The Wall Street Journal’s Brett Arends outlined his 10 least favourite “stock market myths that just won’t die” in a recent column.
Here are five that resonated with me:
“Stocks on average make you about 10% a year.”
Why it’s annoying: Aside from simply not being true, as Arends points out, it is used to shame those of us who choose to put our money into other asset classes. It’s as if anyone who has money in a CD, real estate investment, or precious metals is a total moron because they are turning down a God-given, guaranteed right to a 10% annualized return.
“Our economists are forecasting…”
Most economists suck. If you are a money manager and you consistently suck, eventually it becomes more difficult to find a job. This is not so with the economist racket; make hundreds of bad predictions and you’ll still get booked on TV shows. If even one of those predictions later turns out to be true, congratulations, because rich people will now fly you all over the world to hear your insights… Keynote speeches, your own consulting firm, models, bottle service — it’s all a single vague prediction away.
“Investing in the stock market lets you participate in the growth of the economy.”
A night at the strip club or blackjack table also lets you “participate” in our grand economic experiment. It doesn’t mean you’ll come out ahead.
“If you want to earn higher returns, you have to take more risk.”
A good investment should never present significant risk to your principal. This is something I learned when I was a kid skimming through The Richest Man in Babylon, and it’s something I still believe in today. If there is a chance you will lose it all, that’s not an investment — it’s a day at the race track.
“You can’t time the market.”
I’m glad Mr. Arends includes this one, because it annoys me to no end. All of those index funders on Bogleheads telling people you should never try to time the market — they’re simply wrong.
As he explains in the column, “This hoary old chestnut keeps the clients fully invested. Certainly it’s a fool’s errand to try to catch the market’s twists and turns. But that doesn’t mean you have to suspend judgment about overall valuations. If you invest in shares when they’re cheap compared to cash flows and assets — typically this happens when everyone else is gloomy — you will usually do very well.”
Hey, that strategy seems to work well enough for Warren Buffett… Be greedy when others are afraid.