Ken Fisher joined Barry Ritholtz (@Ritholtz) to talk about process, redwood trees, and “the only three questions that count.” Fisher is an author of many books, Forbes articles, and CEO of Fisher Investments. Here’s our table of contents:
What Fisher talks about when he talks about writing — the only three questions that count — how to pick winning stocks — simple heuristics — and Fisher’s favorite books.
How to write well.
Ritholtz compliments Fisher’s work and says, “you’ve obviously inherited your dad’s writing skills.”
“Not true,” replies Fisher, “because if I had inherited them they would have come to me very naturally, but I worked hard to learn how to write.” Even though his dad was a great writer, Fisher needed help.
It’s easy to write words – even I do this. What’s difficult is to write well.
Garry Shandling explained this to Judd Apatow when the two wrote for the The Larry Sanders Show. “The struggle in the writing room,” Shandling said, “is getting people not to write just words.”
Fisher saw this “more than words” idea with his own father. “He had an ability,” Fisher recalls, “for people to see themselves through things that he had interacted with them on.” It wasn’t the explicit things Fisher’s father spoke about, but the bigger ideas that people applied to their own lives.
That’s the secret sauce to write well. It has to connect with people. This is what Fisher needed to learn.
“I was a lousy writer,” he says, “until I hired someone to teach me how to write.” Only after he learned did he author bestsellers.
Writing as a form of thinking.
“I write to figure out what I think,” Ritholtz says.* Fisher says that he uses writing to clarify his thoughts too. They aren’t alone.
Michael Mauboussin said that he writes (and speaks) about his ideas to understand them.
“I write entirely to find out what I’m thinking, what I’m looking at, what I see and what it means,” said Joan Didion.
“Learning to read well and to write well is really learning to think well,” said Maria Popova.
Writing is a form of thinking much like swimming is a form of exercise.
The only 3 questions that count.
A lot of the interview circles around Ritholtz’s favorite book by Fisher, The Only Three Questions That Count. It’s a rich area and we’ll dive into it.
Question 1: What do you believe that’s false? It’s not an easy question to answer. Tren Griffin points to the Charlie Munger quote that it’s a wasted year if we don’t change our minds about something.
We should probably do this more. Ritholtz says we spend too much time rationalizing our beliefs and not examining them. We do this because it’s easy.
Ramit Sethi calls us “cognitive misers,” because we don’t do much heavy lifting with our brain. If there’s an easy way, we take it.
Fisher suggests these two steps:
First, identify what you believe. “What do you think?” Fisher asks. Financial markets are an expensive way to find out if you don’t already know.
Second, ask, “is there a history that associates with that thing?” Fisher says to find the correlation coefficient and see if two things line up.
This isn’t as easy as it sounds. It’s hard to find good correlations because the data is cavernous. It makes “views wronger longer,” Fisher says.
One way to not be wrong is to use Twitter well. Chris Dixon said that he uses Twitter to follow smart people who tell him what to read. That’s a good start. We also need to follow Jason Zweig’s advice, and feed ourselves oppositve views.
If we combine these two things the worst ideas will be filtered out.
Question 2: What can I fathom that other people can’t? From the start Fisher had an idea for something other people weren’t doing. He wanted Fisher Investments to be like IBM and Charles Schwab. “In both cases doing things that hadn’t been done yet,” Fisher explains.
Thiel writes that the best companies are unions of fields rather than intersections. (I missed this on my first reading) Unions combine entire ideas to form a larger one – intersections take snippets to form a smaller one.
A successful union might be Slack. Mobile U Communication U Design. An unsuccessful intersection might be the movie Pan. Hugh Jackman ∩ Fairy Tale ∩ Movie.
Here’s where things get interesting, Thiel warns us against fooling ourselves.
When you fathom something new, it has to be accurate. One way we mess this up is thinking in terms of intersections and not unions. Thinking with blinders. Thinking we know what we’re doing but, we’re being misled.
Question 3: What is my brain doing to mislead me?
