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Inspired by May: 17 Investing Myths That I Once Thought True

Published 2018-05-04, 11:55 a/m
Updated 2023-07-09, 06:32 a/m

Perhaps there is no more shared trait amongst we humans than our tendency to make mistakes. I’m sure most of us have probably made more than a handful already today, and who knows what the weekend holds.

What makes us special, however, is our ability to learn, adapt and improve in the face of this potentially overwhelming deficiency that we all share. Because of this tendency, investing is full of mistakes and, unfortunately, many of these investing-related mistakes are tied to things that just aren’t so. You see, on a day-to- day basis, it’s no secret that we investors are bombarded with piles of information. Unfortunately, thanks to our brains, the stuff that tends to latch on is the stuff that’s sensationalistic, easy to digest and, more often than not, just plain wrong. In my opinion, here lies at least one of, if not the root of why investors go astray, causing us to be wrong more than we’d ever care to imagine, or admit.

But similar to life, what’s critical is learning and adapting, and ensuring that the same issue only causes us to be wrong once. After all, when we consider investing, we’re dealing with a marathon, not a sprint, and outcomes should be judged as such.

I’ve been investing personally for about 18 years, and professionally for more than a decade. Trust me when I say, I’ve experienced and witnessed more than my fair share of mishaps. Many related to the information bombardment referenced above, many for other reasons.

Inspired by a myth the media latches onto every year around this time, I’d like to share some of the misguided principles and beliefs that have resulted in the investor who I’ve become today. Ideally, by laying out these myths that I’ve believed in along the way, your path to becoming a better investor will be shorter (and more lucrative) than mine. Ready for some soul bearing?

Here we go…

1. The inspiration for this spiel: “Sell in May and go away.” We’ve all heard it, and I’ll bet many believe it. Don’t. I was a believer, and even built a “strategy” around it. But as with so many cute phrases, this is nothing more than a contrived piece of data manipulated nonsense that ties back to the inability most people have to time the market.

2. One of my jobs along the way was that of a “buy-side” trader. I figured, since I was watching the market every minute of every day, I should be able to use that information to my advantage and time the market in my personal account. Bad idea.

3. A piece of literature I once read indicated we were mired in the depths of a sideways market and, therefore, 20% gains should be heralded as supreme victories and locked-in immediately. Well, cutting these gains short not only resulted in me leaving significant further gains on the table, but they also didn’t go very far in helping to cover the inevitable losses that occurred.

4. Hours of my day, generally during a commute (by transit), were once dedicated to reading macro analysis. This turned out to be by far the most expensive reading I’ve ever done. Most of the analysis was bearish, and virtually all of it wrong, leaving me far less invested than I should have been. Ignore macro analysis. Please.

5. As a young whipper snapper in the industry, the beacon of the investment profession was that of a portfolio manager, generally tied to a mutual fund product. Surely, I thought, their days were spent diving into company reports, generating analysis, and you know, managing portfolios. Dreamy, right? As I worked my way through the ranks, and began working directly with portfolio managers on a daily basis, it came as a surprise that nothing was further from the truth. Many of the investment decisions they made were based on a whim, or worse, what some trader told them to do. The bulk of their time was dedicated to marketing and sales, trying to drum up fee-bearing assets for their funds. Talk about a let-down.

6. The first stocks I ever owned were of the penny variety. All went to zero. Never again.

7. A big reason for my draw to penny stocks was because they were “cheap.” Meaning, the $200 I had to invest could buy way more shares of a company with a $0.10 stock price than a company with a $100 share price. Turns out, it doesn’t matter! Two thousand shares of a pile of garbage is still a pile of garbage. Share price matters not a lick. So many continue to get hung up on this fallacy.

8. The attention paid to penny stocks in those early days averted my attention from discovering one of the tried and true ways of building wealth from investing – dividends. They matter. And the longer you invest, the more they matter.

