Wall Street isn't the most transparent place in the world.
Day traders, casual investors, and even those looking to diversify their retirement portfolios are subject to a number of money myths lurking beneath the market's surface.
Benzinga interviewed 12 financial experts to discover the truth.
1. Myth: Diversification Is The Way To Build Wealth
Debunked: Award-winning business journalist Ron Insana replied adamantly against this idea: “Diversification is not the way to build wealth! It is the way to preserve wealth.”
“All great fortunes come from concentrated effort. All great fortunes are kept by spreading that hard-won wealth around," he explained.
2. Myth: The Federal Reserve Can Fix The Stock Market By Itself
Doug Kass, President of Seabreeze Partners Management, weighed in on the commonly held belief that the U.S. Federal Reserve -- and it alone -- can fix the stock market.
“The greatest myth extant is the notion that the Federal Reserve can repeal the supply/demand equation for stocks," he said.
Kass delved deeper into the issue earlier this year. “If you think about it, the shoulders of responsibility of catalyzing domestic growth have been on the Federal Reserve, because our political leaders in Washington D.C. are incompetent, inert and partisan,” he stated on PreMarket Prep.
3. Myth: Invest In Companies That Produce Everyday Products
Debunked: Deep value investor Tim Melvin explained that investors shouldn't always favor companies that produce products they consume.
“I use Amazon regularly, as well as several social media sites like Facebook and LinkedIn," he said. "But the stock price relative to the valuation is too high to even consider buying.”
He clarified further: “The fact that I have a bunch of Proctor & Gamble products in my house does not make the stock worth 25 times earnings.
“Buy what is safe and cheap and you will do a lot better over time than trying to make your portfolio your cupboard.”
4. Myth: Correlations Can Be Relied On
Debunked: JC Parets, Founder and President of EagleBay Capital, said correlations are overrated. “People assume correlations and then don’t actually do the math to see if they are true.”
This phenomenon is rampant in the media, he said. “For example, some academic somewhere once said that the US Interest Rates and the US dollar were positively correlated. In reality, they are not at all. Sometimes they are, sometimes they aren’t and a lot of times they are actually negatively correlated.
“Don’t assume that two things move together because someone somewhere once said they did," he added.
5. Myth: An Investor's Relationship With Company Management Is Not Important
Debunked: Tom Shaughnessy, a micro-cap investor and the founder of SecretCaps, explained that in some cases, an investor's relationship with management is crucial.
“The most significant investment tool, with regard to microcaps, is the ability to access and communicate with management. A keen management team is a...company’s most valuable resource, as execution fuels growth.
"Access to management is unique to microcap investing and provides investors with an edge not seen in other areas of the market," he added.
6. Myth: Buy Low, Sell High!
Debunked: Christian Tharp, a Chartered Market Technician, warned against the complexity of this myth. “First," Tharp said, "just because a stock is ‘low’ compared to a previous time in its history does not mean [it] is destined to move higher. On the contrary, commonly, when stocks are moving lower, they will continue to move lower.”
Low and high are relative terms, he explained. They must be placed within the context of longer-term trends. Tharp asked: “What if that same stock rose another 40 percent from your buy point? Wouldn’t you have then bought ‘low’?"
7. Myth: Start Saving For Retirement Early
Debunked: Mike Lingenheld, editor of Cup & Handle Macro, combated this myth by explaining that young adults theoretically have nothing but time on their sides.
“If you’re a young professional, your greatest asset is time. Income tends to peak between the ages of 45 and 54, which is when you should be investing instead, income-producing assets.”
“For young people,” he continued, “growth should be the primary objective. Never in your life will the opportunity cost of investing in risky assets be so low, and you should take advantage of it.”
8. Myth: You Can’t Time The Market
Debunked: David Moenning, money manager and head of StateoftheMarkets.com, chimed in about this one: “Hogwash!”
“The ‘time not timing’ theme was perpetuated by the mutual fund industry during the secular bull market that ran from 1982 until spring 2000. The idea was self-serving, as those that provided mutual funds wanted investors to put money in their funds and leave it there—forever.”
“The point is there are any number of simple methods to manage the major trends of the stock market,” Moenning added.
9. Myth: Day Trading Is A Very Profitable Strategy
Debunked: Trader and investment advisor Serge Berger shared his thoughs on the problem with day trading: “In my experience, over time for most folks, it is much more profitable to use a swing trading approach of holding periods of a few days to a few weeks.
“There is too much emotion involved in day trading. Holding stocks for a few days to a few weeks fits most people’s personalities and schedules better and is less emotionally draining.”
10. Myth: A PEG Ratio Is A Solid Concept
Debunked: Alan Brochstein, head of 420 Investor, talked about the PEG ratio, a metric used by value investors.
“Many investors use this concept," he said, "which takes the price-to-earnings (P/E) ratio and divides by a growth rate. The idea is that the lower the rate, the better. Some investors use a hurdle of 1.0. This is a seriously flawed tool.”
Why? Because of the variables that can affect P/E ratios, including a lack of steady earnings and interest rates.
11. Myth: Options Are Much Riskier Than Traditional Investing
Debunked: Credit Spreads Expert Nic Chahine quickly addressed the fallacy of dismissing options as opposed to stocks. “Options allow investors to control max risk, control time, control level," he said, adding that they also "allow investors to trade expensive tickers even with small amounts.”
Compared to traditional investing, options give their users the ability to have fewer dollars at risk, and they reduce the need for market timing.
12. Myth: A Short-Sighted View Is The Only Way To Analyze The Market
Debunked: Tim Thielen, Managing Partner at Sea Change Capital, dove into this issue: “Most investors are focused on all the wrong things—trailing returns, standard deviations, top holdings, style boxes.
"While some of these things are important, they are mere ingredients in an overall recipe," he said.
“Unfortunately, by myopically focusing on only a few of those ingredients, they allow for some toxic ingredients to make their way into the recipe as well.
"Those poisonous killers include high fees, high taxes generated [and]…falling prey to fear and greed."
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