CONCLUSION

Time to Say Goodbye

In concluding, allow me to get personal and address why I would write this book at all. You can blame it on the US Forest Service. I fell in love with forests as a kid. My parents lived in a suburb where their back fence was adjacent to the woods. As a kid, I was over the fence and off into a live oak forest. From my parents’ home, in a world long gone, I could hitchhike up to Kings Mountain, 20 minutes out, and be in the redwoods at 2,000 feet in elevation. That’s where I live and have for more than a third of a century. But as a kid, I saw myself living and working in the woods always, as a forester. I went to forestry school because I loved trees.

A summer job pulling chain for a US Forest Service survey crew convinced me I’d never, ever work for the government under any circumstances. And today, forestry is almost always either working for or with the government in one way or another or against the government. That summer taught me everything about government employment is oppressive. What I knew was that I simply didn’t want to have anything to do with the government. I also knew right then, for the same reason, I’d never be a career politician because it, too, meant working for the government. Might have saved my mortal soul. Somehow I hoped I had something better to do with my life. With no sense of what to do next, I switched majors to economics because I’d been good at it earlier.

Forests still jazz me—redwoods in particular. In fact, I’m very proud the only endowed academic chair in the whole wide world dedicated to any single tree species bears my name and is devoted to my beloved redwood. I’ve built and maintained a serious hobby life devoted to redwoods, including locating and excavating more than 30 pre-1920 steam-era redwood lumber mills and collecting and cataloging the artifacts. I’ve also compiled what I believe is the world’s largest non-institutionally owned forest history library, spanning more than 3,000 volumes. But you could never get me to go to work for the government. Serious hobbies are ok, but it is important to separate what you do career-wise from what you do purely for fun.

Capital markets are fun, but they’re also work. I hope the Three Questions will be profitable for you, but along the way, I also hope you liked this book and found it educational. When I first started my Forbes column, Jim Michaels, then the editor of Forbes and generally the dean of American business journalists, taught me that a column was supposed to be three things: entertaining, educating and profitable. Those are pretty good goals for much of life. But as fun as they are, markets are a great deal of work—which you can see in the large amount of data and analysis in this book. The Three Questions are a tool to let you know what you need to know to do well. But you have to apply the effort. No book can do that for you.

The opposite of a governmental employee is a worshiper of free markets and capitalism. By the time I was finished with school, I was pretty well hooked. So after school, I went to work for my father. I learned what I could from him, including that I’m not a very good employee, and struck out on my own. I was too young to know I was too young at the time to be able to succeed on my own—so I could. Over 40 years and many good whacks from TGH later, I’m still at it. Why such a long career of flagellation at the hands of TGH? Why keep going to work and dealing with all the real world’s dull cares when I could retire and dedicate the rest of my life to redwoods, my cats and my wife? Why keep making very public prognostications in Forbes these decades, verifiable by anyone who wants to prove me wrong or attack me? Why do any of this?

Transformationalism

This is an opportunity to keep discovering and doing new things forever. The most important part of being alive at this point in history, in my view, is the ability to do the new. In Chapters 5 and 9, I spoke about my grandfather at length. When he died in 1958, he had seen amazing evolutions ranging from autos to radio, movies, antibiotics, airplanes and more. He could sit in his living room and see the president speaking to him real time in a wooden box—right there. When he was five in 1880, if he could have described to his grandfather what he would see by 1958, Isaac Fisher, my great-great grandfather, would have thought my grandfather was nuts. He would have turned to his son, Philip Isaac Fisher, and said, “Philip, what are you doing to let such crazy notions in my grandson’s mind?”

But Isaac would have been wrong. My grandfather’s generation saw more relative change in basic life than any other generation before or since. They were at the inflection point of the explosion—the nonlinear launching point Americans regularly underestimate, which we otherwise refer to as the American Industrial Revolution. The most singularly powerful unleashing of mental force ever. Capitalist force—the most powerful kind! Before his generation, every generation lived life almost identically to their grandparents. They might move. They might war. They might take a different career. But the basics of life changed very, very slowly in the eons before my grandfather’s birth.

My father, born in 1907, saw tremendous change too—more absolute change than my grandfather did but less relative change. He saw jets, integrated circuits and the beginnings of biotech before he died in 2004. My generation has seen tremendous absolute change and will continue to—but less relative change than my father or grandfather saw. My three sons are in their mid-30s and older. They assume change is normal. Yes, now it is, but it’s still very new. To wake daily as a normal person and participate in changing the world in some small part like my Grampa did as one of the pioneers at Hopkins Med or my father did in growth stock investing—that’s new. That didn’t happen centuries ago except for a few weird one-offs like Isaac Newton. Normal folks didn’t do that. Now they do. We live in exceptional times because we can rise every day, if we choose, and participate in developing new things never before known that will be taken largely for granted by those following us.

I call this process transformation. Normal people now leave their field changed in their wake because of things they developed. Newton was a transformationalist before they were common. The Industrial Revolution unleashed transformationalists throughout our world—people whose imaginations knew no bounds and could fathom the unfathomable.

It happens mainly among scientists and capitalists. Julius Rosenwald was a transformationalist when he started Sears, Roebuck and Co. and changed how people envisioned retailing for 100 years. Carnegie was. Ford was. Adam Smith was when he wrote The Wealth of Nations. But most authors aren’t—they’re usually just incrementalists. Einstein certainly was, and there are a great many in science—famous and not so. More recently, Bob Noyce and Gordon Moore, cofounders of Intel, combined scientific backgrounds with business acumen to transform their little part of the world. Bill Gates is. He changed the world in ways that leveled the playing field for small businesses versus big. Chuck Schwab was. The list is long—even endless. But you need not be huge to be a transformationalist. You just have to change your little part of the world permanently so others always see it differently through your new science, knowledge, technology or vision.

