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Monday, April 2nd, 2007

A book to challenge your beliefs

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I was telling someone recently about Ken Fisher’s book The Only Three Questions That Count and mentioned that he had made over $1 billion as a money manager. They asked “why did he bother writing a book?” I suggested that despite his phenomenal success, Fisher appears to be still living in the shadows of his father, Phil, who wrote the classic growth investing book, “Common Stocks, Uncommon Profits.”

Ken is probably smarter, more ambitious and certainly more successful than his father. But he’ll probably fail to replicate his old man’s status of legend because he is far too obvious. Ken is in your face and always talking about himself and his exploits. Just read the preface of his book “Who Am I to Tell You Something That Counts?” Part of the reason that his father Phil became a legend is because there is a sense of mystery surrounding him.

That minor gripe is my only problem with Ken Fisher, because “Three Questions” is a mind-blowing, paradigm-shifting book that will leave you uncomfortable after reading it. You’ll start to wonder whether you’ve been winging it as an investor all along.

Fisher says it is impossible to beat the market unless you know something that others don’t. To find that he says we need to ask three questions:

1. What do you believe that is actually false?
2. What can you fathom that others find unfathomable
3. What the heck is my brain doing to blindside me?

But it’s not good enough to ponder them. The thrust of the book is that we have to start acting like scientists and empirically test, firstly, our beliefs. Then you have to come up with market scenarios and test them. Finally, you have to be constantly on guard about your mind playing tricks on your investing.

The book particularly spoke to me towards the end of last year because I became cautious on the market, despite my system flashing big buy signals. I had a gut feel that things had gone too far too fast. I was worried about an inflation break out resulting in a ratcheting up of interest rates, which would cause a big sell off. I was wrong and was underinvested.

As I realised reading “Three Questions” I was bearish but had no reason to be. It was purely gut feel. Perhaps the best lesson to come out of the book is that we worry too much about stuff that isn’t of concern. What’s more, if we’d tested it properly, we wouldn’t care about it when the rest of the market is, giving us a profitable edge.

A summary of things that investors fret about that Fisher says shouldn’t be of concern include:

1. High PE ratios
2. National debt
3. Current account deficits
4. Rising gold prices
5. Bird flu
6. Rising interest rates
7. Rising oil prices
8. A weak dollar

This is summarized in the statement that bull markets “climb a wall of worry.” I’ve been worrying too much!

Fisher simplifies market forecasts with four scenarios:
1. Up-a-lot
2. Up-a-little
3. Down-a-little
4. Down-a-lot

We worry about everything, but the market can only do four things. Fisher says “If I forecast up-a-lot, up-a-little or even down-a-little, I’m going to be 100 per cent in equities.”

He also has some gems in there like his discussion on the supply and demand of stocks. I have never heard this before, but it’s so simple and basic. It’s bad for stocks if shares are created in takeover, increasing supply. But it’s good for stocks if shares are destroyed through cash takeovers and buybacks. So while people are warning about the dangers of private equity buying public companies, in actual facts it’s positive for the market.

There is far too much to cover in the book for one review. But it will change your outlook on investment. You will begin to question things held dearly. You will start to learn how to test interesting questions about the market. You will stop being so negative and worrying about doom and gloom scenarios all the time.

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Word Count: 655. This entry was posted on Monday, April 2nd, 2007 at 11:09 am and is filed under General investment, Philip Fisher. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.