The Little Book of Market Myths

One of the hardest things we do (or rather, don’t do). Folks don’t like questioning themselves. If we question, we might discover we’re wrong, causing humiliation and pain. Humans evolved over many millennia to take any number of extraordinary and often irrational steps to avoid even the risk of humiliation and pain.

Those instincts likely helped our long-distant ancestors avoid being mauled by wild beasts and starving through long winters. But these deeply imprinted instincts often are exactly wrong when it comes to more modern problems like frequently counterintuitive capital markets.

I often say investing success is two-thirds avoiding mistakes, one-third doing something right. If you can just avoid mistakes, you can lower your error rate. That alone should improve your results. If you can avoid mistakes and do something right on occasion, you likely do better than most everyone. Better than most professionals!

Maybe you think avoiding mistakes is easy. Just don’t make mistakes! Who sets out to make them, anyway? But investors don’t make mistakes because they know they’re mistakes. They make them because they think they’re making smart decisions. Decisions they’ve made plenty of times and have seen other smart people make. They think they’re the right decisions because they don’t question.

After all, what sense does it make to question something that “everyone knows”? Or something that’s common sense? Or something you learned from someone supposedly smarter than you?

No! You should always question everything you think you know. Not once, but every time you make an investing decision. It’s not hard. Well, functionally it’s not hard, though emotionally and instinctually, it might be. What’s the worst that can happen? You discover you were right all along, which is fun. No harm done. No humiliation!

Or . . . you discover you were wrong. And not just you, but the vast swaths of humanity who believe a false truth—just as you did! You’ve uncovered a mythology. And discovering something you previously thought to be true is actually myth saves you from making a potentially costly mistake (or making it again). That’s not humiliating, that’s beautiful. And potentially profitable.

The good news is, once you start questioning, it gets easier. You may think it impossible to do. After all, if it were easy, wouldn’t everyone do it? (Answer: No. Most people prefer the easy route of never questioning and never being humiliated.) But you can question anything and everything—and should. Start with those things you read in the paper or hear on TV and nod along with. If you’re nodding, you’ve found a truth you’ve probably never investigated much, if at all.

Like the near-universal belief high unemployment is economically bad and a stock market killer. I know of no one who says the reverse—that high unemployment doesn’t cause future economic doom. Yet, as I show in Chapter 12, unemployment is provably a late, lagging indicator and not indicative of future economic or market direction. And amazingly, recessions start when unemployment is at or near cyclical lows, not the reverse. The data prove that, and fundamentally it makes sense, once you start thinking how a CEO would (as I explain in the book). This is a myth I disprove using pretty easy-to-get data from public sources. Data that’s universally available and easy to compile! But few question this myth, so it endures.

This book covers some of the most widely believed market and economic myths—ones that routinely cause folks to see the world wrongly, leading to investing errors. Like America has “too much” debt, age should dictate asset allocation, high dividend stocks can produce reliable retirement income, stop-losses actually stop losses and more. Many I’ve written about before in various books, but here I collect what I view as the most egregious myths and expand on them or use a different angle or updated data.

Then, too, I’ve written about many of these myths before simply because they are so widely and rigidly and wrongly believed. My guess is writing about them here again won’t convince many (or even most) the mythology is wrong. They’ll prefer the easy route and the mythology. And that’s ok. Because you may prefer the truth—which gives you an edge—a way to avoid making investment decisions based not on sound analysis and/or fundamental theory, but on a myth everyone believes just because.

Each chapter in the book is dedicated to one myth. Jump around! Read them all or just those that interest you. Either way, I hope the book helps you improve your investing results by helping you see the world a bit clearer. And I hope the examples included here inspire you to do some sleuthing on your own so you can uncover still more market mythology.

You’ll quickly see a few common characteristics throughout the chapters. A how-to manual to myth debunking, if you will. The tactics I use over and over to debunk these myths include:

Just asking if something is true. The first, most basic step. If you can’t do this, you can’t move to later steps.

Being counterintuitive. If “everyone knows” something, ask if the reverse might be true.

Checking history. Maybe everyone says XYZ just happened, and that’s bad. Or it would be so much better if ABC happened. Maybe that’s true, maybe not. You can check history to see if XYZ reliably led to bad or ABC to good. Ample free historical data exist for you to do this!

Running some simple correlations. If everyone believes X causes Y, you can check if it always does, sometimes does or never does.

Scaling. If some number seems impossibly scary and large, put it in proper context. It may bring that fear down to size.

Thinking globally. Folks often presume the US is an island. It’s not—the US is heavily impacted by what happens outside its borders. And investors the world over tend to have similar fears, motivations, etc.

There are plenty of myths investors fall prey to—I couldn’t possibly cover them all here. But if you can get in your bones the beauty and power of questioning, over time, you should be fooled less by harmful myth and get better long-term results. So here we go.