Three Questions

In the past, I have called Forbes columnist and money manager Ken Fisher to task for some of his oversimplifications or just wrong statements about the markets.

However, I must give credit where credit is due: This week, Fisher crushes the ball out of the park with his exegesis — "3 Questions:"

You want to maximize your chances of getting good results from stock picking? I have a system, and it boils down to focusing on just three big questions. They aren’t what you might expect — say, questions about the market’s price/earnings ratio or interest rate forecasts.

Rather, they have to do with your own psyche. Overcome your psychological failings and you can be a better investor.

First question: What do you believe is true that’s actually wrong? If you are captivated by some market myth, other investors probably are, too. Figure out what that popular but wrongheaded belief is and you can disassociate yourself from it. You can bet against it.

Question two: Can you fathom the unfathomable? If you have the right instinct for turning market statistics into buy-and-sell signals, you seek correlations first, then causal relationships that would explain them.

Question three: What is your blind spot? I’ve been writing here for years about self-blinding psychological traits like confirmation bias and reframing (Aug. 15), fear of heights, myopia and Stone Age hardwired thinking. It takes time and effort, but you can learn. For example, if you are myopic and suffer confirmation bias, you are a trend-follower and will miss upcoming changes like the capital expenditure and agricultural booms starting in 2006.

Terrific stuff, really nails some of the psychological issues investors must grapple with.

Thanks, Ken!

Three Questions That Count
Kenneth L. Fisher
Forbes, 10.17.05, 12:00 AM ET

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  1. spencer commented on Oct 9

    Correlation and turning point signals are two different things. You ahave great correlations, but the buy/sell signal may be so late that it does more harm than good.

  2. Barry Ritholtz commented on Oct 9

    yes, I read the book a few years ago. I liked it, but its probably 30% too long.

    My 2 key takeaways: Black Swan Events are less rare than you suppose, and we cannot be sure that pure randomness is not responsible for some people’s market success.

    My problem with part 2 is that there are simply too many people who have put together a very good and consistent track record, beyond mere Random #s.

    Incidentally, if you follow any of Chaos theory, you may be fooled into seeing randomness when what you are really looking at is chaos theory — patterns that appear random, but actually have some nonrandom elements to them (persistence, trend, etc.)

    Call it fooled by Chaos

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