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A Few Notes on The Little Book of Market Myths

Posted in Big Ideas, Individual Gurus

In his 2013 book The Little Book of Market Myths: How to Profit by Avoiding the Investing Mistakes Everyone Else Makes, author Ken Fisher, chairman and CEO of Fisher Investments, “covers some of the most widely believed market and economic myths–ones that routinely cause folks to see the world wrongly, leading to investment errors.” His hope is that “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 that you can uncover still more market mythology.” Some notable points from the book are:

From Chapter 1, “Bonds Are Safer Than Stocks” (Page 15): “…transformational power unleashed by profit motive is encapsulated by stocks. Bonds are fine, but they don’t represent future earnings. Bonds are a contract. You buy a bond, you get that yield–that’s it. But future earnings eventually improve, as they always have and always will–that’s captured in stocks.”

From Chapter 2, “Asset Allocation Short-Cuts” (Page 26): “…time horizon is just one key consideration in determining an appropriate long-term asset allocation…and must be considered alongside return expectations, cash flow needs, current circumstances and any other unique personal factors. Which makes determining asset allocation by age and age alone a rule of thumb you can give the boot.”

From Chapter 3, “Volatility and Only Volatility” (Page 36): “Volatility is a key risk, but not the only one. For many investors with long time horizons, not accepting enough volatility–opportunity risk–can be more devastating long term.”

From Chapter 4, “More Volatile Than Ever” (Pages 38, 41): “First, volatility is itself volatile. It’s normal to go through periods of higher and lower volatility. Second, it’s a fallacy to assume higher volatility spells trouble. Third–volatility in recent years…isn’t all that unusual… What’s more, stocks can rise and fall on both above- and below-average volatility. There’s no predictive pattern.”

From Chapter 5, “The Holy Grail–Capital Preservation and Growth” (Pages 50, 52): “It’s a fairy tale. …You cannot have upside volatility with no downside volatility.

From Chapter 6, “The GDP-Stock Mismatch Crash” (Page 56): “…stock returns and the GDP growth rate aren’t linked. they don’t match because they shouldn’t match. Stocks can, should and probably will continue annualizing a materially higher rate of return than GDP growth.”

From Chapter 7, “10% Forever” (Page 68): “…long-term [stock] returns are likely to be near the 10% historic average… But planning to skim 10% a year is a recipe for total disaster: It ignores the huge variability of returns.”

From Chapter 8, “High Dividends for Sure Income” (Page 77): “…there’s nothing inherently better about a firm that pays a dividend–it’s just a different way of generating shareholder value.”

From Chapter 9, “The Perma-Superiority of Small-Cap Value” (Page 86): “…to believe a category is permanently and inherently better, you must disavow basic tenets of capitalism–primarily, that prices are set by constantly moving forces of supply and demand.”

From Chapter 10, “Wait Until You’re Sure” (Page 95): “…clarity is one of the most expensive things to purchase in capital markets. That’s true whether it’s a bull, bear or any of the innumerable countertrend rallies within. And as counterintuitive as it seems, risk is actually least when fear is highest and sentiment is most black–right as a bear market is bottoming.”

From Chapter 11, “Stop-Losses Stop Losses” (Page 111): “Stop-losses don’t guarantee protection against losses. They do increase the odds you miss out on upside, and they definitely increase transaction costs… There’s no evidence they produce better results, but there’s mountains of evidence to the contrary.”

From Chapter 12, “High Unemployment Kills Stocks” (Pages 114, 119): “…unemployment is now, always has been and always will be a lagging indicator. …The stock market is the ultimate leading indicator for the economy…there’s no way unemployment, high or low, can be a material stock market driver.”

From Chapter 13, “Over-Indebted America” (Page 151): “Don’t fret the aggregate amount of debt. Focus on how affordable it is. And for America, debt is incredibly affordable and likely to remain so for some time.”

From Chapter 14, “Strong Dollar, Strong Stocks” (Pages 158, 160): “…over long periods, there is no dollar impact on stock market direction. …something might spell doom for stocks, but it won’t be the dollar on its own.”

From Chapter 15, “Turmoil Troubles Stocks” (Page 164): “If you’re waiting for things to ‘calm down’ to be invested, you’ll be waiting a long time…if you didn’t invest during periods of turmoil, you wouldn’t spend much time invested at all…”

From Chapter 16, “News You Can Use” (Page 175): “What you’re looking for are sentiment extremes. Extreme euphoria is typically a bad sign–you see it at nearly every bull market top. Similarly, extreme negativity is characteristic of the bottoming period of a bear market. In-between sentiment is quite normal, and sentiment can swing fairly broadly within a bull market over short periods.”

From Chapter 17, “Too Good to Be True” (Page 189): “If it seems to good to be true, it probably is. That’s no myth.”

In summary, Ken Fisher presents in The Little Book of Market Myths arguments countering 17 “mythical” propositions in the context of avoiding investment mistakes.

Sophisticated investors may not discover many surprises in the anti-myth arguments. It might be interesting to appoint defense counsel for some of the myths.

Myths perhaps derive from dependence on lagged, parochial, aging data. The lagged aspect is unavoidable, but investors can continually broaden and refresh inputs to investment analyses.

See “Ken Fisher Chronicles” and “Forbes Evaluates Ken Fisher’s Stock Picking” for assessments of Ken Fisher’s acumen in forecasting U.S. stock market behavior and his skill in stock picking, respectively.

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