I LOVE TO WRITE
in this column about great investment books I've read. But I rarely get the chance to do so. There's pretty much no such thing as a great investment book.
But here's an exception. Here's one that you're going to want to read. And when you're done, you're going to want to read it again.
Unlike most investment books, this one doesn't pretend to give you all the answers. Instead, this one just gives you questions. And that turns out to be infinitely more valuable because they are precisely the right questions. They cut right to the heart of what it takes to be a serious, thoughtful and successful investor.
The book is "The Only Three Questions That Count," by Ken Fisher. Perhaps you've seen Fisher's face on a seeming infinitude of online ads for his investment-management firm, Fisher Investments. He manages about $30 billion, mostly on behalf of individual investors. He has a great track record and he's made himself one of America's 400 richest men along the way.
I should mention at the outset that Fisher's firm is one of my institutional clients. So maybe that makes me biased. (Fisher's firm is also an advertiser on SmartMoney.com.) More to the point, perhaps after sharing investment ideas with him and his team for several years, I find myself in harmony with the way he thinks.
Fisher's three questions really grow out of a single central principle, and it's a principle I believe is the one and only source of investment success. It is that you aren't going to beat the market unless you possess some information that the rest of the market doesn't possess.
The information that everyone else already has is already built into stock prices. So even if it's correct, you can't profit from it. That, in a nutshell, is the efficient market hypothesis and it's maddeningly correct.
So to succeed as an investor to be sure that you shouldn't just be putting your money in index funds an spending your time knitting instead of thinking about stocks ask yourself three core questions aimed at determining whether or not you've got the information you need.
First, what do you believe that is actually false? You may be preventing yourself from making smart investment moves because you're blinded by falsehoods ones that you get suckered into believing just because everyone else believes them.
Fisher comes up with some good examples of such falsehoods. You probably believe that stocks perform better starting at times when price/earnings multiples are low and that they perform worse starting when multiples are high. Haven't you heard that a million times? Isn't it the core tenet of "value investing?"
According to Fisher's research, it simply isn't true. He's crunched the numbers. Over history, it turns out to just not make much difference whether market multiples are high or low.
So next time you think about some seemingly universal truth about investing, stop and question yourself: Is it really true? How do I know? What makes me believe it? What's the real evidence?
The second question is, what can I fathom that others find unfathomable? If you're investing based on ideas that everyone else can grasp, those ideas are probably too stale to make you any money. Go for the things that you think are true but that everyone else thinks are crazy.
Fisher himself has come up with some very good ideas along these lines. He's the father of the price/sales ratio, a principle of securities analysis so common today that we almost forget that someone had to invent it in the first place. It was Fisher who did, and for years it worked as a metric for understanding stocks in a way to that most people were missing.
It can be very difficult and very tricky to allow yourself to believe things that no one else believes. Here's an example of something I believe that Fisher himself totally disagrees with in this very book: gold.
I believe, as I've written often in this column, that gold is an extraordinarily accurate measure of future inflation. Fisher argues that the Treasury bond market is the better predictor.
I've done my statistical homework on this, and I'm utterly convinced I'm right and he's wrong. Throughout history, gold has always reliably called the turns in inflation. Bonds, on the other hand, have always gotten it absolutely backwards.
I don't care that Fisher thinks otherwise. Indeed, in some sense the very fact that he does by the spirit of his own philosophy of questioning gives me confidence.
And my firm has made money on this idea, by using gold to correctly predict the recent resurgence of inflation (core CPI has almost tripled since December 2003). All the while, bonds have been acting like there's no inflation anywhere in sight. So Fisher is right on the general principle at stake here the principle of daring to buck the crowd with your own ideas even though I think he's wrong on gold.
The third question is, what the heck is my brain doing to blindside me now? Here Fisher walks us carefully through a minefield of cognitive dysfunctions that trick even smart investors into doing very dumb things.
Fisher points out that two emotions rule most investors' souls pride and regret.
We seek to build up our self-image by successful investing, rather then treating success as an end in itself. When we do succeed, we swell up with the pride of it and start believing we can do no wrong. At the same time, we will do nearly anything to avoid the shame of regret that horrible sinking feeling we get when an investment goes bad, and you have to accept the fact that we really blew it.
Fisher says to turn these emotions inside out. Seek regret that is, embrace your mistakes and learn from them. Shun pride invest to make money, not to pump yourself up, and never, ever imagine you are invincible.
I know, I know...you probably wanted an investment book that gives you all the answers.
But the truth is that there aren't really any answers in investing, at least none that last for very long. The world is just too dynamic for that.
There are only questions. And the only way you are going to make money in investing is by asking them.
Bravo to Ken Fisher for realizing that investing is like the TV game show "Jeopardy." Remember that famous line? "Please be sure to give your answer in the form of a question!"
Donald Luskin is chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors. You may contact him email@example.com