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) did relatively well from 2003 to early 2006 and very poorly in 2007 and 2008. In other words, a top-down perspective on the broader economy was key to navigating markets—stock picking just wasn’t as important.

Fisher Investments on Financials will guide you in making top-down investment decisions specifically for the Financials sector. It shows how to determine better times to invest in Financials, what Financials industries are likelier to do best and how individual stocks can benefit in various environments. The global Financials sector is complex, covering many industries and countries with unique characteristics. Using our framework, you will be better equipped to identify their differences, spot opportunities and avoid major pitfalls.

This book takes a global approach to Financials investing. Most US investors typically invest the majority of their assets in domestic securities; they forget America is less than half of the world stock market by weight—over 50% of investment opportunities are outside our borders. This is even more important in the Financials sector because a larger proportion of the world’s Financials weight is based outside the US. Given the vast market landscape and diverse geographic operations, it’s vital to have a global perspective when investing in Financials today.

USING YOUR FINANCIALS GUIDE

This guide is designed in three parts. The introduction, Chapter 1, discusses vital sector basics, including the nature of the sector, its makeup and some core characteristics.

Part II, “Industry Group Details,” walks through the next step of sector analysis. Each of the four chapters will focus on one of the four industry groups. Here, we’ll take you through the global Financials sector investment universe and its diverse components. The Financials sector itself includes 4 industry groups, 8 industries and 26 sub-industries. Various firms are driven by enterprise spending, others by consumers and some by real estate trends. Many are leveraged to combinations of these, yet others are leveraged to none. We will take you through the industries in detail, how they operate and what drives profitability—to give you the tools to determine which industry will most likely outperform or underperform looking forward.

Part III, “Thinking Like a Portfolio Manager,” delves into a top-down investment methodology and individual security analysis. You’ll learn to ask important questions like: What are the most important elements to consider when analyzing property and casualty or commercial banking firms? What are the greatest risks and red flags? This book gives you a five-step process to help differentiate firms so you can identify ones with a greater probability of outperforming. We’ll also discuss a few investment strategies to help determine when and how to overweight specific industries within the sector.

Fisher Investments on Financials won’t give you a “silver bullet” for picking the right Financials stocks. The fact is the “right” Financials stocks will be different in different times and situations. Instead, this guide provides a framework for understanding the sector and its industries so you can be dynamic and find information the market hasn’t yet priced in. There won’t be any stock recommendations, target prices, political stances or even a suggestion of whether now is a good time to be invested in the Financials sector. The goal is to provide you with tools to make these decisions for yourself, now and in the future. Ultimately, our aim is to give you the framework for repeated, successful investing. Enjoy.