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.

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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

Expand for more details on the example

• To conduct a thorough analysis, one might gather data on album sales, social media engagement, and historical stock price movements post-album releases.

• This data can then be used to create a model that predicts stock price movements based on these indicators.

Ken Fisher’s 3 Questions Approach

Ken Fisher suggests a three-step approach to feature research:

1. Common Sense Validation: Statistically validate what is commonly believed but not yet verified. Ask yourself, are you believing in something that is wrong?

2. Unexplored Market Phenomena: Instead of focusing on widely discussed topics, statistically validate phenomena that no one is discussing.

3. 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.

Expand for a deeper dive into Ken Fisher's approach

• Fisher's methodology encourages researchers to challenge the status quo and look for insights where others may not have looked.

• By asking these three questions, researchers can uncover unique investment opportunities and avoid common pitfalls that come from following the herd.

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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.