Whatever philosophy about investing you may hold, Ken Fisher's "The Only Three Questions That Count: Investing by Knowing What Others Don't" will enrich your thinking and improve your performance. Make no mistake: this book is not just good; it's great!
As the title implies, to get to the nuggets of truth--and superior performance--that others miss, you must ask three questions: what do you believe that is actually false; what can you fathom that others find unfathomable; and what the heck is my brain doing to blindside me?
Fisher addresses these questions with wit and verve, writing in a breezy and provocative style that makes the reader want to keep turning each page. Fisher's argument begins with the efficient market hypothesis--that all information known by the investment community is already priced into the markets. Absent trading on inside information, which is illegal, how, then, can an investor beat the market? The answer, Fisher says, is to ask the first of the three questions and realize that much of what is believed by others is simply not true.
Fisher shows this by testing the mathematical correlation between commonly held beliefs and subsequent investment returns. Are high P/E markets riskier than low P/E markets? Will government deficits lead to economic collapse? Will rising oil prices seal the doom of common stock returns? Analyzing the historical data, Fisher shows that each of these beliefs--and many others--is a myth.
Once an investor accepts that the conventional wisdom is mistaken, he can next ask Fisher's Question Two and fathom what others find unfathomable by ignoring the noise and focusing on events and relationships that do correlate.
The third and final step in Fisher's methodology (what the heck is my brain doing to blindside me) helps investors to avoid typical mental errors--overconfidence, hindsight bias, confirmation bias, and order preference. Many readers will be familiar with this material, which draws on the realm of behavioral finance, but Fisher's presentation is both crisp and enjoyable.
At the conclusion of the book, Fisher instructs the reader on how to use the three questions to build a portfolio that beats the market. Distilled to its essence, his advice is to adopt a benchmark, think globally, and overweight or underweight when asking the three questions gives the investor an advantage over the market.
The book is a treasure trove of keen insights. One piece of advice I found particularly helpful was Fisher's observation that the market offers just four possibilities: to be up a lot, up a little, down a lot or down a little. Only in the situation where an investor reasonably concludes the market will be down a lot does it pay to alter one's asset allocation and disfavor equities, since over long periods of time, the market moves inexorably higher, and in the other three scenarios, efforts to time the market may cause the investor to miss equity upsides when the downside risk was minimal in any event.
Occasionally, Fisher's unabashed praise of deficit spending and freewheeling capitalism seems a bit over the top, sounding more like a paean to a Republican political platform than sound economic analysis. Still, Fisher is convincing in his argument that our fears about these policies may be misplaced and that they may promote the growth of the economy and boost stock markets worldwide.
After reading the book, you will never again take any conventional investment advice as a given--and you will be better off as a result.