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Fisher Investments on Health Care is the eighth in a series of investing guides from Fisher
Investments Press—the first-ever imprint from a money manager. While reading the entire
series would be a worthwhile endeavor for serious students of capital markets—covering the
full breadth of capital market analysis—each book can stand on its own in its area. This book
(and the series) presents a usable, top-down strategy for analyzing standard investing sectors
(Energy, Materials, Consumer Staples, Industrials, etc.) as well as other investing regions and
categories. This book is on Health Care—currently about 8 percent of total world stocks (as
measured by the MSCI All Country index).
When folks hear “Health Care,” they probably think pharmaceuticals and insurers. And that’s
right—but the sector also covers equipment makers, hospitals, biotechnology, distributors,
services, supplies, technology, and life sciences. It may seem stodgy, but there’s massive, nonstop,
life-saving innovation going on in drugs and equipment, and also many Health Care subindustries.
Thanks to major US legislation passed in 2010, Health Care is certain to be a hot and often
controversial topic for many years to come. That legislation (and any later legislation to
change, repeal, clarify, or what-have-you 2010’s legislation) will impact Health Care firms in
ways legislators couldn’t have possibly imagined—and certainly aren’t fully fathomable at this
time. But the job of a Health Care analyst isn’t to decide whether legislation is good or bad, or
to debate how the sector should be regulated. Instead, it is to always rationally assess the
existing landscape, whether it’s likely to change, and how that likely impacts demand (and
alternatively supply) for Health Care stocks.
Plus, Health Care is no stranger to legislation! Think of all the regulation aimed at
pharmaceutical firms, insurers, medical device makers, hospitals, and so on. And Health Care
firms are frequently targets for lawsuits. Nothing new about that! Understanding how
regulatory and legal matters impact the sector and its industries is vital to making better
forecasts. This book shows you how and provides a fundamental framework.
Don’t let regulation scare you off. Health Care plays a vital portfolio role—it’s a classically
defensive sector. When times are tough, folks still take aspirin and need hips replaced. But
when times are flush, you generally don’t double up on insulin or heart medication. Hence,
investors see Health Care as a refuge—it tends to do better than the market during bear
markets while lagging in the sizzling times. In an overly simple sense, Health Care can be
thought of in just that way—a great thing to own when other forms of defensive stocks beat
the market, but not so great when defensive stocks lag in general. But Health Care has
certainly had periods when it outperformed during a bull market—as it did in the late 1990s! It
is fairly defensive, but innovation can be a tremendous driver too. This book explains the
disparate drivers for Health Care’s many industries, and how to know if the sector as a whole
(and underlying industries) is likely to out- or underperform—no matter the market conditions.
And it’s wrong to think Health Care is inherently less risky just because it’s overall more
defensive than sectors like Consumer Discretionary, Energy, or Materials. Or that Health Care
should get better or worse returns over the long term. Over the long term, finance theory says
all equity categories should net pretty similar returns when properly accounted for—though
traveling drastically different paths over the short to intermediate term. Ultimately, given
enough time, newly created supply or the destruction of existing supply tends to equalize
categories. In the nearer term, demand tends to drive stock prices, but longer term (what may
seem for most like an eternity but really isn’t), supply swamps demand for that category. (For a
more detailed discussion on the general process of how supply is almost all powerful in
affecting stock prices in the very long term, see my 2007 John Wiley book The Only Three
Questions That Count, pages 240–250.) That’s why a good portfolio is broadly div
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