The five biggest investing myths

Most people are taught a handful of widely accepted investing myths about how markets work, but many quietly limit returns over time.

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I came across a guy called Simon Ree recently. He worked in investment banking for many years before ditching it to run his own business.

Simon describes what he calls “The Five Big Myths of Wall Street”. My head was nodding as I read them. I thought I’d share them with you, with some personal observations added in. And while he says Wall Street, it applies just as much to us here in Australia.

Without further ado…

 

Myth #1 – 10% per annum is a fantastic return

In the last ten years, the ASX has returned about 9% per year with dividends. The financial industry tells us we should be happy if we get this (and keep charging us fees in the meantime). It also ignores the huge volatility that can swing your account around like a yo-yo and keep you up at night.

Simon argues that 10% is, in fact, a pretty small hurdle (in the right market) for the individual investor. I agree. Experience tells me many individual investors can achieve much better returns than this. I’m not saying it’s easy. It isn’t. For starters, you’ll need to be a lifetime devotee of the market. That’s not for everyone.

Here’s why. Individual investors have far more discretion about what they buy, when to hold or sell, and when to go to cash completely. They can be more concentrated. A lot of funds are so enormous they are almost completely inflexible. Conversely, some of the smaller small-cap funds have posted outstanding returns in the last financial year. One doubled.

In the case of Australia, many investors can bypass the ASX completely and enjoy the stronger opportunities in the US market. A case in point is MT20 last year. Financial advisers are also hamstrung by compliance and legislation not to expose their clients to too much risk or unique strategies that stray too far from the accepted “wisdom”.

Personally, I set up my SMSF in 2021 and have never looked back.

 

Myth #2 – Finance is complex and investing is hard

Simon has a good line here. He says Wall Street likes to keep its clients “fearful but hopeful”. The idea is that you’re compelled to invest for the opportunity, but feel obliged to give it to them to manage because of their expertise. Ryan Gosling’s character makes a similar point in The Big Short when describing MBS and the GFC: “Wall Street makes things look complicated so you think only they can understand them – and so you’ll give them your money.”

There’s an extraordinary amount of commentary in finance about a myriad of factors. Ninety-five per cent of it is completely useless and/or unaccountable drivel. The hidden agenda is that it’s either marketing or designed to give the client base comfort and confidence.

The reality is investment is all about risk versus reward. Simple, but not easy.

At Marcus Today we believe in education by osmosis. Educating self-directed investors to make better stock market decisions, and to identify and ignore the irrelevant.

 

Myth #3 – Investing is sensible, trading is like gambling

“Trading” is often considered speculative and inappropriate for “serious” investors. Maybe. There’s a blurry line between what is trading and what is investing. The reality is there are very (very) few true investors.

We can see that because the holding period for individual shares has been shrinking for a long time. Even Wall Street titans like Nvidia (NASDAQ: NVDA) and Amazon (NASDAQ: AMZN) suffered huge drawdowns over the last 25 years, and more than once. It’s very hard to grind these periods out. And no one really wants to hold a stock for years and years if it meanders around not doing much.

The name of the game is to make money. That, at least to me, can mean using different strategies to suit the context of the times.

A case in point: one of my first “investments” in my SMSF was shorting the ASX in April 2022 when it fell 8%. Did I get the whole move? I can’t even remember. But I made some money, then used the funds to buy cheaper shares for the longer term.

A friend of mine trades the SPI and nothing else. That’s his expertise. Is he an “investor”? No. But he makes a bucketload.

Sometimes the market rewards a longer approach, sometimes a shorter one. All of us have to find a style that suits our personality, our lifestyle, and our goals. For example, I like the idea of day trading, but I haven’t been able to make it work for me.

It’s better to forget about loose definitions like trader or investor, and find something that works for your psychology.

 

Myth #4 – Buy and hold is the only rational investment strategy

The financial industry’s main pitch is for you to be a buy-and-hold investor. That keeps you where they want you, with your money under their management. As Marcus says, they will keep it that way no matter how precipitous the market looks, or how mediocre the returns they deliver.

Simon calls this the bedrock of the financial advice industry. One reason is that products built around this idea are highly scalable. But the implication goes deeper.

“When the next recessionary bear market comes (when, not if), not having a hedging strategy or at least a risk-management discipline in place is going to expose investors to significant capital destruction.”

Warren Buffett likes to say you should be able to watch the stock market get cut in half and stay calm. Yeah right. Neither of us can bear to watch hundreds of thousands of dollars, maybe millions, go down day after day as the news gets worse and worse.

Why would you want to put yourself in that position? Be prepared. It may not be now, but the bear is lurking in the future.

 

Myth #5 – High risk equals high returns

This is a dangerous notion, and it isn’t true. It all depends on the context.

You can, of course, make high returns with high-risk ideas like junior mining explorers. Most of the time, however, you will lose your money. The catch is you don’t need to do these things unless you want to swing for the fences, especially if you wait patiently for the fat pitch.

Consider earlier last year. Alphabet (NASDAQ: GOOG) fell 30% from February to the April tariff low. It wasn’t a stretch to step in and buy one of the greatest businesses of all time, with billions in cash. That’s a completely different proposition to a junior explorer with a bit of dirt and big dreams.

Alphabet has since doubled. You had a shot at a high return with, in hindsight, modest risk. That’s the kind of setup I like to wait for.

I’ve always liked this quote from hedge fund legend Jim Rogers: “I look down before I look up.” Risk management is the key, because compounding is the magic of investing.

There you go. Five big myths. Perhaps you can think of a few more.