Ed Rempel, a CFP and CMA, has been a regular guest poster on Million Dollar Journey. This time he has written about typical stock market beliefs that are proven false. This is part 1 of 2.
Every once in a while, I come across a truly fascinating book. I love reading financial and investment books. I’ve read most of the major books in the stores and try to read at least one on each theme. But it is rare to come across such an insightful book.
I’m referring to Ken Fisher’s book “The Only 3 Questions That Count”. Ken Fisher is one of those few fund managers that has beaten the index over a long period of time. He is the son of Philip Fisher, who wrote the classic “Common Stocks and Uncommon Profits” in 1958, is a regular columnist for Forbes and is considered the most accurate forecaster by Forbes.
The most amazing part of the book is all the common beliefs about the market that are actually false. In the book, he goes through the numbers to see if many commonly held beliefs are true, and he clearly shows many that are not – a few of which I believed. The title of this article is the first of his 3 questions.
Here is the list, and just to be clear, all of these are proven to be FALSE:
- High P/E markets are riskier than low P/E markets.
- Cheaper stocks do better than less cheap stocks.
- A weak dollar is bad for stocks.
- Rising interest rates are bad for stocks. Falling rates are good.
- A tax cut causes more debt, which is bad for stocks.
- Higher oil prices are bad for stocks and the U.S. economy.
- Stocks do well when the economy does well.
- Stock markets do better in countries with faster growing economies than slower ones.
- Higher risk markets outperform lower risk markets.
- Stocks of firms that grow faster do better than those that don’t.
- Current account and trade deficits will cause the U.S. dollar to fall.
- America has way too much debt.
- The low “personal savings rate” is bad for stocks.
- Small stocks do better than big ones.
- “So goes January, goes the year” (the January effect).
- “Sell in May and buy in September” gives you better returns. Also, Santa Claus rallies, the October effect, Monday effect, Friday effect and Triple Witching.
- A huge terrorist attack (such as destroying a U.S. city) will be very bad for the stock market.
- Stop losses will improve your returns.
- Dollar cost averaging improves your returns.
- Anything you see or hear in the news will move the market.
How many of these do you believe? If you doubt that any of these are false, you should read the book. Ken Fisher quite clearly debunks all of these. While I pride myself in not falling into many common myths, I still believed a few of these.
What is more is that my investment philosophy and portfolio allocation was partly based on some of these. It was quite shocking to me to find things I used for deciding the best portfolio allocation were actually not true!
Even more amazing is the “it’s just the opposite” section. Not only are these items false, but the opposite is true:
- Big government deficits are bad.
- Current account and trade deficits are bad for stocks markets.
- Gold is a good hedge against a declining stock market.
You may doubt that these are false, but the book contains actual stats about each of these that quite clearly disproves them – and sometimes proves the opposite. In part 2, I’ll discuss the rest of the book and show a couple of examples about the above.
But first, I’m really curious about the readers here. Which of the above 23 do you really doubt is actually FALSE?