In part 1, I listed 20 commonly believed myths that Ken Fisher disproves, and 3 commonly held beliefs where he proves the opposite is true. Here are a couple of examples of his stats and a review of the rest of this extremely insightful book.
The stats show that in the 9 years with the highest U.S. budget surpluses in the last 60 years, the stock market average the following year was 0.8%, while the year after the 9 largest budget deficits the stock market average was 21.8%. So, government deficits are hugely bullish, while surpluses are clearly bearish.
The reasons are also surprising, but the main one is that each dollar spent (or usually wasted) by the government is spent on average 5 more times each year. So, deficits stimulate the stock market.
He shows that trade deficits are signs of a strong economy that can afford to import and is usually associated with stronger stock markets.
Are you avoiding the U.S. because of the dreaded triple deficits and investing in Canada because these 3 are all surpluses? The truth is clear that the recent under-performance of the U.S. is DESPITE the triple deficits!
We may have believed that investing in higher risk markets like the NASDAQ or China will give us higher returns with the higher risk. But the returns of all major markets seem to have similar long term returns. Since the NASDAQ started in 1972, the returns averaged 12.5%, vs. the S&P500 of 12.7%, FTSE at 11.7% and MSCI EAFE at 12.8%.
In 2003-5, China’s economy grew by 11.5%, 17% and an astounding 33% while its stock market fell. Meanwhile, Germany’s economy grew by .9%, 2.4% and 1.4%, while its stock market gained 38%, 8% and 28%.
Ken Fisher goes on to explain how he has beaten the stock market. He sticks with market exposure unless he can “fathom things that others find unfathomable” and he is always aware of “what the heck is my brain doing to blind side me?” These are the last 2 questions
He shows how to try to figure out what actually works, some of which is to bet against all the above false facts when many investors are investing based on them. He explains how to go about proving or disproving thinks you may believe, and he explains what actually drives stocks market returns long term.
The 3rd question is all about behavioral finance. He calls the stock market TGH (The Great Humiliator) and shows how market efficiency and mental errors humans tend to make cause them to lose money in the market.
For example, why do we believe all of the above? It is because of “pattern recognition” (we tend to see patterns that don’t exist) and “confirmation bias” (when we believe something, we only see those stats that support the belief and ignore the ones that don’t).
This is probably the single finance book from which I have learned the most and I would highly recommend it to anyone serious about studying the markets. Considering how many investors have a highly simplified understanding of the stock markets based on what they see and hear on the news, it’s a huge eye-opener to see someone that actually looks at the numbers to see what is really true.
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