Self-made billionaire Kenneth Fisher, who has around $100 billion in assets under management spoke to venteran investor Ramesh Damani about the stock markets and how one can should invest in the time of coronavirus.

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The founder, Executive Chairman and co-CIO at Fisher Investments joined Damani in a free-wheeling chat on CNBC-TV18's Wizards of Dalal Street.

Here's the complete transcription of the the conversation:

Damani: After every bear market there is a bull market. What is the evidence that we are in the new bull market now?

Fisher: This is a different kind of bull market, but it is a bull market in my opinion for many reasons. One of them is that it is exceptionally rare when you look at the very broad global or US only market, not smaller subset markets to recover this much of a decline and not move on to new all-time highs.

So if we look at the portions of the market, for example, that did best before the bear market that started in February, those portions have actually continued to do best overall both in the downturn and in the subsequent upturn. Now that is a feature which makes it very unusual because while we had a bear market by size, clearly more than enough size, it is also true that normally coming out of the bottom of a bear market into a brand new bull market, smaller and value stocks tend to lead the way bouncing hard off the bottom -- that is not what has happened this time.

In that way, what I would say and have been saying is that this is a new bull market, but it is both a bear market and a new bull market that acts more like an oversized correction than it does... I believe that is one of the reasons that it has been fooling so many people.

Damani: You said that it is a correction masquerading as a bear market. Having said that, is the leadership being intact in the high cap stocks in America suggests to you that this was a correction and not a bear market?

Fisher: We clearly have an economic contraction but it is not like a normal recession. It is a different kind of contraction because of the many governmental clampdowns on economic activity; the forced restriction as opposed to the normal way a recession is created.

People are having a very hard time with this, but simply the stock market has always been a leading indicator and Ramesh you know that. But not everyone seems to and not everyone seems to accept it. So the reality is that normally the stock market is pre-pricing a future that is in someplace 3 to maybe 30 months into the future. Sometimes on a long end, sometimes on a short end, knowing exactly how far it is pre- pricing is very difficult to do, but it is always pre-pricing.

This time because of the nature of the pandemic leading to unexpected forced clampdown of economic activity very rapidly the market had a pre-priced decline at the fastest rate ever in history. Of the very top of the market, we got two official bear market territories depending on where you were in 16-18 trading days but that is not quite true, there were a few places that were already there.

But on a global basis, US basis, major market basis, developed nation basis and most of the EM—most not all, we were there in 16-18 days right off the top. That reality, the fastest ever drop off the top is one whereby my measurement whenever we have had market pre-pricing really fast, what it tends to do then is revert to pre-pricing far into the future, how far into the future, I really don't know but maybe 20 months, 25 months maybe even as far as 30 months, but it is right now looking past this economic decline, that is pretty clearly true.

Damani: Looking past the second quarter, maybe. However, is the market looking past a recurrence of coronavirus, a possible inflation because of the Fed stimulus? Market prices all this pretty rapidly and investors don't seem to understand that?

Fisher: So first let me go back to what markets do for a living which is to pre-price all widely known information. I nor anyone else really understands what will happen with the future of this disease. People can speculate about it and have opinions, but no one really knows. All of those opinions are pre-priced and in that pre-pricing there is a clear effect for a second surge in the fall. The question is if there is a second surge will it be much worse than people fear? That is really the way the market would react. But I think it is really possible at this point in time we are pre-pricing towards the later part of the next year.

The fact is that this contraction in economic activity is very unlike any recession any one of us has ever lived through and the rebuilding of it will also be unlike the recovery from the recession or depression that any of us have ever lived through too. The stock market isn't acting the way it normally acts in a recession. As I said earlier, normally market bottoms before the economy bottoms, starts skyrocketing while the economy is still getting worse and economic data looks uglier and uglier and in that process. Here it is pre-pricing an eventual return of the stocks that skyrocket. Most are of small value which by the way look a lot like the Indian market. This time it is really growth oriented stocks, the mega cap and the tech portions of the market that have led.