9. Historical track records are the juice that fuels the marketing machines that are the mutual fund companies of the world. The importance of these figures certainly seemed logical to me, that is, until I went to work for a mutual fund manager who had accumulated a fantastic historical track record. The problem was, this record was predicated on one decision – not owning Nortel when it became more than 30% of the S&P/TSX Composite Index. When Nortel crashed, by not owning it, this manager’s relative performance ballooned, and that balloon ride lasted for a good number of years, even though the performance numbers since have been mundane at best. Past performance is not a predictor of future returns. In fact, I might argue that perhaps the exact opposite is true. Terrible past performance might well be a better indication of fantastic future performance.

10. In my trading days, CNBC was always on in the background, and any downtime tended to be spent with my chair turned and eyes and ears glued. Seemingly, everyone that crossed the screen was brilliant and warranted attention. And certainly nothing was more important than when a “Breaking Alert” hit the screen. Wrong. Virtually everything that’s trotted out before us in the financial media, regardless of the medium, is noise and warrants no attention at all.

11. Humans love certainty and when it comes to investing, there’s perhaps no better example of this than analyst one-year (or pick a time frame) price targets. For years, I thought these mattered, and would indeed try to come up with them on my own. But then something strange occurred. Not only did I realize the analysts weren’t accountable for these targets, and seemingly changed them on a whim, any that did pan out were more attributable to luck than anything. Don’t let your brain trick you into thinking there’s anything certain about investing, especially when it comes to targeting a specific a stock price at a precise date.

12. Most of my career has been spent in the Canadian stock market, which means, I’ve spent a lot of time and effort trying to figure out how to invest in commodity producers. This has involved some pretty cool trips and a journey or two down a mine shaft. All of this time and effort and guess what? I’ve finally figured it out! Turns out, there’s nothing to it really. All you have to do is figure out how the underlying commodity is going to perform and voila.

13. You or I can’t predict how commodities are going to perform!!!!

14. And to further this point, forecasting of any kind is impossible to get right with any degree of statistical certainty. The next time you see a forecast – for anything – remember, even a broken clock is right twice a day.

15. Starting from my early days in a call centre for a prominent mutual fund company, it seemed clear to me that “value” investing was the only way to go. We’ve all heard the divisions – value, growth, income, GARP, etc. Fact is, these are just more hocus pocus designed by mutual fund marketing machines. Every investor is a “value” investor. After all, who’s buying stocks that they think are worth less than they’re currently trading for? Perhaps there are varying degrees of value, but don’t be tricked into believing you need exposure to all these made-up categories and the fees they entail.

16. I can’t tell you how many management teams I’ve met with over the years. The answer is lot’s. However, I can tell you approximately how many I’ve met that were actually worth meeting. About five. Another myth of the investment world is that if you can hear the story straight from management, you’ve got an edge. Nope. Information is so widely disseminated, and management meetings so typically filled with fluff, this just isn’t so. Fear not, retail investors like us aren’t at the information disadvantage that the “pros” would like us to believe. Just another arrow in the marketing quiver.

17. The decision to sell wasn’t even a consideration in my early years. It seemed easy. Buy in, let the stock double, sell and repeat. Turns out, this formula doesn’t hold in the real world. Realize that the decision to sell is even more important, and difficult, than the one to buy. It might even be that never selling is the best investment decision you’ll ever make.

I will leave it at that. To be clear. This list is not comprehensive. Not because I’ve cherry picked, but because I’ve no doubt buried an egregious error or two in my subconscious along the way. Not only is it not comprehensive, it’s going to grow. We never stop making mistakes in life, or investing. If we do, it’s because we aren’t
being honest with ourselves. The more awareness we bring to this inevitability, the better able we are to manage. This realization is one of the fundamental principles that underlie our market-thrashing Stock Advisor Canada members-only advisory service (a service that I head up). Our team has made mistakes, and will
continue to make mistakes, as have our members. Yet, we’re all in it together, learning from these mistakes and how to manage them, in the pursuit of becoming better investors.

We are no doubt stronger together than apart, and if this kind of dynamic is missing from your investing life, I encourage you to join us. Click here. Bring your experience to the table and help us learn where you’ve gone right and wrong in the past. In exchange, we’re more than happy to do the same, helping you become a better investor, just like the rest of us.

Iain Butler
Chief Investment Adviser, Motley Fool Canada

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