Finally, an investment book worth reading has been released by Wiley Finance. The book is called The Only Three Questions That Count by Ken Fisher, 2007. Ken Fisher is the founder and CEO of US$30 billion Fisher Investments, and also the son of famous Philip Fisher of Common Stocks Uncommon Profits-fame. What is the premise of Ken Fisher’s new book? Well, best to use his own words…

And what is that only question that counts? Finance theory is quite clear the only rational basis for placing a market bet is if you believe somehow, some way, you know something others don’t know. Effectively, it’s an unfair advantage; but if done correctly is fully legal, ethical, moral, and even nonfattening. The only question that counts is: What do you know that others don’t know?

In a fresh and light writing style, Ken Fisher looks at the stock market like a scientist instead of a craftsman. He offers up heavy doses of investor psychology and sets out to debunk many common myths about investment and finance. For example, he uses his own market data, observations, logic and analysis to conclude that Warren Buffett is NOT a great investor, that rising interest rates are NOT bad for stocks, the a large deficit and a war in Iraq have NOT been bad for the US economy, and that high PE ratios do NOT foretell a market crash… to name but a few surprises in store for readers.

Fisher asks us to think about the stock market from a fresh perspective….

Success in investing requires you to question everything you think you know; particularly those things you think you really, really know. Using Question One (’What do you believe that is actually false?’) properly gives you discipline to prevent some basic errors. The ability to just avoid mistakes is key to successful investing. As you examine mythology and begin discovering faulty logic, don’t simply correct it once and forget about it. Investing is an applied science, not a craft. If you get a validated answer to a hypothesis, don’t assume you can apply the results always and everywhere and get the same result. TGH (The Great Humiliator) is an ever-changing opponent requiring constant retesting of hypotheses.

After asking ourselves ‘What do we believe that is actually false?’, Fisher insists we then ask ourselves ‘What can we fathom that others find unfathomable?’. Once you begin to fathom the unfathomable, Fisher ask you to ask yourself one final question: ‘What the heck is my brain doing to blindside me now.” But more on the 2nd and 3rd question in future articles in this series. Let’s wrap up this brief introduction article with Fisher’s wonderful advice on 4 ways to avoid investing fads…

1. If most folks you know agree with you on a price move or some event’s impact, don’t take this as confirmation you are right. It is a warning : you are wrong. Being right requires aloneness, and willingness to let others see you as maybe nuts.
2. If you read or hear about some investment idea or significant event more than once in the media, it won’t work. By the time several commentators have thought and written about it, even new news is too old.
3. The older an argument is, the less power it has. So, for example, inflation fears may have moved markets in 1994, but sometime early 1995 that view will run out of steam.
4. Any category of security that was hot in the last five years won’t be in the next five years, and vice versa.

Follow these four steps, Fisher advises, whenever you are presented with an investment decision, and you’ll be better armed to ignore the noise and see what others find unseeable.
Sage@wallstraits.com

Credits: This article contains extracts from The Only Three Questions That Count, Ken Fisher, Wiley Finance, 2007.