Damani: Whether it is a correction or a bear market, markets will never give you that chance once no unknowns happen.

Fisher: Clarity is one of the most expensive words in the stock market. The all-clear signal is a sign that there is too much good that has already happened and you never get that all-clear signal.

For example, earlier you mentioned inflation, let me speak that in this way - recently I have been writing about what I call the pessimism of disbelief and this is a concept that I last spoke in 2010 and it happens in every early bull market. The massive plunge in prices in the back part of the bear market so frightens people that they perceive bad things must have caused it. This tendency is called confirmation bias. This makes people see what they want to see and see what they believe they should see. This further leads to over-focus on bad things and to take any potential good thing and twist it into a bad thing.

That twisting in is something that happens in every single cycle. So if you go back for example to 2009-2010, we had the same function where regardless of what you may have thought about the governmental efforts, the fact is people had the view either that they won't work or if they work they will cause subsequent inflation which then the central banks will have to fight and which will unravel the good later.

If you go back to that period, of course, that inflation never occurred and that did not happen. That same function you can see right now, where people are saying that the activities of central banks and the stimulus programs that governments are trying to implement or have been implementing, will cause subsequent inflation. This is the morphing of a potential good into a potential bad and is a classic sign of pessimism of disbelief and bull markets just blow right through the pessimism of disbelief.

So, once you start seeing that twist, it is one of the most bullish things you can find.

Damani: You have also said that whether it is life or markets, optimists do better than pessimists. The biggest optimist that you and I probably know is Warren Buffett. However, he has been very circumspect during this crisis and is sitting with $120 billion worth of cash in Berkshire. Does that bother you?

Fisher: First, I am never bothered by what anybody does. It is their business what they want to do, whoever they are. In the marketplace nobody fights all the time. As I have often said and written for a long time, if you are right for 70 percent of the time in the long term, you become a living legend. So you better get used to being wrong a lot because living legends are still wrong 30 percent of the time, whoever you are and that is going to apply to anybody including Warren Buffett.

You mentioned earlier my father. Now because of my father when I was young, I got to meet some great investors. The reality of great investors, in my opinion, including my father and other people is that when they get to a certain age, they lose their edge. I am not suggesting that Warren Buffett has lost his edge but I cannot find a history of people his age that don't become relatively static in a crisis, they just tend to be inactive in a crisis.

My sense of Warren Buffett is that, what is happening to him is, he is moved into a relatively inactive phase tied to his age. Could I be wrong about that? Yes. However again I don't worry a lot about what anybody does. It is what I do that I worry about.

Damani: Your father taught us the concept of a good stock should be held forever -- long term investing -- so do you also feel that timing the market and given what has happened right now - this 'V' shaped recovery, timing the market is a much game?

Fisher: Let me take you through my thinking on that just a little bit. My father, who was a marvellous human being and he had what we today would call Asperger's syndrome, but all of his life almost until his life was over no one knew that term.

He lived in a world optimally as a professional in the 1930s to the 1970s before we got to ubiquitous computer power and something that he couldn't really deal with in that world, that I think he would have dealt with if he had been a younger man as computers evolved. To become ubiquitous is to recognize, which was true then but it was hard to see then, because of the lack of ability to do good real-time data analysis that there are times when great companies with great style do great and there are also times and functions where they do badly in the marketplace relative to other stocks and another place where low-quality and smaller do terribly but they get their day in the sun also in a time when they do great and that's not fully predictable but it's semi predictable.

Once you get to that you see an extra value in trying to decipher that and I have been working on that basically because I come from a different generation. When I was young, I did things some of which were good some weren't that were aimed at trying to unlock the scarcity of data.

However, today data is ubiquitous and you can both use it for good and it also can blow back on you, but that's a world that my father never could have really operated in because by the time that world comes along he is just much too old to be able to move into it and what we have today, where on a smartphone you have more data than a mainframe computer ever could have accessed pretty much his whole life, but he couldn't really deal with that.

