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The Only Three Questions That Count: Investing by Knowing What Others Don't

Name: The Only Three Questions That Count: Investing by Knowing What Others Don't
ISBN: 9780470292679

by Kenneth L. Fisher, Jennifer Chou, Lara Hoffmans

October 2008

Beginner

480 pages

13h 23m

English

Wiley

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Copyright
ACKNOWLEDGMENTS
FOREWORD
PREFACE
Who Am I to Tell You Something That Counts?Polling for Perfect TruthInvesting by Knowing What Others Don'tIdiots and Professionals: Oh, but I Repeat MyselfBecause Mr. Crafty, It's Not a CraftIt's All Latin to Me—Starting to Think like a ScientistThe Only Three Questions That Count
1. QUESTION ONE: WHAT DO YOU BELIEVE THAT IS ACTUALLY FALSE?
1.1. If You Knew It Was Wrong, You Wouldn't Believe It1.1.1. Using Question One1.1.2. Common Myths You Believe In Too1.1.3. Let's Prove You're Either Right or Wrong (or Really, Really Wrong)1.2. The Mythological Correlation1.2.1. Why High P/Es Tell You Nothing at All1.2.2. It's Hard to Figure Out1.2.3. If Not Bad, Can They Be Good?1.3. Always Look at It Differently1.3.1. How Would Your Grandparents Think about It?1.3.2. A Quick Preview of Question Three1.3.3. Upside Down and Backwards If You Can1.4. When You Are Really, Really Wrong1.4.1. The Holiest of Holies—the Federal Budget Deficit Myth1.4.2. Let's Kill the Blood Suckers1.4.3. What about Those Other Deficits?1.4.4. It's All Relatively Relative1.4.5. Question Everything You Know
2. QUESTION TWO: WHAT CAN YOU FATHOM THAT OTHERS FIND UNFATHOMABLE?
2.1. Fathoming the Unfathomable2.1.1. Wondering Is Wonderful2.2. Ignore the Rock in the Bushes2.3. Discounting the Media Machine and Advanced Fad Avoidance2.3.1. Investment Professionals—Professional Discounters2.3.2. Friends Don't Let Friends Be Contrarians2.3.3. Patterns, Patterns Everywhere2.4. The Shocking Truth about Yield Curves2.4.1. The Interest Rate Brouhaha2.4.2. Think Globally, Think Better2.4.3. Inverted, Schminverted2.5. What the Yield Curve Is Trying to Tell You2.5.1. On the Flip Side, Let's Flip It2.5.2. Flip It Again2.6. The Presidential Term Cycle2.6.1. Nobody Can Predict What a Genuine Phony Will Do2.6.2. Reversing the Trend2.6.3. Test and Test Again
3. QUESTION THREE: WHAT THE HECK IS MY BRAIN DOING TO BLINDSIDE ME NOW?
3.1. It's Not Your Fault—Blame Evolution3.1.1. Behavioral Finance3.1.2. The Great Humiliator3.2. Cracking the Stone Age Code—Pride and Regret3.2.1. Look! Me Kill Huge Beast! Me Very Skilled!3.2.2. Throwing Spears—Overconfidence3.2.2.1. The Tragedy of Enron3.2.3. See! I Told You So—Confirmation Bias3.2.4. Following a Trail—Pattern Recognition and Repetition3.2.5. 20/20 Hindsight Bias and Order Preference3.3. The Great Humiliator's Favorite Tricks3.4. Get Your Head Out of the Cave3.4.1. Another Flip—Accumulate Regret, Shun Pride3.4.1.1. Less Can Be More3.4.2. Genius? Or Lucky and Forgetful?3.4.3. The Whole Versus the Sum of Its Parts3.4.4. Bunnies or Elephants? Always Think in Terms of Scalability!
4. CAPITAL MARKETS TECHNOLOGY
4.1. Building and Putting Capital Markets Technology into Practice4.1.1. History as a Research Lab4.2. It's Good while It Lasts4.2.1. Finding Earnings When There Were None4.2.2. The Stock Market Is Not a Ballpeen Hammer—But It Can Hit You Hard4.3. Forecast with Accuracy, Not Like a Professional4.3.1. Wronger, Stronger, and Longer4.3.2. Why Tell You Any of This?4.4. Better Living through Global Benchmarking4.4.1. Your Benchmark Is a Road Map for Your Long Journey4.4.2. Pick an Index, Any Index (but Don't Believe More Volatility Gets You Higher Returns)4.4.3. Risk versus Return?4.4.4. Global Thinking Equals Better Thinking4.4.5. Never Say Dow4.4.6. The Two-Stock Index4.4.7. Never Maximize Return4.4.8. The Greatest Risk of All4.4.9. You Too Can Beat the Market4.4.10. Emerging Markets and the GDP Myth
5. WHEN THERE'S NO THERE, THERE!
5.1. Johns Hopkins, My Grampa, Life Lessons, and Pulling a Gertrude5.1.1. The Six Investment Life Lessons of Gertrude Stein5.1.1.1. The Number Six Most Important Gertrude Stein Life Lesson5.1.1.2. The Number Five Most Important Gertrude Stein Life Lesson5.1.1.3. The Number Four Most Important Gertrude Stein Life Lesson5.1.1.4. The Number Three Most Important Gertrude Stein Life Lesson5.1.1.5. The Number Two Most Important Gertrude Stein Life Lesson5.1.1.6. The Number One—All Time Most Important Gertrude Stein Life Lesson5.1.2. Skip Oakland—Think Bird Flu5.2. In the Center Ring—Oil versus Stocks5.2.1. We Just Don't Know5.2.1.1. Colorado, Canada, and China Have it in Common—Not "C"5.2.1.2. Pray for High Oil Prices—Not Low Ones5.2.2. Believe the Stock Market—Not Me—Stocks and Oil Prices Don't Correlate5.2.3. The 1 Percent Solution5.2.4. I Can Confirm It's Confirmation Bias5.2.5. The Gas-Pump Quiz5.2.6. Anything the French Can Do We Can Do Better5.3. Sell in May because the January Effect Will Dampen Your Santa Claus Rally Unless There Is a Witching Effect5.3.1. Time for Some Homework
6. NO, IT'S JUST THE OPPOSITE
6.1. When You Are Wrong—Really, Really, Really Wrong6.1.1. When Debt Is Good!6.1.2. The Killer Question—What Is the Right Amount of Debt for a Society to Have?6.1.2.1. I'm Saying It—Right Here—In the Next Sentence6.1.3. Surprise!6.1.4. Fun Times—Here and Now6.2. Multiplier Effects and the Heroin-Addicted Apple iPod Borrower6.2.1. Not the Dow Again! EEK!6.2.2. Does Someone Need to Pay Back This Debt? No6.2.3. The Dwindling Savings Rate and the Decline of Humanity6.2.4. Too Weird and Whacky—Weird, Weird-II, Weird-III, Weird-IV6.3. Let's Trade This Deficit for That One6.3.1. Let's Play the "Which Country Do You Want to Be?" Game6.3.2. Mercantilists Are Darned Near as Bad as Commies—And I Hate Commies!6.4. The New Gold Standard6.4.1. The Golden Hedge6.4.2. Gold, Inflation, and 206 Years of the Long Bond6.4.3. What Is It? What Isn't It?

