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Stock-Market Myths That Just Won't Die

40 points by pavel 16y ago

joe_the_user 16y ago
My hackles go up whenever I hear the term "myths". Despite this, I think this good debunking. Summary: Let the buyer beware. There are no short-cut to investing wisely. Don't buy without doing your homework, and don't expect certainty even when you've done your homework.
- pbhjpbhj 16y ago
  I read it more like "don't be a sucker, stock brokers want your money, why?, because they can't guarantee to make their own on the stock market and it's their job".
- orblivion 16y ago
  > My hackles go up whenever I hear the term "myths". I hate it when people use this term. They almost always mean "something I disagree with and I'm tired of hearing" rather than "something that is verifiably wrong". Somehow I missed it this time, though. I guess because I assumed this sort of thing can actually be verified.
jaxn 16y ago
We have had some recent ponzi schemes here in Tennessee lately. It seems that one of my friends is being investigated now. I was talking about this with another friend and he said "I am starting to wonder if every investor who beats the market does it by cheating?" The general theme of that list seems to be that you can't beat the market with much consistency.
- philwelch 16y ago
  By definition, an efficient market has all the publicly known information already encoded in its prices. Hence, even theoretically it's impossible to beat the market without doing insider trading, which is considered illegal and hence "cheating". Conversely, if insider trading were considered acceptable, the market would actually contain more information than was publicly accessible, and we could infer things from stock prices that we didn't actually know.
  - d2viant 16y ago
    It's not impossible. Examples that prove this are outliers like Warren Buffett and Peter Lynch. Just because the information is public doesn't mean people are interpreting or acting on it correctly.
    - philwelch 16y ago
      No, even with a perfect market there will be, randomly, some people with significantly better luck than others ;) Seriously though, crucial the assumption is a perfectly efficient market, and inefficiencies exist everywhere.
      - jaxn 16y ago
        Sure, some people get lucky. Hence the "with much consistency".
        philwelch 16y ago
        Consistent luck is still luck, and Warren Buffett and Peter Lynch are 2 out of millions. Likewise, 0.47 of people who bet it all on black at the roulette table are lucky, but 0.47^N of people who bet it all on black at the roulette table are consistently lucky. Seriously though, there are real inefficiencies as well, and someone like Warren Buffett is probably exploiting them rather than being really lucky. (Also, I hasten to point out that Berkshire Hathaway currently invests by M&A'ing smaller companies, which is considerably less of an efficient market than the stock market, which is likely more efficient now than it was decades ago--and often, M&A'ing a company can be a value add.)
        d2viant 16y ago
        Consistent luck? Over decades and decades? At what point does the success become attributable to the person? Investing isn't really a fair comparison to gambling. Gambling is essentially random -- investing you're much more in control of how you do, especially when you make larger and larger investments. Acquiring smaller companies is a relative term, they just bought BNSF for $44 billion. Berkshire rarely purchases smaller companies, they simply don't make a material difference on the balance sheet -- even if they do very well financially.
hristov 16y ago
I don't really agree with this article. Number 4 goes out of its way to cherry pick periods starting from a stock market boom as examples. This is not really relevant for today's markets because the boom has already passed and we are in a slump. Number 6 is especially egregious. Think about the reasoning behind this for a second: "The widely quoted price/earnings (PE) ratio, which compares share prices to annual after-tax earnings, can be misleading. That's because earnings are so volatile -- they're elevated in a boom, and depressed in a bust." Are we currently in a boom or bust? If we were in a boom, then they might have a point that corporate earnings are higher than they will be in the future and that the P/E ratio therefore makes stocks look better than they are. But I don't think anyone can say that we are in a boom. We are instead in a very serious recession. So the above paragraph would mean that the P/E ratio actually underestimates the values of stock which means that stocks are even better buys than they would initially seem. I don't know why the WSJ seeks to deflate demand for stocks now when stocks are relatively cheap after trying to inflate and encourage demand right before the crisis when stocks were really expensive. But I would not trust their advice much.

