Three Core Questions

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.