Thursday, September 9, 2010

10 Stock-Market Myths That Just Won't Die

IN THE NEWS from The Wall Street Journal

With the PSEi closing today at an all-time high (lending credence to this little prediction I made six weeks back), investor interest and confidence on the local stock market continues to roll. The six-month return on local stocks is now at a staggering 23%, even as more developed markets in Hong Kong and New York remain stagnant or continue to flounder (see image above). Perhaps now, more than ever, is the perfect time to take a closer look at some of the things our so-called experts, stock brokers, and financial advisers say about stock investing and make the most out of this potentially rewarding situation.

1. "This is a good time to invest in the stock market."

It may run counter to what our instinct tells us, but maybe the best thing to do in a situation like this is get out and sell. That is unless you believe the index is going to double in the next few years, as some of these geniuses insist.

2. "Stocks on average make you about 10% a year."

This is based on some past history--stretching back to the 1800s in the US--and it's full of holes. Think about how different the past ten years is from the ten before that, what with our Internets, Googles, iPhones, and iPads. Now imagine how the collective "we"--investors, listed companies, and market dynamics--are different from "them" some 100 years ago. And after all, we all do agree that past performance does not matter, don't we?

3. "Our economists are forecasting..."

Forecasting is, at best, a calculated guess. Even if the person doing the forecasting (i.e., the economist) asserts that he knows what he's doing, actual results tell us that it cannot be done consistently accurate. Show me one person who was able to predict this market high (e.g., me), and I'll show you a hundred others who bet on the opposite.

4. "Investing in the stock market lets you participate in the growth of the economy."

I look at the Hong Kong economy now and the performance of its stock market in the past year, and I only see inconsistency, which is the same thing I see when I think of the way things are in the Philippines and this overwhelming stock market performance. This incongruence happens because economic performance is built on fundamentals, unlike stock market performance, which sits on top of the unpredictable whims and behavior of market participants.

5. "If you want to earn higher returns, you have to take more risk."

At its essence, this is something I still subscribe to; anyway, it all depends on how we define and measure risk. Just remember, it does not make sense to invest in something that exposes you to a significantly high chance of losing principal, since that does not necessarily equate to higher returns.

6. "The market's really cheap right now. The P/E is only about 13."

Two things we have to remember about using the P/E ratio to gauge the value of markets and individual stocks. One, earnings or, in other words, accounting income, can easily be manipulated. Two, the attractiveness of a certain P/E is in the eye of the beholder: for a guy who's used to 30x P/Es in China, a 15x P/E in Hong Kong looks very cheap and tempting, indeed; but for someone in the US, for example, who's used to multiples of 13x, 15x P/E stocks may look just a tad expensive.

7. "You can't time the market."

Haven't you heard me say this time and time again? But forget what I said--it can be done. You just need a couple of cojones and a bit of luck. And now's the perfect time to try it. Sell... n... o... w.

8. "We recommend a diversified portfolio of mutual funds."

Putting all your cash in just one kind of mutual fund or UITF, be it equity or fixed income, may not be diversification enough. To really reap the benefits of diversification, you'll need to invest across asset classes.

9. "This is a stock picker's market."

Again, stock picking is more an art form than skill. Maybe now's the best time to show how investing in a passive fund which tracks the market index, now with a 35% year-on-year return, is a tough act to follow, much less beat.

10. "Stocks outperform over the long term."

This passage from the article is just too beautiful to change:

"Define the long term? If you can be down for 10 or more years, exactly how much help is that? As John Maynard Keynes, the economist, once said: 'In the long run we are all dead."
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