7. SHOCKING BUT TRUE
7.1. Supply and Demand . . . and That's It7.1.1. Cash, Stock, or Hybrid?7.1.2. What Really Makes Stock Prices Move7.1.3. The Three Drivers of Stock Demand7.1.3.1. Economic Drivers7.1.3.2. Political Drivers7.1.3.3. Investor Sentiment7.1.4. That Wall of Worry7.1.5. Supply: How It Works7.1.6. Merger Mania7.1.7. No One Stock Style Is Always Better—Period!7.2. Weak Dollar, Strong Dollar—What Does It Matter?7.2.1. Five Myths and More Supply and Demand7.2.1.1. Myth Number One—The Dollar Is Still Falling7.2.1.2. Myth Number Two—The Budget Deficit Will Cause the U.S. Dollar to Fall7.2.1.3. Myth Number Three—The Current Account Deficit Causes the Dollar to Fall7.2.1.4. Myth Number Four—Currencies Are Determined by Trade Balances, Foreign Policy, International Popularity, and So On7.2.1.5. Finally, Myth Number Five—A Weak Dollar Is Bad for Stocks7.2.2. In Case You Forgot, Supply and Demand Determine Currency Prices7.2.2.1. Currency Supply7.2.2.2. Currency Demand7.2.3. What Really Drives Currency Demand7.2.4. Fear of a False Fact Is Bullish
8. THE GREAT HUMILIATOR AND YOUR STONE-AGE BRAIN
8.1. That Predictable Market8.1.1. Direction, Not Magnitude8.1.2. Look Out Below!8.2. Anatomy of a Bubble8.2.1. Bubble Trouble? What Bubble?—It's Always a New Paradigm8.2.2. Sympathy Selling8.3. Some Basic Bear Rules8.3.1. When Bulls Cross-Dress8.3.2. When Bears Cross-Dress8.4. What Causes a Bear Market?8.4.1. Osama Bin Laden, Katrina, and Foghorn Leghorn Walk into a Bar8.4.1.1. What If They Destroyed a Major American City?8.4.1.2. Remember Grampa Fisher?
9. PUTTING IT ALL TOGETHER
9.1. Stick with Your Strategy and Stick It to Him9.1.1. Growth—Or Income—Or Both—That's It9.1.1.1. Maximize Terminal Value against a Primary Purpose9.1.1.2. Cash Flow9.1.2. The Richest Have It Tough!9.2. Four Rules That Count9.2.1. Rule Number One—Select an Appropriate Benchmark9.2.1.1. The First Determinant—Time Horizon9.2.1.2. Stocks or Bonds? The 929 Percent Question9.2.1.3. The Second Determinant—Cash Flow9.2.1.4. Homegrown Dividends9.2.1.5. The Third Determinant—Return Expectation9.2.1.6. The Fourth Determinant—Individual Peculiarity9.2.1.7. Heat Chasing—To Shift or Not to Shift9.2.2. Rule Number Two—Analyze the Benchmark's Components, Assign Expected Risk and Return9.2.3. Rule Number Three—Blend Noncorrelated or Negatively Correlated Securities to Moderate Risk Relative to Expected Return9.2.3.1. The Magic of Diversification9.2.4. Rule Number Four—Always Remember You Can Be Wrong, so Don't Stray from the First Three Rules9.2.4.1. Core versus Counter Strategy9.3. Finally! How to Pick Stocks That Only Win9.3.1. Just Tell Me How to Pick Stocks Already!9.4. When the Heck Do You Sell?9.4.1.9.4.1.1. Lock and Load9.4.2. Togas, Puppy Strangling, and Other Profit Killers
CONCLUSION
Transformationalism
A. U.S. Equity Total Returns 1830 to 1925
B. S&P 500 Composite Returns
C. Simulated Technology Returns
D. Nasdaq Composite Returns
E. U.K. Stock Market Total Returns
F. U.K. Stock Market (FTSE All-Share) Total Returns
G. Germany Stock Market Returns
H. Germany Stock Market (DAX) Total Returns
I. Japan Stock Market Total Returns
J. Japan Stock Market (TOPIX) Total Returns
K. Fisher Investments Global Total Return Performance
L. Ten-Year History of the Forbes Report Card
L.1. Disclosure
M. The United Deficits: Data
NOTES
GLOSSARY

