The Little Book Of Market Myths: Book Notes

This post has my personal notes from the book ” The Little Book of Market Myths” by Ken Fisher. In this book, Ken Fisher smashes some of the common myths about investing. The key lessons I learnt from reading the book are as follows:

1. Bonds are less volatile than stocks in the short run. In the long run( 20-30 years) they are more volatile and give lower returns. Over long periods, the returns on stocks have been greater than bonds 97% of the time(881% vs 247%). When bond returns have been greater, they are almost similar to stock returns( 263% vs 243%). So if you are truly a long-term investor, you should invest most of your money in stocks.

2. Asset allocation should not be determined by age. 100-age=% of stocks is wrong. This is because of inflation, increased life expectancy and that we invest not only for ourselves but also our spouse and probably future generations. Therefore we should have a longer horizon and invest more in stocks.

3. Stocks are volatile. But they have both upside volatility and downside volatility. That is why they outperform. Volatility risk is not the only thing we should consider. We should consider liquidity, exchange rate, political, interest rate risks as well as opportunity cost risk. All this should lead us to accept volatility( which is not increasing anyway) and get good long-term returns.

4. Growth requires volatility and the risk that our portfolio may go down in the short run. If we do not accept that risk we may preserve our capital but not the value of our capital. It is wise to remember that stock returns have been positive 75% of time over 1 year, 85% over 5 years, 95% over 10 years and 100% over 20 and 30 years.

5. GDP growth is not correlated with stock market return. GDP measures a country’s economic output, not its health. Stocks are businesses with earning and for businesses as a whole earnings increase with time and hence stocks will increase with time as humans and capital markets are resilient and inventive.

6.You should aim at total return and not on dividend return. Stock returns average around 10% over the long run but over the short run they can be extremely variable. So you should have a globally diversified portfolio and remove not more than 2%-4% every year. Taking 10% every year or depending on dividends is not the way to go.

7. Small cap value stocks are not better over the long run. In reality, all well constructed indices will have similar returns over long periods of time. Therefore diversify globally.

8. The world has always looked scary and the future uncertain. Don’t wait for a good time to invest. Invest regularly over a period of time and you will do well.

9. Stop losses are not useful as stocks can rebound from any loss. You are likely to lose money by stop losses as you will not know when to reënter.

10.Unemployment rates, the amount of US debt( because our debt is affordable), consumer spending and a weak dollar do not determine stock market returns. Therefore, keep investing.

11. Do not believe the news blindly as the stock market has already discounted it. Returns from the stock market are dependent on the gap between reality and expectations. Always make a cold analysis of the facts and see what the true impact is. Do not be a blind contrarian.

12. If an investment seems too good to be true, it probably is. Remember these warning signs:

  • Your adviser also has custody of your assets.
  • Returns are consistently great! Almost too good to be true.
  • The investing strategy isn’t understandable, is murky, flashy, or “too complicated” for him (her or it) to describe so you easily understand.
  • Your adviser promotes benefits, like exclusivity, which don’t impact results.
  • You didn’t do your own due diligence, but a trusted intermediary did.

You should do due diligence on any firm you hire. But a firm with one sign merits a deeper look. Be exceedingly wary if there are multiple. Better to be suspicious and safe than trusting and sorry.And the idea that returns “too good to be true” may be valid can be particularly damaging.

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