ancestral instinctive traits. The “lizard brain” refers to the brainstem; unlike the cerebral cortex, which is responsible for logical thinking and rational judgment, it is known to trigger impulsive behavior and unfounded fears. Therefore, he argues that one must properly control these instincts to succeed in both life and investing.
Ken Fisher argues that to control the lizard brain, one must distinguish whether an intended action stems from rational judgment or an instinctive reaction. Over millions of years of evolution, humans have prioritized survival above all else. As a result, a tendency to excessively avoid risk and a tendency to cling to beliefs once deemed correct have become deeply ingrained in the brain. This is also why the pain of loss feels far greater than the joy of gain.
He advises that we must always be on guard against indiscriminate fear and confirmation bias, which can hinder rational judgment.
If you’d like to learn more about how to effectively control the lizard brain, you might find it helpful to read Seth Godin’s ‘Linchpin’ or ‘The Mean Market and the Lizard Brain’ by Terry Burnham, a former professor of economics at Harvard University.
The three pieces of advice we’ve examined so far are also investment principles that Ken Fisher has consistently emphasized. He coldly observed how people uncritically follow public opinion and lose their rational judgment when overcome by fear. He also maintained an attitude of constantly pondering to discover facts unknown to others and continually questioning himself about the possibility that his own judgment might be wrong. It was precisely this mindset that served as the driving force behind his ability to stay ahead of the rest.