Content preview from The Only Three Questions That Count: Investing by Knowing What Others Don't

Chapter 3. QUESTION THREE: WHAT THE HECK IS MY BRAIN DOING TO BLINDSIDE ME NOW?

It's Not Your Fault—Blame Evolution

One of the first things we learn about finance is "Buy low, sell high." In the movie Trading Places, when Eddie Murphy and Dan Aykroyd prepare to corner the orange juice market (illegally and implausibly, but comically), you can tell the script writer was casting about for something finance-sounding to say. So Dan tells Eddie, "Buy low, sell high." What more advice do you need, really?

We all know the goal, but more often than not we end up doing the opposite. How hard can this be? Buy when stuff is priced low; sell when it's priced high. It's not rocket science. And yet, this problem is ageless and endless. Investors routinely buy and sell precisely backwards. For evidence, look at Figure 3.1 showing fund flows—the amount of money going into and out of equity mutual funds each month.

Inflows for stock mutual funds were highest during February 2000.^[45] That was about the best time in recent history to get out of stocks—at the peak of an ensuing three-year bear market. Fast forward to 2002, and the reverse is true. Everyone bailed from funds in July^[46]—a fantastic time for stocks—just before a new bull market. Here is incontrovertible evidence of investors buying high and selling low en masse. These weren't a few deranged ignoramuses engaging in this behavior. This shows a widespread group-think—a frenzied mob of loser lemmings lumbering in and out of the market precisely ...

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The Only Three Questions That Count: Investing by Knowing What Others Don't

by Kenneth L. Fisher, Jennifer Chou, Lara Hoffmans

Chapter 3. QUESTION THREE: WHAT THE HECK IS MY BRAIN DOING TO BLINDSIDE ME NOW?

It's Not Your Fault—Blame Evolution

Become an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
and much more.