BID FAREWELL TO OLD INVESTING MYTHS
Imagine you are a police investigating a crime scene. You are depending only on hearsays to write a report about the progress and results of the investigation. Does that make the police report fair and accurate? No. A precise report looks at the evidence, witness accounts, and other important details relative to the case.
Same thing with investing. It is almost impossible to make sound decisions by relying on old maxims or outdated information. Traders should be very careful about relying on sayings about the stock market, or they might end up losing all of their money.
Wall Street is Smart. Individual investors might be surprised at how professional money management can be ridiculous sometimes with all the training and tools given to Wall Street. Certain asset managers won’t absolutely invest in a stock if the revenue growth is lower than 25%. A good company with 24% revenue growth will not make the cut.
In reality, the Wall Street is short-term oriented and decides only on matters seem smart when viewed in the short term. Money is earned in the markets by finding out solid companies with quality management and being with these firms through the years. Wall Street is obsessed with a beat-and-raise short-term outlook that makes them juggle ideas and search for the next big thing.
Stock Market Gains 10%. One of the most common notions about the stock market is equities produce around a 10% average return annually. Way back in 1871, the market generated an average return of 10.6%, but the compounded annual growth rate was about 8.9%. At that time, the standard deviation period was 18.9.
Nevertheless, the idea that market always generates 10% return is a myth. This is not to say technological innovation will or will not continue to bolster the growth rate. Growth lies on the size of an economy and extent of deficits. So if the economy and deficit becomes greater, future growth will become more difficult.
You Cannot Beat the Market. Contrary to what academics have postulated, investors can and do actually surpass the market. Yes, trading in the stock market has never been easy. It will never be. But there are several studies which prove simple, value-oriented techniques can result to consistent returns that beat the market.
As a matter of fact, outdoing the market is a feasible and doable goal. An investor has to balance risk and returns on his portfolio based on his financial goals.
This and That Will Protect You from Losses. No magic, element, or any other secret power can shield an investor from losses - and losses are inevitable. The only way to protect an investor from losses is through diversification. This can help a trader maximize his gains and reduce his losings by investing in several financial derivatives such as bonds, stocks, options, and currencies. In stock market, alternatives to stocks are other stocks. Purchasing the right asset at the wrong price, or buying overvalued alternative assets won’t help.
Some Sectors Do Well Regardless of the Current Economic Situation. At one point, health care stumbled as the capital funds of hospitals were smashed due to the credit crisis and fewer patients went to the doctor because they could not afford copayments or lost their entire insurance. Food companies were trapped between higher input costs and sticky prices, prodding them to secretly shrink packaging in order to gain more profits. Utilities endured difficulties as they found fewer buyer for their debt and business activity slowed due to lower demand. The bottomline is even the "strongest sectors" may be affected by a recession or crisis.
It’s Different This Time. Do you remember the number of times analysts, commentators, and investors debunked the "it’s different this time" myth? In late 1990s, technology firms placed absurd valuations and the internet would completely revolutionize commerce. Each time the biotech industry had discovered a new approach to treat disease, it was "different". Whenever houses changed hands at riotous prices, it was "different". Unfortunately, the market has never been different. Things do not just change within a day.
Trading on investing myths can cost you a substantial amount of money. These old sayings can either make you take too much (or too little risk), or worse, avoid investing at once - the biggest mistake an investor can commit.
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