Investor Ken Fisher has written a book entitled “The Only Three Questions That Count: Investing By Knowing What Others Don’t”. In it he makes the point that the market is pretty efficient at pricing in “common knowledge” and common expectations. If everyone thinks stocks will go down next month, that prediction will already be priced into the market. If everyone thinks they will go up, that premium will already be priced into the market. And the market is to a large extent driven by the herd psychology of investors, who all tend to believe much the same things, whether they be truths or myths.
Fisher’s point is that the way to make money in investing is to know something that isn’t commonly known, and hence isn’t already priced into the market. Of course insider traders already know this, and even though the practice is illegal no doubt some are clever enough to get away with it anyway. However Fisher argues that much of what investors believe is mythology unsupported by the data, and ordinary investors who can see through that mythology have the same kind of advantage as insider traders, but legally.
Fisher’s three key questions are:
- What do I believe that is actually false?
- What can I fathom that others find unfathomable?
- What the heck is my brain doing to mislead and misguide me now?
In the course of the book, he explores a number of beliefs that are common in our country, such as that high price to earning ratios mean a given stock or the market as a whole is overpriced and due to fall, or that debt is bad and we have too much of it, and he makes a good case for their being false. He also explores some of the human psychology that makes it hard for us to think rationally about investing. For investors it’s a book well worth reading, though it will take some work because he delves into the data pretty deeply to disprove some of the common investor myths.
But the reason I mention this book is because his three investment questions apply just as well to life as a whole. We all believe all sorts of things that are false, and that we could tell were false if we simply looked at the data with an open mind. We are all subverted in our daily lives by some of the quirks of the human mind (it’s hard to have a truly open mind). And for all of us there are concepts that we think are unfathomable (to us, at least), but that we could master to our advantage if we only put our minds to it. And, as in investing, seeing through the myths most others believe gives us a substantial advantage in life.
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