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Three Questions

Posted By Barry Ritholtz On October 9, 2005 @ 10:30 am In Investing,Psychology | Comments Disabled

In the past, I have called Forbes columnist and money manager Ken Fisher [1] to task for some of his oversimplifications [2] or just wrong statements [3] about the markets.

However, I must give credit where credit is due: This week, Fisher crushes the ball out of the park with his exegesis — "3 Questions:"

You want to maximize your chances of getting good results from stock picking? I have a system, and it boils down to focusing on just three big questions. They aren’t what you might expect — say, questions about the market’s price/earnings ratio or interest rate forecasts.

Rather, they have to do with your own psyche. Overcome your psychological failings and you can be a better investor.

First question: What do you believe is true that’s actually wrong? If you are captivated by some market myth, other investors probably are, too. Figure out what that popular but wrongheaded belief is and you can disassociate yourself from it. You can bet against it.

Question two: Can you fathom the unfathomable? If you have the right instinct for turning market statistics into buy-and-sell signals, you seek correlations first, then causal relationships that would explain them.

Question three: What is your blind spot? I’ve been writing here for years about self-blinding psychological traits like confirmation bias and reframing (Aug. 15), fear of heights, myopia and Stone Age hardwired thinking. It takes time and effort, but you can learn. For example, if you are myopic and suffer confirmation bias, you are a trend-follower and will miss upcoming changes like the capital expenditure and agricultural booms starting in 2006.

Terrific stuff, really nails some of the psychological issues investors must grapple with.

Thanks, Ken!

Three Questions That Count [4]
Kenneth L. Fisher
Forbes, 10.17.05, 12:00 AM ET

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/10/three-questions/

URLs in this post:

[1] Ken Fisher: http://www.forbes.com/fisher

[2] oversimplifications: http://bigpicture.typepad.com/comments/2005/08/ken_fisher_is_w.html

[3] wrong statements: http://bigpicture.typepad.com/comments/2005/02/presidential_fi.html

[4] Three Questions That Count: http://www.forbes.com/forbes/2005/1017/124.html

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