“The first principle is that you must not fool yourself — and you are the easiest person to fool.” – Richard Feynman, Surely You’re Joking Mr. Feynman.
Fisher notes that our reptilian brains are not well adapted for our current environment.
In Mean Genes, Terry Burnham explains why.”Our ancestors got their chemical kicks the old-fashioned way: they earned them through good behavior.” Burnham explains how a plethora of today’s bad behaviors (too much weight, too little savings, risk seeking, etc.) were wonderfully helpful a long time ago. It feels good because it was good. That’s no longer the case.
“We will see that many judgement errors in human risk-taking stem from a common source:” Burnham writes, “we live in a very different world from that of our ancestors.”
The trouble is two fold- it’s hard to stop and we don’t realize when it starts. But it’s not impossible to combat.
First we play defense.
James Osborne commented about different checks we can install to slow down these kinds of actions. If you trade too much, said Osborne, give your login password to someone else. Burnham writes about the same thing. If we love eating tasty things, keep healthy tasting things on hand.
Fisher says that this sometimes happens accidentally. He mentions a study where people in funds with higher fees had greater returns. Not because of the intrinsic value or investing acumen. Rather, it cost those customers more to trade, so they traded less. It’s an example where activity does not ≠ gains.
After a good defense, comes a chance to play offense.
Fisher mentions this idea throughout the interview – watch out for your mistakes but also look for mistakes others make. It’s the business equivalent of going on vacation at during off season.
If we expect people to be greedy, take risks, or over-trade, we should incorporate that into our strategy.
How to pick winning stocks.
When Ritholtz asks how Fisher picks stocks, Fisher says, “I don’t look at stocks.”
What?! But before Fisher explains his method, we need to understand the game. It wouldn’t make sense to get basketball tips from LeBron James if we didn’t know what basketball was.
Fisher subscribes to the definition provided by Benjamin Graham:
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” ― Benjamin Graham
Markets factor both voting and weighing into price, and Fisher thinks about both these things.
Weighing, the intrinsic value. Fisher approaches stock picking from the macro end. He looks at the world -> countries -> sectors -> sub-sectors -> factors (value, growth) -> stocks. The company choice is the caboose in his decision train.
Fisher compares it to fishing in the right pond. Whether or not you catch any fish includes a bit of luck. Being in a place helps a lot.
That’s the things that you see in the market, but it’s also important to think about what others see.
Voting, the perceived value. What do other people believe is true? A derivative of the “3 questions,” Fisher wants to know what other people think. He says current (3-30 months) beliefs are already priced. If you want to be different (unions not intersections), you need to zig when the others zag. This is second level thinking.
We’ve seen second level thinking elsewhere. Howard Marks said, “If you think the same as everybody else, you’ll behave the same as everybody else, and you can’t expect to outperform them.” Ray Dalio writes about it in Principles.
When you don’t know a lot, simple heuristics work well.
Casey Neistat asks, “is this good for me and my technology company (Beme), and if the answer is no it gets a pass.”
Richard Feynman got so tired of choosing a dessert that he resolved to always order chocolate ice cream.
Barry Ritholtz said that he looks at the prices of classic cars as a signal for bull and bear markets, or if people say “ugh” to his trading ideas.
Some banks figured out how to filter out dangerous marijuana growers.
Van Halen found out that if one thing on their rider was wrong, other things might be too.
Simple works well because we don’t have the time or resources to always make a choice, (remember, we’re cognitive misers) but a signal might nudge us one way or another.
Fisher uses this technique as well (quoting Franklin Templeton); “bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”
It’s not always right, but it gets darn close.
Fisher’s book list reflects his interests in the markets and outdoors. He suggests: Hunting with Bow and Arrow, Hunting American Lions, Where are the Customer’s Yachts, How to Lie with Statistics, Think and Grow Rich, and Humble Approach.
Thanks for reading, I’m @mikedariano on Twitter.
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*I couldn’t figure out who exactly Ritholtz was quoting when he said, “I write to figure out what I think.” If you know, please let me know.