Sunday, May 06, 2007

Book Review: The Only Three Questions That Count

Ken Fisher is a well known investment manager and long running Forbes columnist. I have read his columns on and off for many years (although comments on specific US companies are of limited direct relevance to me). He also appears in the Forbes list of the richest Americans. So it was that I picked up his book with considerable anticipation. I was not disappointed.

The most important lessons I took from Fisher's book were:

1. the need to challenge conventional wisdom as a matter of course when making investing decisions. He provides explains the theory and gives some good examples of this (although the notion that deficits are bad is not exactly a universally held belief - basic Keynesian economics teaches that deficit spending is a good way to boost an economy). He also makes the point that the power of the internet and some basic tools such as spreadsheet software make it very easy for individual investors to do some quite sophisticated investment analysis;

2. the need to keep your own thinking processes under tight control. Again, this is nothing new (many writers have covered the sorts of cognitive errors that Fisher talks about) but Fisher does express the issues and illustrate them with examples in a manner which makes for practical reading.

Fisher's key investment principles can be summed up as:

3. benchmarking is better than seeking absolute returns. Seeking absolute returns is a poor strategy involving unacceptable levels of risk;

4. if you want to beat the market (after defining what market you are referring to) the preferred approach is to over or underweight various sectors - but only where you believe that you have a basis for knowing something hat the rest of the market does not. It logically follows that (i) unless you have a basis for believing that the market will be "down a lot" in the short term, you should be fully invested at all times and (ii) no one style of investing will be best;

5. if you have a reasonable amount to invest (US$200,000 or more) you are better off investing directly in shares rather than buying index funds and ETFs.

One rather trivial negative: it would have been very useful if the websites referred to in the text had been listed in an appendix for ease of future reference.

All in all a very educational and interesting read.

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