Mailbag: Fisher Investments Reviews Your Questions on US Debt, Passing Investing & More

Transcript

Ken Fisher:

The key to using any of these tools well is the same as in all the rest of investing—it's all about getting educated and then gaining the experience, learning from mistakes, and getting better and better, and making sure that you're right more than you're wrong.

Every month, some people write in these questions. These little short ones. I try to answer them quickly. I'm not really good at answering anything quickly. If you've heard me before, you know that. I kind of have a little disease of blabbermouth.

Japan was heavily in debt, and their stock market stalled. Will US debt do the same for us? No. Now, I've just done a longer answer on US debt and why almost everyone misunderstands US debt and why it's not particularly a problem at all. And I refer you to that.

But the simple punchline is that interest payments as a percent of GDP, or as a percent of government revenue, are actually at very normal levels. They're at lower levels than they were in the 1990s and about the same level that they were in the early 60s. But if you really did have a debt problem, you'd see that in very high long-term interest rates compared to the ones that we have now, which are historically very normal.

Japan had very different circumstances. It wasn't Japan's debt that did Japan in, it was its lack of ability to innovate successfully, and as other parts of the world engaged in what I would view as more free-trade capitalism and adapted better, the Japanese model, which was largely more of a top-down control of the economy, export-based, more like the pre-capitalism concept in economic evolution of mercantilism, which you can read about online if you wanted to.

They got eaten alive by China emerging and doing a lot of the same things that Japan had done well before. But the analogy of trying to compare Japan to the United States just doesn't hold up.

Why can't people just invest in a passive S&P 500 ETF? What's wrong with that investment strategy? Nothing. If you can do it. Most people don't do it. Here's why. Now first off, there is nothing wrong with S&P 500 ETF.

They are perfectly valid tool. But the fact of the matter is, and I'm going to take you to a tangent that you may find insulting, there have been studies done for decades that show that the easier it is to trade something, the shorter the average holding period it is for most investors.

The fact is, for example, and let me give you one that's been long documented, not with the world of ETFs but with the world of mutual funds. You know, intuitively, that there's load funds that charge a big load fee, which when I was young, there were many fewer mutual funds than exist today—like maybe 3% as many—load funds were the predominant funds. Then there's also no-load funds.

Everyone knows that the no-load funds that just charge an annual fee, but don't charge an upfront load have higher annual returns if they're doing the same thing, and a lot of fund families have a fund that's no-load and a fund that's load doing the exact same thing.

That history is long proven. The part that people have a hard time with, the flip to that, is the people owning the load funds have actually had higher returns than the people owning the no-load funds, despite the fact that the no-load funds have higher aggregate returns than the load funds.

How can that be? And the answer is very simple—the people in the load funds feel trapped in by the load and hold them for very, very much longer than the people in the no-load funds, who tend to in and out them at all the wrong times, and they don't get the returns of the no-load funds, they get the return of the period that they own the no-load fund for, which on average, for no-load funds, has never been over 18 months. So, am I suggesting therefore you should buy a load fund?

No, that's not what I'm saying. What I'm saying is, the easier it is for something to trade, the more people will tend to buy it high and sell it low. And that's actually pretty much the history of S&P 500 ETFs. People say I'm going to buy them and hold them long term.

And if they do, that's a perfectly valid thing to do when it works. But if you use it like a trading vehicle, well, that's like everything else. Most people are wrong most of the time in investing. They buy high, they sell low, they in and out at all the wrong times. And now, it's not a valid strategy because it's really dependent on how well you can be a trader.

You say, but I'm not a trader, I'm going to buy it and hold it for the long term. And the answer is a lot of people think that few of them actually do it because they buy it intending to hold it for the long term, and then along comes the Ukraine war, and it scares them to death and they bail out. Along comes Covid and it scares them to death and they bail out.

Along comes fears of inflation and it scares them to death and they bail out. Along comes a presidential election where they think, if the other guy wins that I don't like it, they're going to be terrible. Oh, my God! And then they bail out and they do it at the wrong time.

So, the point that I'm wanting you to get is, if you can buy an S&P 500 fund ETF and hold it for 20 years, you'll get a reflection of capitalism, which is pretty good, if you buy with the intent to hold it for 20 years and you sell it 18 months later, you better be a good short-term timer, and most people aren't; that's the answer to that.

And then the last one that we have now for this month is, with fees across the board compressing—they're talking about investment fees, which is actually not fully true—but, I get the point they're asking about. With fees across the board compressing, what do you think of ETFs versus Mutual Funds for someone with a smaller sum of money to invest?

It's a little bit like the question of earlier about the S&P 500 ETFs, but its answer is a little bit different. Let's just start with the assumption of here's a mutual fund and here's an ETF. If they do the exact same investing function, then the only differences are the relative fees of the two and how they're taxed.

The ETF has inherently got a tax advantage over the mutual funds. So, other things equal, I will say, generally, that if there's a mutual fund doing something and an ETF doing exactly the same thing, the odds of the ETF being better for you if you're in a taxable account are clear.

On the other hand, if it's a 401k, well, that doesn't really matter. Now, let me go a different direction. When I was going to college in the woods of Humboldt County as a kid, I was doing demolition. And when I started doing demolition, I wasn't very good with a hammer and crowbar and all that other stuff. And I learned, and I got better. Good, that's what experience does.

Now, in that, let me just say that a hammer is a tool—a mutual fund is a tool; an ETF is a tool. There's nothing wrong with these tools. With a hammer, you know, you can use it to set a nail. That's a good thing. A set of nails is useful for things like carpentry. On the other hand, you can also use it to break a window by accident, And that's not such a good thing.

It's all a question of how you use the tool. Hammer is a perfectly fine tool. You know, a good carpenter can set a nail, and in one subsequent bang, place it without dimpling the wood, and do it over and over and over and over again. That's pretty good. Somebody else mostly just bangs up their thumb, right? Or bends the nail as they try to put it in.

And it's all a question of how you use a tool. When I was going to school and doing demolition, I had an abundance of stuff and I bought this dilapidated piece of garbage house on four acres for a $8,500 note from an estate sale, and I was going to fix it up and try to flip it and make money. But I wasn't as fast. I was doing demolition and I didn't have enough time to work on the place and winter's coming on.

So, I took the yarding and the four acres I was yarding a lot of the stuff in demolition there and, you know, boards and stuff on barns I'd taken down, stuff from houses I'd taken down, and I'm storing all this stuff out there and winter's coming on.

So, I went across the creek and built this tree house to survive the winter in, which actually worked out pretty well, but one of the things was all the nails that I had from demolition—cans and cans and cans of old rusty nails—that are all bent.

So, you take a bent nail, you pound it straight, you put a vise grip on it, and you set it and tap it just to get down to where the vice grip would touch the wood. Then one more pound, you can put it in without dimpling the wood.

Tools are pretty good. Vise grip good. The hammer is good. The nail is a fine thing. ETFs fine. Mutual funds fine. They're all tools. It's a question of how you use them. Most people don't use these tools very well, and the key to using any of these tools well is the same as in all the rest of investing. It's all about getting educated and then gaining the experience, learning from mistakes, and getting better and better and making sure that you're right more then you're wrong.

Thank you very much for listening to me. I hope you enjoyed this month's mailbag and sending more questions next month. Take care. Thanks.

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