Only Three Questions That Count

I am currently reading two interesting books: The Only Three Questions That Count: Investing by Knowing What Others Don't by Ken Fisher and Equity Management: Quantitative Analysis for Stock Selection (Hardcover) (this book sells for $2475 on Amazon, more about it later)

The The Only Three Questions That Count: Investing by Knowing What Others Don't by Ken Fisher is an interesting book and I am almost through it and it is very interesting so far. It debunks many investment myths. Ken Fisher has a long post about his book on the Financial Planning website.

In Investing 101, they teach you that the market is an efficient discounter of all widely known information. Therefore, the only way to beat the market--other than with blind luck--is knowing something others don't. But how? They don't teach you that.

Investing is largely taught and applied as a traditional craft. You learn an approved curriculum, apprentice under a master craftsman and practice, practice, practice until you're a master yourself. People undertake virtual apprenticeships and try to invest like Peter Lynch or Warren Buffet. Growth groupies do it one way, value vamps another. There are endless books that teach you all about the craft, from Ben Graham on, be it buying at low valuations or high momentums.

Yet , as academics remind us, precious few beat the markets over the long term. Among those who have, there's no investing school that has created a preponderance of market beaters, not growth, value or small cap. Nor do legendary practitioners fall into any particular curriculum. All curricula dwell in the realm of widely known information, which is, by definition, factored into pricing. To beat the market over the long term, you must know something others don't. How do you do that?
THE SCIENTIFIC METHOD

My third of a century in the industry and my long history of beating the market convince me that there is a way to know things others don't. It is basically the scientific method, which is rarely applied to markets. I detail it in my book, The Only Three Questions That Count (John Wiley & Sons), due out in January 2007.

I have learned, first, that much of what is widely believed about investing is mere myth. Second, investors don't seek out what others don't know because they assume it can't be done. How do you fathom the unfathomable? They are missing bet-able patterns because they don't know that they can look for them or how to do so.

Third, our brains weren't set up to do this stuff. Our distant ancestors were wired to deal with survival problems, not capital markets. If we receive information in a certain framework, we can see it clearly. If we receive the same information from another vantage point, we miss it altogether. By understanding how evolutionary psychology and behavioral finance overlap and by using scientific inquiry, we can turn our brains from our worst investing enemy into our friend. Or, as Homer Simpson would say, "Brain, I know you and I have never been friends, but . . ."

You don't need to be right all the time--just more often than you're wrong. To do that, start thinking like a scientist, creating a query session leading to actionable advantages over your peers. First, we need a question that helps us where we see wrongly. Then, we need one that helps us where we don't see at all. Third, we need a question helping us sense reality when our eyes aren't the right tools.

Question 1: What do you believe that is actually wrong? If most people believe X causes Y, but you can prove that X doesn't cause Y, you can bet against Y happening while everyone else bets it will happen. You have debunked a myth and can make one fewer mistake--and you can bet successfully against the crowd.

Question 2: What can you fathom that others find unfathomable? Most folks would say "nothing." But you can do this. It's what made Edison and Einstein so successful but weird--they could figure out how to think about the unthinkable. You know that if no one knows what causes Q, and you can prove Z causes Q, then, when you see Z happen, you can bet on Q. You know something others don't.

Question 3: What is your brain doing to blindside you now? This question links your brain to behavioral and evolutionary psychology. Learn how your brain hurts you, and you can re-train it. Most investors focus on craft, not an internal deficiency.

There is more about it on that site, basically it gives you a glimpse in to what is inside the book.