Debunkery: Book Notes

This post contains my personal notes from the book, “Debunkery” by Kenneth Fisher.

1. Investing is a probabilities game, not a certainties game. There are no fail-safes or guarantees.  All investors make mistakes. Great investors make less mistakes.

2. To debunk a lot of myths in investing do the following:

  • Consider big numbers in proper context.
  • Be counterintuitive
  • Check history
  • Think globally
  • Check data yourself
  • Run some simple correlations
  • If most people believe something is true-question it.
  • Do a “four-box” to check outcomes.

3. Things keep changing in investing. The things that used to work will stop working often.

4. Capitalism is not perfect in the near-term. But in the long-term, it is probably the most perfect thing.

5. Bonds are not safer than stocks in the long-run.

6. Stocks are volatile and they will continue to be volatile. To get stock-like returns you have to accept stock-like volatility. If somebody sells you stock-like returns without stock-like volatility he is a fraud.

7. Retirees should invest a significant proportion in stocks because they are going to live longer in the future and only stocks can give them a good enough return over that time-frame.

8. Your benchmark should be a market index( stock, bond or a blend). This benchmark is a roadmap, risk-managment tool and a measuring stick for performance. How long you need your assets to last( time-horizon), your return expectations and your cashflow needs should determine your benchmark.

9. When you have a stop-loss, remember you are hoping the stock does go down further and you have got out earlier. If the stock does not go down but rather goes up, then the stop-loss was a waste. You cannot predict which way it will go.

10. A covered call does not have lower risk than a naked put. Both are the same.

11. Dollar cost averaging each month for 12 months is not better than putting a lump-sum every year.

12. Do not invest in variable annuities or equity-indexed annuities. Invest in normal fixed annuities, if at all you want to invest in them.

13. Passive investing is not easy. It is tactically very easy, but it is not psychologically easy. There are two reasons for this. One is the desire to go in and out of the market. The second is the desire to invest in this index or that index depending on which performs better. That is why we need a guide or a guidepost to help us along the way.

14. Mutual funds are a good way to invest for smaller sums of money. For larger amounts, there may be better ways like buying stocks of an index individually and holding them for the long-run.

15. Beta measures the past volatility of an stock with the index. It does not measure current or future risk, it measures past risk. Past performance is not indicative of future results though. And what falls a lot during bear markets, rises up a lot during bull markets.

16. You cannot predict equity risk premiums. Stocks will do well compared to cash or bonds over long periods of time. But we cannot predict how much better and there will be a lot of ups and downs along the way. You cannot get rid of it.

17. The VIX( Volatility Index) does not predict whether stocks are going to go up or down. It just says what the current volatility is.

18. Consumer confidence surveys are useless in forecasting the future for stocks.

19. Price-weighted indices are not useful. The Dow is a price -weighted index. Therefore it is not useful.

20. These indicators are useless: If stocks go up in January, they will give a positive return that year. Sell in May and go away.

21. P/E says nothing about forward-looking risk or return over the next one, three, or five years. You must dig deeper to understand why a P/E is high, low, or middling, and what that means (if anything), and where future earnings are going—which isn’t easy. Stocks can rise and fall on low and high P/Es equally. And P/Es can be high and stay high for a long time—all while stocks rise. Same with low P/Es.

22. A strong dollar or a weak dollar does not correlate with stock price movement, and strength or weakness of any other currency also does not correlate with stock price movement.

23. Rate highs or rate cuts do not influence stock prices over the long run.

24. Dividend paying stocks are not superior. Start thinking about cash-flow rather than income.

25. To keep your purchasing power, most investors need their portfolios to stretch and grow some. That means your fantasy 5 percent or 8 percent fixed deposit won’t work. Never forget inflation’s impact.

26. The market is an exceedingly efficient discounter of well-known information. Baby-boomers cashing on their stocks will not affect stock prices. Glacial moves like population shifts does not move stocks.They price in what’s coming over the next 12 to 18 months—24 months tops—particularly if what’s coming was previously unfathomed and a surprise to most.