40 points by pavel 16y ago

My hackles go up whenever I hear the term "myths". Despite this, I think this good debunking. Summary: Let the buyer beware. There are no short-cut to investing wisely. Don't buy without doing your homework, and don't expect certainty even when you've done your homework.

pbhjpbhj 16y ago
I read it more like "don't be a sucker, stock brokers want your money, why?, because they can't guarantee to make their own on the stock market and it's their job".
orblivion 16y ago
> My hackles go up whenever I hear the term "myths". I hate it when people use this term. They almost always mean "something I disagree with and I'm tired of hearing" rather than "something that is verifiably wrong". Somehow I missed it this time, though. I guess because I assumed this sort of thing can actually be verified.

jaxn 16y ago

We have had some recent ponzi schemes here in Tennessee lately. It seems that one of my friends is being investigated now. I was talking about this with another friend and he said "I am starting to wonder if every investor who beats the market does it by cheating?" The general theme of that list seems to be that you can't beat the market with much consistency.

philwelch 16y ago
By definition, an efficient market has all the publicly known information already encoded in its prices. Hence, even theoretically it's impossible to beat the market without doing insider trading, which is considered illegal and hence "cheating". Conversely, if insider trading were considered acceptable, the market would actually contain more information than was publicly accessible, and we could infer things from stock prices that we didn't actually know.
- d2viant 16y ago
  It's not impossible. Examples that prove this are outliers like Warren Buffett and Peter Lynch. Just because the information is public doesn't mean people are interpreting or acting on it correctly.
  - philwelch 16y ago
    No, even with a perfect market there will be, randomly, some people with significantly better luck than others ;) Seriously though, crucial the assumption is a perfectly efficient market, and inefficiencies exist everywhere.
    - jaxn 16y ago
      Sure, some people get lucky. Hence the "with much consistency".
      - philwelch 16y ago
        Consistent luck is still luck, and Warren Buffett and Peter Lynch are 2 out of millions. Likewise, 0.47 of people who bet it all on black at the roulette table are lucky, but 0.47^N of people who bet it all on black at the roulette table are consistently lucky. Seriously though, there are real inefficiencies as well, and someone like Warren Buffett is probably exploiting them rather than being really lucky. (Also, I hasten to point out that Berkshire Hathaway currently invests by M&A'ing smaller companies, which is considerably less of an efficient market than the stock market, which is likely more efficient now than it was decades ago--and often, M&A'ing a company can be a value add.)
        d2viant 16y ago
        Consistent luck? Over decades and decades? At what point does the success become attributable to the person? Investing isn't really a fair comparison to gambling. Gambling is essentially random -- investing you're much more in control of how you do, especially when you make larger and larger investments. Acquiring smaller companies is a relative term, they just bought BNSF for $44 billion. Berkshire rarely purchases smaller companies, they simply don't make a material difference on the balance sheet -- even if they do very well financially.

hristov 16y ago

I don't really agree with this article. Number 4 goes out of its way to cherry pick periods starting from a stock market boom as examples. This is not really relevant for today's markets because the boom has already passed and we are in a slump. Number 6 is especially egregious. Think about the reasoning behind this for a second: "The widely quoted price/earnings (PE) ratio, which compares share prices to annual after-tax earnings, can be misleading. That's because earnings are so volatile -- they're elevated in a boom, and depressed in a bust." Are we currently in a boom or bust? If we were in a boom, then they might have a point that corporate earnings are higher than they will be in the future and that the P/E ratio therefore makes stocks look better than they are. But I don't think anyone can say that we are in a boom. We are instead in a very serious recession. So the above paragraph would mean that the P/E ratio actually underestimates the values of stock which means that stocks are even better buys than they would initially seem. I don't know why the WSJ seeks to deflate demand for stocks now when stocks are relatively cheap after trying to inflate and encourage demand right before the crisis when stocks were really expensive. But I would not trust their advice much.