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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

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.

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.

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