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By rrockw
December 19, 2006

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The Only Three Questions that Count by Ken Fisher
Publisher: Wiley
Pages: 448
Review Date: 12/2006

Review: The first thing that grabbed my attention was how in the preface he lashed out at Warren Buffett saying "... he isn't a portfolio manager and has no correctly calculated performance record over the past 35 years as a portfolio or money manager." Maybe you can't define him as a pure money manager at the current time (but he is responsible for capital allocation at Berkshire and his record of increasing value is indisputable) but from 1957- 1969 he ran the Buffett Partnership that averaged a 30.4% annual return.

So before I even finished reading the preface of the book my respect for Mr. Fisher tumbled significantly.

Let's look at his three questions that count:

1. What do you believe that is actually false?
2. What can you fathom that others find unfathomable?
3. What the heck is my brain doing to blindside me?

I think those are all good questions, but where Mr. Fisher fails is in how he puts the questions to work (the exception is Question 3, the chapter on that question contains some useful information).

For instance in the chapter that discusses Question 1 he talks about PE ratios and budget deficits, when I would think a much better use of his time would have been to discuss how an investor could identify the companies that the market is mispricing.

For question 2 instead of discussing inverted yield curves I would have used that question to discuss how investors can look at Company A and see something in the business that other investors aren't seeing and as a result are mispricing in the market. Since Mr. Fisher doesn't seem to appreciate Mr. Buffett, lets use his purchase of Washington Post, Coke, Freddie Mac, GEICO, and Gillette as examples. He saw that all these companies were examples of great business with observable competitive advantages that were being mispriced by the market.

How does Mr. Fisher suggest that you invest for the long run? He suggests that you pick a benchmark and try not to deviate from that benchmark's return "by much more than you are comfortable lagging it". He tells his readers that they must determine whether the market next year is going to be up-a lot, up-a-little, down-a-little, or down-a-lot. Once they have made that decision they then must decide how to allocate their capital. He suggests in the up-a lot, up-a-little, or even down-a-little categories to be 100% in equities.

In my mind that type of guessing is a total waste of time and in my opinion investors would be better served trying to locate good companies selling for less than their intrinsic value rather then trying to guess what the tea leaves are saying and then trying to make asset allocation decision based on them.

So as they say the proof is in the pudding so lets look at Mr. Fisher's investment record as listed on page 405 of his book:

Fisher Investments (as of 06/30/06):

3 year return: 14.3% vs. 11.2% for the S&P 500
5 year return: 5.5% vs. 2.5% for the S&P 500
10 year return: 9.9% vs. 8.3% for the S&P 500

Now let's look at a list of some quality funds and their performance record that I took about 15 minutes to compile. These funds all invest using a more focus investing style (and I would suspect that everyone of these funds would say Warren Buffett has significantly influenced their investing process):

Longleaf Partner's Fund (as of 9/30/06):

(I wasn't able to quickly locate their 3-year performance)
5 year: 12.3% vs. 7% for the S&P 500
10 year: 12.7% vs. 8.6% for the S&P 500

Fairholme Capital Management (as of 11/30/06):

3 year return: 19.72% vs. 11.81% for the S&P 500
5 year return: 16.04% vs. 6.08% for the S&P 500

Sequoia Fund, Inc. (as of 9/30/06):

5 year: 7.85% vs. 6.96% for the S&P 500
10 year: 11.99% vs. 8.57% for the S&P 500

To sum up my thoughts on Mr. Fisher's book, I would recommend all investors avoid this book, as my opinion is a smart investor who uses a focused approach has a much higher chance of outperforming benchmark asset allocaters.


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