Some More Stock Market Truths

How does the share market really work? Here are a few things you need to know.

Warren Buffett

The words 'Warren' and 'Buffett' are the top two financial keywords for advertising and product marketers on the internet, but this does not mean you need to invest the Warren Buffett way. His approach to investment is not realistic (not for you), and if you could emulate him, someone would be doing it, and we’d all be invested and all be billionaires. But you can’t, no one is, and we’re not. Forget Warren Buffett. A few brilliant quotes may make you or your product sound good, but it is meaningless in the real world. (You can email me with your indignation and Buffenthusiasm if you like - but the point is not whether investing using Buffett-style principles works, the point is the prostitution of the Warren Buffett brand to sell products - I abhor the products that quote and mention Buffett in their marketing as if he endorses the product, which he most certainly doesn't.)

No one knows the future

Let’s face it, if all the kings and queens, presidents and prime ministers, finance ministers, central bankers, bankers, brokers, fund managers, accountants, financial planners, and even taxi drivers couldn’t predict the global financial crisis, no one can, so stop expecting them to. Advisers provide financial advice. If you expect them to predict the future as well you are deluded, and if they do purport to predict the future, they are (deluded).

Sales first

The financial markets are a huge industry focused on sales first, returns second. It is like a car yard, the moment you step onto the forecourt, someone is going to sell you something. Expect it. It's not a charity. It is sales. And once you’re in the markets, the job of every financial professional is to keep you there, which is why almost no financial adviser (product salesman) will ever tell you to sell. It was hard enough getting you in without telling you to get out, even if selling was the right thing to do at the time. Most of the time, the only person who can make the decision to sell is you, and you will need to be assertive to get it done.

Property or shares?

Shares are not better than property, and property is not better than shares. It's horses for courses. They are very different investments. You have to work out which one suits you. Shares and property are marketed as returning about the same over the long term, but one uses a lot of leverage, the other doesn’t. One is priced every second, the other by the month. One is very very liquid, the other is not. One is expensive to deal in, one is cheap. One needs to be physically managed, the other requires no involvement at all. The point being that you should not choose between them on the basis of relative returns, you should instead decide which one you prefer, which one suits you, which one interests you, and which one lets you sleep at night. Or, more relevant, which one you are likely to be good at?

Real returns

The long-term average return from the stock market, the foundation of all share market product selling, is a fantasy. The headlines do not take into account the real return to the investor, the return after taking into account inflation, dealing costs, tax, management fees, accountancy fees, administration costs, as well as the cost of your time and stress. Average returns quoted are always better than reality. It's marketing. It's in the small print.

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Macro crap

The media, the commentators, the brokers and the investors spend endless hours trying to find some macro excuse for every little movement in the market, but at the end of the day, short-term market movements cannot be explained every day using macro factors. The intricate movements of the market can only be explained by knowing why the buyers bought and why the sellers sold, and to really understand that, you would have to sit in the asset allocation meetings at Fidelity, AXA, PIMCO, J.P. Morgan, Credit Suisse, and every other large fund manager that moves the market, and hear why they bought or sold. For some reason, we must have everything explained to us by logic every day and we will bend the facts to fit until we are satisfied that nothing is left unknown. But sometimes there are more sellers than buyers, and sometimes more buyers than sellers. It is incredible how influential the overnight market reports written by Reuters and Bloomberg journalists and cribbed by everyone else have become. But they weren't there when Fidelity decided to sell equities and buy bonds.

Nothing for nothing

Any adviser selling you the average return is going to deliver you the average return, less their fee of course. It is the most effortless of sales. But there is no need to pay for that. Instead, advisers, fund managers and brokers have to set out to add value, to put in an effort for their fees, because these days, with thousands of managed funds, listed investment companies and exchange-traded funds, you can get the average for a fraction of an advice fee.

You have to predict what's wrong to make money

Knowing a PE and a yield will not make you money. The money is made in knowing or correctly guessing what is going to happen that is not in the price. The most money will be made in the stocks that the analysts get the most wrong. Think about it. Every year the top and bottom-performing stocks are not the stocks the market predicts most accurately, those stocks will hardly move. The big money is always in the stocks that the market gets most wrong. In other words, you will not make money knowing what everyone knows. You will not make money listening to an adviser telling you about consensus forecasts, PEs and yields, or calculating valuations based on accurate forecasts. All that is valueless, because it is in the price.

An index is a fantasy, not a reality

It is amazing that fund managers ever allow themselves to be compared to an index, because an index compounds dividends perfectly at no cost, replaces index constituents at no cost, has no dealing costs, has no staff, no rent, no water cooler, and no coffee machine. An index is cost-free, which is why of course, all fund managers underperform, not because they are useless muppets, but because they are competing with a fantasy. In the same way, if you think your future returns are going to mimic the All Ordinaries Accumulation Index over a period conveniently picked out by a marketing company in hindsight, then you too are in fantasy land. The whole index marketing thing is simply an attempt by every industry to dumb you down into thinking an asset class offers these returns, is reliable over long periods, and is safe so you invest in it. But it’s just marketing.

Here are a few more truths that we could easily expand upon, but who has the time? So here is the concise version:

• For every statistic, there is an equal and opposite statistic.
• Don’t worry about getting rich quick and you won’t have to worry about getting poor quick.
• ‘Set and forget’ is really good but only when applied to selected examples in hindsight.
• Anyone who says "If you never sell, you never take a loss" is a complete idiot.
• If any adviser ever tells you they can’t time the market, get a new adviser.
• You can’t be unemotional when it comes to money but you can recognise when you’re being emotional.
• Nothing is forever, it’s just until it starts going down or up again.
• Research is only as good as the assumptions it is based on - which by definition involves guesswork.
• A share price occasionally reflects the value of the underlying company. Your job is to work out when.
• The difference between a good financial salesman and a bad one is the extent of their misplaced certainty.
• If you wouldn’t entrust your retirement to a complete amateur, why did you entrust it to your partner?
• The only difference between you and a guru is that gurus have a media gig and an excellent wardrobe of ties.
• Once-in-a-lifetime events happen once every ten years.
• The only guaranteed way to get rich is to be born rich, and if you’ve already failed, welcome.

For more truth and lies - Read The Marcus Today Stock Market Dictionary.   More about the author – Marcus Padley Marcus Padley is a highly-recognised stockbroker and business media personality. He founded the Marcus Today Stock Market Newsletter in 1998. Over the years, the business has built a community of like-minded investors who want to survive and thrive in the stock market. This is achieved through a combination of daily stock market education, ideas and activities.

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