Fisher Investments on Financials

Preface

The Fisher Investments On series is designed to provide individual investors, students and aspiring investment professionals the tools necessary to understand and analyze investment opportunities, primarily for investing in global stocks.

Within the framework of a “top-down” investment method (more on that in Chapter 6), each guide is an easily accessible primer to economic sectors, regions or other components of the global stock market. While this guide is specifically on Financials, the basic investment methodology is applicable for analyzing any global sector, regardless of the current macroeconomic environment.

Why a top-down method? Vast evidence shows high-level, or “macro,” investment decisions are ultimately more important portfolio performance drivers than individual stocks. In other words, before picking stocks, investors can benefit greatly by first deciding if stocks are the best investment relative to other assets (like bonds or cash) and then choosing categories of stocks most likely to perform best on a forward-looking basis.

For example, a Financials sector stock picker probably did pretty well from 2003 to 2006—real estate trends were mostly favorable and lending robust. However, his picks did extraordinarily poorly in 2007 and 2008 as conditions reversed and financial panic ultimately set in. Was he just smarter earlier in the decade? Did his analysis turn bad somehow? Unlikely. What mattered most was stocks in general (and especially Financials stocks) ...