Ken Fisher And Three Market Beating Questions

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His Life

Ken Fisher. Author. Columnist. Money Manager. Son of famed investor Philip A. Fisher. And last but not least, he’s mentioned on Forbes list of the richest Americans.

For almost 25 years Ken Fisher has written articles for Forbes Magazine and has done research in the field of behavioral finance. His firm, Fisher Investments manages over $35 billion dollars. It’s been ranked as one of the top registered investment advisor firms.

This is how he rolls.

His Lessons

Instead of giving you chart formations and technical indicators, Ken Fisher asks you to look deep inside yourself and ask 3 questions. These questions may not change your life. But they’ll make you think before you enter The Stock Market Casino.

Ken Fisher’s book The Only Three Questions That Count offers guidance to help put you ahead of other investors. When you ask these three questions you’ll feel smarter. When the time is ready, the teacher will appear, because the student is ready. Are you ready grasshopper?

Let’s start with information. The market is very good at assimilating information and adjusting stock prices. News, scandals, taxes, interest rates, prices of commodities, hopes for the future. They’re all at work adjusting the market.

The point is you can’t make money off of information everyone knows. Wall Street institutions have teams of people whose job is to find out everything, before you do. After they get the inside scoop, the buying & selling quietly begins.

Ken Fisher And Three Market Beating Questions

Speaking of information everyone knows, this reminds me of the message boards on Yahoo! Finance. After I’ve purchased a stock, I’ve been known to visit the message board mosh pit. Here is an example of Ken’s point above:

Some time ago I purchased a $14 technology stock and the company’s earnings were to be released in two weeks. The message board was buzzing with several types of people. You had the company’s staunch defenders. Insulting their stock was akin to making fun of their momma.

You have the bashers. For days they bashed the stock, the CEO and and anyone else who claimed to own shares.

Then, you have the armchair analysts. They posted their analysis of company’s financial data as if they worked for Price Waterhouse. The armchair analysts were positive that when the earnings results were released, the stock would double. It was at this point I knew I held a loser.

Positive earnings were released and the price dropped to $10. Come on. Everyone knew this information except the gang on Yahoo’s message board. The price had been adjusted long ago. As more investors bought in, the more the professionals sold.

The Three Questions

Which of My Beliefs Are False? Many investors hold false beliefs about the market. Never buy a stock the week before you get married. You know, stuff like that.

The biggest belief-buster is the P/E ratio. Investors today believe you should buy stocks when the P/E ratio is low. This signifies to them that the stock is cheap and they’ll profit on the upswing. The other side being, if the P/E is high…time to hit the sell button.

Ken Fisher’s research has shown a low P/E does not equal buying opportunity. It’s when the price is high that buy orders start flying across trading desks.

Ken Fisher suggests using the E/P ratio or Earnings Yield. It is a rough gauge and not gospel. Take earnings and divide by share price. When the Earnings Yield is above the corporate bond yield, the stock is cheap.

Other belief-busters that Ken Fisher identified include:

• Rising oil prices are bad for the economy and a negative for the stock market. No correlation. Don’t believe the hype.

• Cheap stocks grow faster then expensive stocks. No proof.

• A booming economy means a bull market. Part of the time. The other part it’s a bear.

• Tax cuts are bad for the economy because the government must make up the shortfall by borrowing. If the U.S. government can borrow money and make a good return, borrow away.

What Can I Understand That Others Cannot Understand? The investor must know things that others do not. What can I understand about the future of this company that others don’t.

Obtaining exclusive information about a company you have no relationship with is almost impossible. But you can understand how certain companies or an industry may be affected by certain events.

For example: Understanding that huge orders for a hot new cell phone will soon benefit certain retail stores is insight that the public may not have figured out yet. What about the electronics company that got the order to build the parts. Or the entertainment company with the exclusive rights to sell music via the phone.

What Cognitive Illusions Are Fooling Me Now?

• Confirmation bias: We tend to remember and value evidence that supports what we want to see. Got your eye on a stock? Can you really take a step back and judge the charts and data objectively?

• Pattern vision: We tend to look for patterns in the unknown. Does the volume on that stock chart really support the increase in price? Is that chart pattern really a Cup With Handle? Or do we want it to look like one.

Some of Ken Fisher’s advice is obvious. One interesting point he made, is if you hold a basket of stocks make sure they are not correlated. This helps minimize risk. If you hold seven internet stocks and the industry gets bad news, you could be holding seven losing positions.