Tuesday, April 20, 2010

Three Questions (Part 3)

Ken Fisher's book "The Only Three Questions that Count" he asks the following three questions:

1. What do you believe that is actually false?
2. What can you fathom that others find unfathomable?

Another thing he asked us to consider is why sometimes having a deficit, debt, interest rate changes, stronger/weaker U.S. dollar etc. by themselves doesn't correlate with a stronger or weaker stock market. This was a paradigm shift for me.

He looked at overall GDP of the U.S. compared to the amount of debt we actually have. And more fully he looked at world GDP compared to debt and global interest rate vs. U.S. interest rates. A lot of times we look at the FEDs and how they change the interest rates.

Lower interest rates mean people aren't as willing to put money in bank, banks aren't making as much money off loans, and if they do make loans, they would loan to large, safe corporations so during times of lower interest rates or yield curves with a positive slope, banks are more willing to lend to value companies or companies with low P/E. Whereas during times of flat or inverted yield curves, short term interest rates are equal or greater than long term interest rate (something we had a couple years back) banks are more willing to take risks and invest in growth companies or companies with high P/E.

But Fisher also points out that we are not just working with the Federal Reserve of the U.S. The stock market is a global market and the U.S. makes up only a percentage of world money supply. So even if the U.S. have low interest rates doesn't mean other countries like Canada can't raise theirs. In the case that other countries have higher interest rates they would save more there, People would put money into their banks rather than put money in other things. And the opposite is true as well. If another countries' interest rate is lower than the U.S. there is nothing stopping them from taking a loan from that country and investing it in another country with a higher yield. This is just simple economics.

Anyways, investing involves a lot of variables and unfortunately we believe a lot of "myths" and these myths are being expounded by the media, CNBC, Fox, etc. One of the things that Fisher encourages is to ask ourselves these three questions:

1. What do you believe that is actually false?
2. What can you fathom that others find unfathomable?

Evaluate our own understanding and see where other people are wrong... When we know something that others don't know, though the truth might be unpopular, it is exactly then that we test out that hypothesis (like a science experiment) and discover if we are truly right.

So think GLOBALLY not just nationally. Find correlations, find new technologies in helping you discover something others don't know.

The last thing he is most positive about is that after every bear market, huge losses is accompanied by several years of large gains. This is historically true. After all major bear markets, there has always been a V shaped recovery, meaning the market hit some point and gained double digits several years in a roll. You can check it out from historical data. So you get a sense from Fisher that he is very bullish, almost too bullish. I think that's a good attitude especially in the middle of the worst recessions and depressions. Most people have gloom and doom at the bottom of a stock market. If you are the only person who believes that stocks will go back up based on historical data, you will most definitely ride it back up... just as it did in 2009-2010 (so far). But like most people, they pulled everything out of the market, sat with it in cash while the market rebounded 60-70 percent and in some cases stocks rebounded 100-200% while the majority sat back on a pile of cash making less than 1% interest.

So that's it. Examine your own thinking. You could be wrong. Look at other people, they could be wrong. Create new ways of thinking.

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