The 12 Investment Myths
By Jack Calhoun
In the sixteen years that I have been an investment advisor, I have come to a gradual realization. A sort of slow epiphany, really:
Most individuals are possessed of a group of beliefs about investing that are completely wrong. In fact, not just wrong, but backwards.
These beliefs feel right. They seem logical and intuitive. And that is what makes them so dangerous, because they are very difficult for people to let go of. Very often I have found it like trying to deprogram someone who’s been in a cult.
The cult leader, in this case, is Wall Street, and the media is its propaganda machine. Wall Street – which, for me, is a catchall for the worldwide collection of financial services firms that must sell products to investors in order to get paid – is the Mighty Oz of Misinformation. It convinces investors that they should chase performance, bail out of the market when things get tough, and let their emotions be their guide. It makes them feel they are suckers if they aren’t “doing something” in response to whatever the current market environment may be. And the media, in its never-ending, insatiable thirst for content and ratings, soaks up the message and blasts it out to the investing public all day, every day.
The key realization for me over time was that I kept hearing the same mistaken beliefs over and over again. Finally, one day, I sat down and wrote out all of these beliefs – these myths – that investors had challenged me with through the years. And I realized that there was a core group of a dozen myths that were at the root of the problem – the main culprits that caused investors to fail to enjoy the stellar returns that stocks historically provide.
Thus was born The 12 Investment Myths.
CLICK HERE to download a sample chapter
My goal with this book was simple but challenging. I wanted to reach out to as wide an audience as possible – people who were not necessarily interested in the details of investment strategy but who knew they needed to educate themselves about sound principles. I wanted to give people a short book they could read in its entirety on a cross-country plane flight and still come away with their investment worldview significantly impacted. And I wanted to keep it punchy and upbeat so that people might actually want to do something that is rarely done with books about investing: Read it.
I suppose you might say I was going for “Dave Barry meets John Bogle”. And if there’s one thing I feel like I can say with confidence about my book, it’s that no one has ever attempted that before.
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What people are saying about The 12 Investment Myths:
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~Steve Chandler |
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In The 12 Investment Myths, Jack Calhoun debunks these myths with humor and clarity, providing both experienced and novice investors alike with a wonderful path out of the wilderness created by Wall Street.” John Nofsinger, Ph. D., |
Myth #1: A savvy investor should be able to beat the market.
FACT: Hope springs eternal for investors that they can find the market-beating guru to lead them to easy riches. But active managers have a nearly insurmountable hurdle to overcome due to the high costs associated with frequent trading. Those few managers who beat their benchmark are usually flashes in the pan and don’t sustain their winning ways for long. Investors who fall prey to the siren song of the market-beating guru usually end up experiencing only disappointment and lost potential earnings as they migrate from one high-flyer to another just as the managers are poised for a return to mediocre performance.
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Myth #2: Brokerage Firms Are Built On A Client Service Model
FACT: The big brokerage firms are not built on a client-service model; hey are built on a product-distribution model. The endless, massive fines those firms keep incurring for violating their investors’ best interests testify to this fact. Brokers who are compensated by the products they sell cannot claim to be objective and do not meet a fiduciary standard of care for their clients.
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Myth #3: It’s all about performance.
FACT: It is one of the great ironies of investing that the more you make investment decisions based on performance, the more likely you are to experience poor performance. The reality is that the performance of stocks, funds and managers is usually attributable to what market sectors have recently been in favor. Since those sectors cycle in and out of favor quickly and unpredictably, investors who chase returns usually miss the run-up and arrive just in time for the downturn.
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Myth #4: Activity is good.
FACT: Investors allow fear of the unknown to coerce them into making rash decisions with their investments. Those decisions are often encouraged by “advisors” (product-compensated sales people) who convince the investor that moving around to avoid/capitalize on current market conditions is wise. In reality, activity in a portfolio is usually detrimental and causes investors to miss out on the crucial few days of huge gains the market delivers, usually when we least expect it. This constant activity is the reason investor returns trail market returns by a wide margin.
