Ken Fisher's Financial Analysis
An exploration of financial features in investment and Ken Fisher's three-question approach to stock market research.
TL; DR
Financial features are signals that precede price movements, have high linear correlation, and clear economic causality.
Ken Fisher's approach involves validating common beliefs, exploring unexplored market phenomena, and not succumbing to cognitive biases when facing the truth.
Feature Research Approach in Finance
What is a Financial Feature?
A financial feature is a signal, denoted as 'A', that:
(1) Precedes the price movement,
(2) Has a high linear correlation with the price, and
(3) Has a clear economic causality.
Example
As mentioned by Hong Jin Chae/Damodaran (pg 13~15), purchasing stocks because you like a new album from your favorite idol group involves:
Considering all related stocks
Understanding how stock prices move following the release of a new album and subsequent ranking changes
Identifying album rankings or other indicators that precede stock price movements and can predict ranking changes
Ken Fisher’s 3 Questions Approach
Ken Fisher suggests a three-step approach to feature research:
Common Sense Validation: Statistically validate what is commonly believed but not yet verified. Ask yourself, are you believing in something that is wrong?
Unexplored Market Phenomena: Instead of focusing on widely discussed topics, statistically validate phenomena that no one is discussing.
Facing the Truth: When your brain resists an evident truth, do not succumb to that resistance.
Reference
For more information on Ken Fisher's approach, see the third week's discussion on "Beating the Stock Market with Three Questions" at Ken Fisher's 3 Questions.
When conducting quantitative research, it's essential to consider these approaches to identify robust features that can provide a competitive edge in financial markets. Whether it's through common sense validation, exploring uncharted market phenomena, or challenging your own biases, a disciplined approach can lead to more effective and reliable investment strategies.
Last updated