Befriending Your Brain

If you and your clients have a New Year’s resolution to be better and smarter investors, then you may want to check out Forbes columnist Ken Fisher’s latest book, The Only Three Questions That Count: Investing by Knowing What Others Don’t.

Much of Fisher’s success is due to his career-long practice of challenging the conventional wisdom of investing. He notes that the authority he challenges most of all is his own — because challenging yourself, Fisher writes, is the key to success. Unlike many investors who consider investing an art, Fisher believes it’s more a science. “You don’t need to be right all the time — just more often than you’re wrong,” writes Fisher. “To do that, start thinking like a scientist.”

The author notes that he’s learned three major lessons in his three decades in the industry: “1) Much of what is widely believed about investing is mere myth; 2) Investors don’t seek out what others don’t know because they assume it can’t be done. How can you fathom the unfathomable? [Investors] are missing bet-able patterns because they don’t know that they can look for them or how to do so; and 3) Our brains weren’t set up to do this stuff.”

Fisher writes that our caveman ancestors were wired to deal with survival problems, not capital markets. “By understanding how evolutionary psychology and behavioral finance overlap and by using scientific inquiry, we can turn our brains from our worst investing enemy into our friend.” Fisher quotes Homer Simpson approvingly: “Brain, I know you and I have never been friends….”

Fisher’s three questions, and his explanations as to their importance, are:

1. What do you believe that is actually wrong? (If most people believe X causes Y, but you can prove X doesn’t cause Y, you can bet against Y happening while everyone else bets it will happen. By doing this you have debunked a myth and made one fewer mistake — and you can successfully bet against the crowd.