
Stock-Market Myths That Just Won't Die - pavel
http://online.wsj.com/article/SB128000197220920621.html
======
joe_the_user
My hackles go up whenever I hear the term "myths".

Despite this, I think this good debunking.

Summary: Let the buyer beware. There are no short-cut to investing wisely.
Don't buy without doing your homework, and don't expect certainty even when
you've done your homework.

~~~
pbhjpbhj
I read it more like "don't be a sucker, stock brokers want your money, why?,
because they can't guarantee to make their own on the stock market and it's
their job".

------
hristov
I don't really agree with this article. Number 4 goes out of its way to cherry
pick periods starting from a stock market boom as examples. This is not really
relevant for today's markets because the boom has already passed and we are in
a slump.

Number 6 is especially egregious. Think about the reasoning behind this for a
second:

"The widely quoted price/earnings (PE) ratio, which compares share prices to
annual after-tax earnings, can be misleading. That's because earnings are so
volatile -- they're elevated in a boom, and depressed in a bust."

Are we currently in a boom or bust? If we were in a boom, then they might have
a point that corporate earnings are higher than they will be in the future and
that the P/E ratio therefore makes stocks look better than they are. But I
don't think anyone can say that we are in a boom. We are instead in a very
serious recession. So the above paragraph would mean that the P/E ratio
actually underestimates the values of stock which means that stocks are even
better buys than they would initially seem.

I don't know why the WSJ seeks to deflate demand for stocks now when stocks
are relatively cheap after trying to inflate and encourage demand right before
the crisis when stocks were really expensive. But I would not trust their
advice much.

------
jaxn
We have had some recent ponzi schemes here in Tennessee lately. It seems that
one of my friends is being investigated now. I was talking about this with
another friend and he said "I am starting to wonder if every investor who
beats the market does it by cheating?"

The general theme of that list seems to be that you can't beat the market with
much consistency.

~~~
philwelch
By definition, an efficient market has all the publicly known information
already encoded in its prices. Hence, even theoretically it's impossible to
beat the market without doing insider trading, which is considered illegal and
hence "cheating".

Conversely, if insider trading were considered acceptable, the market would
actually contain _more_ information than was publicly accessible, and we could
infer things from stock prices that we didn't actually know.

~~~
d2viant
It's not impossible. Examples that prove this are outliers like Warren Buffett
and Peter Lynch.

Just because the information is public doesn't mean people are interpreting or
acting on it correctly.

~~~
philwelch
No, even with a perfect market there will be, randomly, some people with
significantly better luck than others ;)

Seriously though, crucial the assumption is a perfectly efficient market, and
inefficiencies exist everywhere.

~~~
jaxn
Sure, some people get lucky. Hence the "with much consistency".

~~~
philwelch
Consistent luck is still luck, and Warren Buffett and Peter Lynch are 2 out of
millions. Likewise, 0.47 of people who bet it all on black at the roulette
table are lucky, but 0.47^N of people who bet it all on black at the roulette
table are consistently lucky.

Seriously though, there are real inefficiencies as well, and someone like
Warren Buffett is probably exploiting them rather than being really lucky.
(Also, I hasten to point out that Berkshire Hathaway currently invests by
M&A'ing smaller companies, which is considerably _less_ of an efficient market
than the stock market, which is likely more efficient now than it was decades
ago--and often, M&A'ing a company can be a value add.)

~~~
d2viant
Consistent luck? Over decades and decades? At what point does the success
become attributable to the person? Investing isn't really a fair comparison to
gambling. Gambling is essentially random -- investing you're much more in
control of how you do, especially when you make larger and larger investments.

Acquiring smaller companies is a relative term, they just bought BNSF for $44
billion. Berkshire rarely purchases smaller companies, they simply don't make
a material difference on the balance sheet -- even if they do very well
financially.

~~~
philwelch
Did you read the part of my comment where I said Buffett probably gets better-
than-market gains because the market isn't perfectly efficient, or that
Berkshire Hathaway acquisition can be a legitimate value-add to the invested-
in company qualitatively different from just picking the right stock? I don't
think you're arguing in good faith if you ignore everything after the words
"seriously though" in all of my comments.