27. Capital markets are not a zero-sum game. They have been growing and expanding for ever and will continue to do so as long as we exist.

28. Be entrepreneurial. Start a firm. Follow a charismatic leader and get in on the ground floor. Rise through the ranks. That’s a great way to get super-wealthy—through concentration. But if that’s not your road, diversify—use the 5 percent rule. This is bunk that’s only part-of-the-time bunk—but it’s crucial to know the difference.

29. You may not like government debt, but you shouldn’t react negatively to stocks when you see big budget deficits that cause more future debt. History is clear. Instead, react bullishly toward deficits. But when it comes to stocks, what I actually fear is a surplus. You should too. History shows the aftermath of surpluses isn’t good for stocks. And that’s what counts.

30. Unemployment should not and will not drop before a recession ends. Growth will begin, and unemployment will keep trending higher. And stocks should move up, big time, before any of that.

31. Feel free to buy gold—for earrings, necklaces, and electrical wiring. But for your portfolio, gold has less luster unless you’re a super-duper timer.

32. Evidence is contradictory enough for you to not place bets on market direction based on capital gains cuts or hikes—because it’s clear there can be overriding impacts. You can’t predict market direction based on tax changes. It doesn’t work.

33. Oil and stocks have completely, wholly, and inherently separate supply drivers. And they have many, many demand drivers—some overlap, many don’t. Our economy is intensely complex—there are just no iron-clad “when X is up, sell stocks, and when X is down, buy stocks” rules that work long-term. So when oil goes down, stocks may not go up and vice versa.

34. Any silly thing can cause a correction. That is the nature of the correction. Corrections are driven by sentiment and not fundamentals. Pandemics and health scares do not spell doom for stocks.

35. Consumer spending is usually stable and not volatile. Therefore changes in consumer spending are less than what we usually think and therefore they should not affect stock prices.

36. Presidential term cycles do not have a lot of effect on stock prices in the long run.

37. There is a time when Republican(pro-market and pro-business) politics helps markets and times when it hurts markets. This applies to Democrats( socialist) also. It all depends on how Republican a Republican is and how Democratic a Democrat is.

38. Over long periods, markets are more steadier than what people think.

39. Buy global stocks and not stocks in your country or region alone.

40. All categories of stocks will have similar long-term returns over the long run, i.e decades.  But their performance over shorter periods can be varied. That is why it is important to buy global stocks.

41. America’s debt is not at a critical level. America can handle its debt well currently. We need not worry about China too much holding US debt.

42. Trade deficit does not hurt stocks.

43. GDP growth is not predictive of stock market growth.

44. Terrorism will not affect the stock market’s long term growth.

45. Normal individual year returns are extreme. The average return we get from stocks is made up of a number of years that mostly vary wildly with average. Normal returns are extreme with both up and down side volatility. To get the market return over the long run, you have to accept downside volatility.

46. Capital preservation without volatility risk and growth is impossible.

47. We have a lot of hind sight bias. We react based on gut feelings. A loss feels worse than a gain.

48. Bear markets means you will have a big bull bounce from it usually.

49. You cannot make sure it is a bull before diving in. The end of bear markets has the greatest drop and it bounces up very quickly based on sentiment and liquidity and it is hard to catch this. You have to remain invested to recoup the losses. You can invest more if you want.

50. No investment style-growth, small-cap, large-cap or value is good for all times. Each one will have its good time and bad time but in the long run they are all equal.

51. The five signs to identify a potential fraudster are:

  • Your adviser also has custody of your assets—this is true in 100 percent of the cases.
  • Stated returns are consistently great—almost too good to be true. Also true in 100 percent of the cases.
  • The investing strategy is murky, flashy, or too complicated for the adviser to explain to you so you can understand it—almost always.
  • The adviser promotes himself (or herself, though rats are usually male) as an “exclusive” club, or otherwise distracts you with flash, bling, and connections—none of which have anything to do with investing.
  • You hired the adviser based on a recommendation or through an intermediary and didn’t do any real due diligence yourself. Con artists hate anyone who does any real due diligence and avoid them.
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