The only three questions that count
Posted on January 20, 2009 by Richard Beddard
Filed Under Investing |
Top-down, bottom-up – It’s all the same…
The Only Three Questions That Count is the title of a book by Ken Fisher, which I have rather cheekily expropriated for this blog entry.
Ken’s questions were designed to help the reader be a better top-down investor by challenging her to think rigorously about what category of investment she should choose; stocks, bonds and cash, and then what sub-category; value shares, growth shares, domestic shares or foreign shares, for example. Picking Glaxo over Astra Zeneca is the final piece in Ken’s process, and the least important.
His questions were:
- What do you believe that is actually false?
- What can you fathom that others find unfathomable?
- What the heck is my brain doing to blindside me now?
They make more sense if you read the book, but the point is to win at investing you need to know something other people don’t and by answering these questions you might find out what it is.
I thought I’d try to formulate three questions for bottom-up investors; those of us that start with companies, not asset classes, and build a portfolio out of companies with attributes we like.
Actually, I’ve just realised I need to justify bottom up investing since Ken’s research indicates that picking particular companies doesn’t matter much. Unfortunately, I have less than twenty minutes left to write this blog, and although I’ve heard of similar research, I’ve never read it. So, here’s a short, and possibly misguided, defence of the bottom up investor:
Value investors buy shares when they’re cheap. If they’re expensive, they sell. So, as a by-product of analysing individual companies they move money from expensive sectors (say technology in 1999) to cheap sectors (say utilities in 1999) and even from shares to cash and back again. If they’re more sophisticated than I, they might include bonds too. They’re still allocating money, but they arrive at those allocations from the detailed analysis of the stocks and rely less on economic or market analysis.
So, on to my three questions, with apologies to Benjamin Graham, Peter Lynch and other great bottom-up investors of the past. The first two questions are about companies, the third is about the investor:
- Is the company cheap?
- Can you see any reason why it might not be prosperous in, say, three years time?
- Do you understand how it makes money?
Since the majority of investors have sold cheap companies (that’s how they got so cheap), you’re already fathoming companies that other investors aren’t. Because they’re unglamorous, they’re less likely to blindside you. In other words, though they come at investing from opposite perspectives, I have an inkling my value investing questions fit Ken’s methodology.
Comments
5 Responses to “The only three questions that count”
Leave a Reply
Hi Richard
It is useful to have a checklist but I think it is dangerously seductive to think that successful investing can be distilled into answering just three questions. Ken probably expects his readers to combine his methodolgy with their own investment process.
Hi John, thanks for your comment. You’re quite right of course, and that’s what I was trying to do viz-a-viz my investment process. I also agree that it’s seductive to boil successful investing down to three questions. When you actually start to think about those questions you open up many cans of worms (take mine: how do you know a company is cheap? What determines future prosperity?). I’m planning on expanding on them in a subsequent blog. However, if you do have an investment process and you can summarise it in three questions, then perhaps that’s a good sign that you’ve thought it through!
[...] week I boiled the way I pick shares down to three questions, the only three that count. Having spent most of the blog building up to that point I didn’t elaborate, leading Mike to [...]
[...] is part three of a three-part mini-series. In part one I said there are only three questions that count. In part two, I explained how I decide a company [...]
[...] 02 Oct 2009 Home / Editors’ Blog About « « Do WHA/T? The only three questions that count » [...]