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Myth #5: Investors do alright for themselves.
FACT: Do-it-yourself investors are plagued by “cognitive dissonance” – the brain’s tendency to focus on the positive and block out the negative, which leads investors to bask in their successes and conveniently ignore their disasters. Investors also suffer from the modern malady that is the desire for instant gratification, churning their accounts in a fruitless quest for easy money. As a result, individual investor performance tends be much worse than what those investors realize, because investors don’t adequately track the costs of trading and taxes. This lack of a true “net” performance number keeps them from having to face the consequences of their actions.
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Myth #6: The media is a good source of investment advice.
FACT: The media does not exist to provide you sound investment advice (nor is it obligated to). The media is in business to turn a profit, and that profit is made by drawing readers, viewers, or web visitors to their content and keeping them there as long as possible. This is only possible when the content is dramatic, and the principles of prudent investing are decidedly not dramatic. Wall Street is expert at feeding the media with the type of sensational content that hooks investors by appealing either to their fear or greed as dictated by the current market environment, thereby furthering its endless need to have individual investors in a constant state of buying and selling.
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Myth #7: Invest in Good Companies
FACT: For much of the 20th century, it was a perfectly prudent approach to invest your money in the stocks of a few good companies and leave your money to grow over time. But today’s market is a much more volatile environment for individual stocks; good companies can experience sudden, unforeseen problems that can tank their stock price by half or more in a just a few weeks.
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Myth #8: Investing is Exciting
FACT: Investors often fail to grasp the distinction between speculating and investing. Speculating is exciting and adrenaline-inducing, much like gambling. It can generate much higher short-term returns than prudent investing and also can cause you to lose massive amounts of money. Speculating is not just limited to active traders; people who bet everything on a few stocks or market sectors are also speculating, because their investment fates are not tied to the broad market but to the few market sectors or stocks they have put their money on. In contrast, prudent investing is decidedly unexciting in the short-term, because there is no action. It is about making a plan and sticking to it no matter the current market environment.
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Myth #9: All Risk Is The Same
FACT: Most investors fail to distinguish between good risk and bad risk. Good risk can be identified as “market risk”, which is the risk that is inherent to stock investing. It’s “good” because stock investors receive higher returns than bond and cash investors; investors are compensated for taking on that risk. Bad risk is bad because it is unnecessary to take it; examples of this type of risk include “sector risk”, “security risk” and “manager risk”. Investors with portfolios concentrated in just a few stocks or market sectors, or who invest in actively managed funds in which fund managers are employing subjective decision making, take on these risks and often pay a heavy price for it.
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Myth #10: The End Is Near, So Why Invest?
FACT: The sensitivity of investors to bad news and fear of future events is exponentially greater today than it was in years past. Much of this is attributable to the endless, instantaneous transmission of news, which is distressing and overwhelming to the senses. The advent of electronic trading has enabled investors to trade on these fears and anxieties at a moment’s notice. Your opinion about the state of the world, where we are headed and how fast we are headed there is a matter of personal perspective, but if you let negativity start influencing your investment decisions then you are guaranteeing a bleak future (at least financially) for yourself.
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Myth #11: I’m Not A Market Timer!
FACT: Few investors have the steely resolve necessary to stay the course in a prudent strategy, all the time, in every market environment. At some point in their investment lives, most individuals will allow current events to influence their investment decisions, a deviation that will result in lost future earnings for the investor.
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Myth #12: An Investment Advisor’s Job Is To Find You “Opportunities”
FACT: By far, the most important role of an investment advisor is to bring discipline and resolve to the investment process and provide a barrier between your money and your emotions. “Advisors” who are constantly peppering you with the latest, greatest investment opportunity – be it fund, manager, stock , annuity, or whatever – are not advisors at all but merely product sellers in sheep’s clothing.
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