So one of the things you hear me say a lot and now for a fairly long time is there's a time for this kind of style, there's a time for not that kind of style. If you just go back and look at the last five years of the MSCI India and you compare it to the last five years of the Russell 2000 value -- US small cap value -- they look not perfectly correlated not perfectly like mirror images of each other but very close and why because the Indian market is a small cap value market and there's a time for that and there's a time not for that and that part of trying to figure those things out, something that I have been working on all my life but my father never could have, he lived in a world with a hand-cranked adding machine or an electronic calculator and a pencil -- different world.

Damani: What kind of world are we entering into post COVID-19? Would it still be about the large-caps or are there other sweet spots that we should look at after this correction?

Fisher: I believe we already are after the correction. If you look for example at the NASDAQ, it's almost at new all-time highs. You take the world and break it down into what was doing well before the pandemic and the February peak in the market and then look at what's been doing well since, there's only a few variations.

The fact is what's been leading the market is mostly the same stuff. Could that change? Yes, it could. Will it change because of what's been going on with the pandemic and the economic constrictions associated with that? I don't think so and the reason that I don't think so is that this is not the kind of recession that we have normally had.

In the traditional kind of recession, the part that performed best coming off the bottom right from the beginning was smallcap value, low quality stocks that had been over killed in the downturn. In this world the downturn was full-sized bear market and coming off that, the bottom smallcaps continued to lag. I think it's in the next cycle which I don't think is necessarily terribly far into the future - maybe three to four years - where you will see small value lead, for a significant period of time and for a significant amount of money.

Damani: Considering you spoke about India mirroring the Russell 2000, clearly you follow India a little bit. What your thoughts on India as an emerging market and have you looked at any Indian companies to invest?

Fisher: In my opinion, emerging markets are misnomers. The four largest emerging markets together make up about almost two-thirds of the MSCI emerging markets index in money value while there is relatively little in common between them.

Among emerging markets, Brazil, which is a much smaller market than India, has a fair amount of common with Mexico which again is smaller still but neither one of those have all that much in common with India. India, one of the bigger ones, doesn't have that much in common with Taiwan, and if looked at its sectoral make up or the nature of market cap with China, they are all different. Thus, to lump them together as if they were all one is inappropriate and incorrect. Saudi Arabia is very different.

The fundamental feature of India can be described as the very largest stocks in India are tiny compared to the dollar weighted average of the global market. The dollar weighted averages of the global market is in the $188 billion dollar range. The very largest stocks in India are 4-5 percent of that in size, so it is a small cap market compared to the world. The sweet spot of the market over the last couple years are mega cap. The Indian tech companies are dominating but it is not the right time. As an investor, you should always think global. Some sectors will do better while it may not be the right time for others.

Damani: It is perhaps not the right time for the stocks, but at a time the US election is drawing upon us, Indian investors are very keen to understand Trump versus Biden. Does it make a difference and how are you calling this race?

Fisher: Let me just make these statements about the way the market works relative to presidential elections. In an election year, where we elect and there is a long history of this and there is almost no inconsistency here. In an American election, in a year where we elect a Democrat, the election year tends to be below average and the inaugural year tends to be above average. Exactly, the reverse happens in a year where we elect a Republican, the election year tends to be above average and the inaugural year tends to be below average. The reason is that people generally think Republicans is more pro-business, more pro-free market, more anti-regulatory. They tend to think of the Democrats as sort of the reverse of that like they are more anti-business. And those pre-pricings are built in to an election year and because the market pre-prices, when we elect the Republican, the market is hopeful about him in the market pre-prices that. When we elect a Democrat, the market is more fearful of a negative effect.

When you get to the inaugural year that flip-flops and reverses because presidents can't do as much in the American system as people hope or fear. A lot of people hope for the guy that wins, a lot of people fear the person that wins but we have a system in America that was created by the founding fathers to slow down the president and the president's ability to get much done. So if you are hopeful about the president, you are going to get disappointed. If you are hopeful about the president in inaugural year, you will get pleased.

First Published:Jun 6, 2020 9:06 AM IST