Our lives—the way we live them daily—are fundamentally changed by every transformationalist. Sometimes we don’t know it because we don’t see it. When I endowed the Kenneth L. Fisher Chair in Redwood Forest Ecology, I did it partly because I love redwoods but also because its initial holder, Steve Sillett, is a transformationalist who is very rapidly changing the way we think about redwoods. He has no limits in his mind as to the questions that can be answered that we’ve never addressed. He is transforming how we know redwoods and big trees in general. I wouldn’t have endowed the chair if I didn’t see a transformationalist to support.

In capital markets, there’s no limit to what you can do to learn and build capital markets technology that no one has ever understood before. You can be a transformationalist of capital markets. You couldn’t do that 200 years ago. Today you can. Today you can wake up and work daily on asking questions simply challenging what we know—opening the vista of what we may know soon. The Three Questions are specifically for that purpose—so you, some of you who read this book, may get it in you to stretch to become a transformationalist yourself.

When I developed the PSR, I was trying to do that. When I did early work on small-cap value (before that term existed) and showed the institutional investing world how it fit in terms of variance and covariance into traditional finance theory’s Markowitzian framework of mean variance optimization, I was trying to do that. I’m no Newton, no Bob Noyce. I’m no great genius by any standard. But I can ask questions. And so can you. And you may be a great genius able to fathom things I never could and become a great transformationalist.

I keep doing what I keep doing because at this point in human evolution, the most exciting and fun thing we can do is to develop the new that has never been developed before and decimate past mythologies. We will make mistakes to be sure. But we will progress for sure. You can do it as well or better than I can. If you’re younger, you can do it far longer than I can. You can make a huge difference. I know most of you won’t because you won’t want to. But if a few of you get the idea while young or willing to ask the Questions and attempt transforming parts of finance and market theory, you can have a huge impact on the future.

The most important reason I keep pushing ahead is because I can get up every morning and address the new in my little part of the world, and maybe in 2012, I’ll use the Questions and fathom a Question Two that really creates something new and shattering. Or maybe you will.

Yes, managing money is a valuable service, and doing a good job is vital in a world where so many don’t. But I hold no illusions I’m saving lives like the graduates of Hopkins Med 100 years ago. I’m no capitalistic version of Mother Teresa. Yes, my firm’s many clients rely on my firm’s services for their well-being, and that is a pretty important undertaking—one I am honored to provide. But my firm today can do that without me. When I retire, it will carry on just as it does now because we built it with the ability to do that. The reason to get up and do it at this stage in life is for the fun of the new and different and challenging.

Another reason I do what I do? I love Capitalism. In my view, it is thus far the most holy, perfect accomplishment of humanity. Under Capitalism, all are born to opportunity. The poor become rich. The richest were mostly born not rich. Those on the Forbes 400 mostly fall off over time. Bill Gates was born simply upper middle class and as a youth became the richest man in America and created the biggest endowment in history. The world’s great innovations and transformations and transformationalists have all come from capitalistic societies and none from elsewhere in the past 200 years. Contemporary elitist intellectuals have wrongly snubbed Capitalism since long before I was born, but they are no more right in their vision than Gertrude Stein from Chapter 5.

The stock market is pure Capitalism. The stock you buy doesn’t know if you’re white or black, male or female, old or young, American or French. Prices are dictated by supply and demand and nothing else. It’s global, efficient, wildly volatile, always surprising, raw and beautiful. In many ways, TGH and I have a very intense love-hate relationship.

And by writing this book, I’m bringing the message to you—that Capitalism is good and the stock market is unpredictable but beatable. So what should you do now? I want you to move down that learning curve fast—hopefully faster than others—and advance capital markets science. As I’ve said repeatedly, you can’t make market bets and win long term unless you know something others don’t. I didn’t share some of what I know to wow you with cute analytical tricks. It was a demonstration of applying a scientific method to the market. To show you how. The advantages I showed you will all fade away one day. Maybe some sooner than later—but all someday. Yet asking the Questions will go on forever. The only thing that will help you or me beat the market going forward is innovation. To my knowledge, while there are many books showing people investing tools—just as my first book showed my innovations like the PSR of 1984—I’m unaware of any investment book before this one, not a single one, showing you how to innovate for yourself.

So here it is. Maybe you think all this is wrong, or maybe just part of it is wrong. That’s fine. I’m ok with you seeing me as wrong. But I don’t want you to just think I’m wrong. I want you to prove it. If you don’t believe what I’ve shown you, at least use the methodology to prove me wrong. Show me an R-squared, show me a cognitive error, fathom something for me scientifically I haven’t fathomed—and write to tell me. But really prove me wrong. Don’t just write me to tell me I’m an idiot. I won’t pay attention. What you think of me is none of my business. Truly, I invite you to be skeptical about everything in this book. Get data, run an analysis, do it over long periods with different starting dates. Check it overseas to make sure you haven’t found a flukey factor. Show me the data and stats, and then tell me I’m wrong.

What I don’t want you to do is think I’m wrong but never prove it. That won’t do you any good. It’s just a waste of time. If you think I’m wrong and can show it satisfactorily with data, you haven’t hurt anyone. In fact, you’ve just helped yourself because you’ve established or confirmed reality. And if you’ve made it to this conclusion, you must, in some small way, believe what everyone knows and accepts isn’t always right. So show me how I’m wrong. I can take it! Show me the data and how you ran your analysis. Maybe you will discover a new way to stick it to TGH, and for that I salute you. But if you prove I’m wrong, you will have proved the methodology works. And in a different way, then, I’m still right—isn’t that beautiful?