Secrets Of Success: Staying in the game will yield results

Instead he is constantly challenging himself to find our more about the mysteries of "The Great Humiliator" as it is known in his vocabulary, a reference to the fact that even those with the grandest reputations are regularly confounded by the way that share prices behave.

A few years ago, when the internet bubble was still in its infancy, I spent some fruitful weeks taking part in an online forum that Fisher was persuaded to run for Forbes magazine.

The forum proved to be remarkably instructive and helped guide me through the subsequent bear market without suffering too much serious damage. It was Fisher who explained, for example, why a study of previous bubbles showed that investors should expect to see technology stocks fall by as much as 80 to 90 per cent once they had peaked, a lesson that was to save me a lot of money.

Several things struck me from talking through with Fisher his current perspective on the markets. One was his confidence that this is still a good time to own shares. He predicted a good year for stocks at the start of this year and still sees nothing to change his mind, despite the market's relatively strong performance so far this year.

One of the points he makes is that the years in which the stock market rises by a moderate amount are not as common as you might think. While UK equities have grown at a compound rate of 10 per cent per year since 1926, years in which they have risen by 0 to 20 per cent only happen about four years out of 10. A third of the time they rise by more than 20 per cent and the rest go down.

What this means is that if you are going to have a good year, it is quite likely that it will be a very good one, not just an average one. Given that bullish years in recent times have often had a particularly strong final quarter, it would be no surprise to see the rally we have had since 2003 - although it is beginning to look quite mature - continue into the new year. The wobble this week might of course suggest otherwise, but daily volatility is often a snare.

Another regular theme in Fisher's thinking is the idea that many of the things that appear to worry markets are not as troublesome as press reports and market chat might lead you to think. Two current examples would be the rise in oil prices and the yawning budget deficit in the US.

While you can argue about the long-term effects of these two phenomena, Fisher's point is that there is simply no evidence that they are bad for share prices in the short term.

In fact, he says, if you look at past market history, there has been very little recent correlation between oil prices and the level of the stock market. If anything, the reverse has been the case. Similarly, periods when the US budget deficit has been high have tended to coincide with strong stock market performance.

The most compelling reason in his view for still being long of the stock market is the fact that earnings yields on shares are still so much higher than bond yields. The earnings yield, the percentage of a company's market value that is represented by its current earnings, is calculated by inverting its price/earnings ratio. A company on a p/e of 20 will therefore have an earnings yield of 5 per cent (100/20=5).

The relationship between earnings yields and bond yields has rarely been as favourable as it is today, not just in the UK but in many other leading countries as well. It is one reason why there is so much merger and acquisition activity going on at the moment.

Companies with strong earnings yields find takeovers easier to justify as they can do so without suffering damaging earnings dilution. This in turn leads on to the question of styles. Since the market peaked in 2000, as has been noted here, value stocks have comfortably and consistently outperformed so-called growth stocks.

A new era when growth stocks are once again rewarded is surely on its way before too long, though timing the turn precisely is always going to be difficult.

Fisher's take on this is that a key measure to watch is the yield spread, the difference between short-term interest rates and longer-term bond yields. It explains, he reckons, 85 per cent of the relative performance of growth and value stocks.

When the yield curve is upward sloping (that is, longer-term interest rates are above short-term rates), value stocks tend to do better, while growth stocks do best when the yield curve is flatter.

At the moment, with the Federal Reserve on a path of raising interest rates since mid-2004, but longer-term bond yields stubbornly refusing to rise, the curve is starting to flatten.

Indeed, if the bond markets continue to be as complacent about long-term inflation trends as they appear to be right now, the yield curve may soon tip over so that longer-term yields are below short-term interest rates.

Such an inverted yield curve is typically a danger signal for investors, a warning of possible recession ahead. Fisher's view is that you don't want to be owning value stocks if the yield curve is going to invert, but thinks mid-2006 could be around the time the style cycle will probably shift back in favour of growth.

As ever, his approach is the pragmatic one of taking each year as it comes and following all the relevant market indicators with great care, with one eye always open for the next surprise that The Great Humiliator might have in store.

jd@intelligent-investor.co.uk