Stock Market Myths – Don’t Believe the Hype!

How many of you reading this have known somebody who has lost money in the stock market?  How many of you have lost money yourself?

A recent realization came to mind about how unusual it is for a blog like this – or any other article related to personal finance – to be believing in and promoting the potential of the stock market at a time when public perception and confidence in it is perhaps at one of its all-time lows.  After all, the years 2001 and 2008 were not that long ago and they marked two of the biggest, most recent dramatic corrections in the value of the stock market within the last century.  Some of you may know people whose retirement savings vanished into thin-air as a result.  Some of you may have been one of these people and maybe can’t understand why you’re even reading an article like this.

As a result of stock market crashes and major corrections, a lot of myths have developed about why it is something that a person should avoid at all costs.  What are some of these myths and are they true?

MYTH:  Nobody “ever” wins in the stock market

This is an actual complaint and it was uttered by somebody who honestly never did win buying stocks.  It seemed as though no matter what he bought he sold at a loss, in one case nearly $130,000 based on a whim that took nearly a decade to recover from.  The good news is that after several years more of smaller losses following this recovery, he decided to get out and stay out and focus instead on his strengths as an investor, primarily real estate which he has a very good knack for.

Whenever you hear something like this, always consider its source and also consider that it represents only one viewpoint or experience.  Contrast this with another investor whose experience over four decades has resulted in overall net gains, including a timely one that allowed him to buy a luxury SUV and take himself, his wife, one of his brothers, and his brother’s wife on a cruise during a very hard time in their lives, all from the profit made on the sale of only one stock.

Or consider the 73-year-old widow, a former K-Mart cashier of twenty years who knew how to save and then invest wisely, who recently received quarterly dividends from some of her stocks that allowed her to do several electrical upgrades in her home and is planning plumbing upgrades with future dividend payments.  If she had been relying on just her pension checks then she would have had barely enough to pay bills and buy food let alone do any sort of upgrades to her house.

MYTH:  The stock market is the best way to get rich quick 

One of the biggest stereotypes about what a stock investor is is that of a day-trader spending hours in front of a series of computer monitors, buying and selling at every respective dip and blip that they can detect.  Locking in that gain of a few percent per day and perhaps lucking-out every now and then by getting a double-digit percentage gain in one day.  The sad by-product of such a stereotype is the average person thinking that he doesn’t fit the mold to be a stock market investor unless they’re day-trading.

Short-term stock traders are better off installing a slot-machine handle on the side of their computer

What most people don’t see is how most such short-term traders eventually lose way more than they ever gain.  They’re better off installing a slot-machine handle on the side of their computer and pulling it every time they place a buy or sell order because what they’re essentially doing is no better than gambling.

Instead of considering that a business success story often takes many years to pan out, often well over a decade, they instead care nothing about the long-term picture and hope to cash in on some news of the day that sends a stock pick up a few percent and then get out before it drops.  The addiction lies in trying to get a bigger and bigger daily gain, sort of like how one gets addicted to a drug after the first high or to golf after they hear that first ‘ping’ of a 200-yard drive off the tee that goes down the center of the fairway.  There’s always the hope that the next one will be better.  There’s no patience involved, only constant activity.

The reality is that the stock market is the best way to get poor quick IF you have less than a three-to-five year time frame.  If you want to invest your money in something for less than a 3-year time frame, then buying a stock is the LAST place you should put your money.  This is the general consensus of any reputable investment advisor.

If you have a minimum three-to-five year time frame during which you won’t need that money, ideally longer, then owning at least a dozen quality stocks over many years is statistically the best way to grow wealth over all other types of market investments – mutual funds, ETFs, bonds, precious metals, etc.

David Gardner, a co-founder of The Motley Fool, has recommended over 80 companies for their Stock Advisor service.  At one point, 18 of those had lost over half of their value.  HOWEVER, the return of 18th best performer all by itself wiped out almost half of all the losses of those 50-percent-plus losers. Several of the top seventeen have had returns in excess of 1,000 percent that have all but obliterated the losses and resulted in a substantial overall gain.

But the key has been the power of time:  the average holding time of each of those stocks (winners and losers) has been over a decade, yet the vast majority of investors would have sold any one of the top 18 after only a few percent gain or at the first dip of more than five percent.

So no, the stock market is not the place to get rich quick, but it is a fantastic means to grow wealth slow.

The stock market is not the place to get rich quick, but it is a fantastic means to grow wealth slow

MYTH:  The stock market is manipulated to benefit rich people at the expense of ordinary people

There are enough documented cases to prove that there is manipulation of the stock market at various times and to varying degrees.  If you’re still thinking that buying a few stocks might be a good way to make a return on your money then you have to understand the market in order to make it work for you.

You’ve already read about the power of time in allowing a company’s fortunes to pan out.  Holding on to a good company’s stock for many years is the most effective way to survive any manipulation or market correction or crash.  But like trying to learn chess by going up against a chessmaster after your first week will almost guarantee a loss, so will jumping into the stock market unless you’ve first been made aware of the realities of what this “game” involves.  Once you are aware then you won’t fall for all the little things that cause investors to panic and buy/sell at the wrong time and/or after too short a time.  And you will also learn that your greatest enemy is not the “rich” or anyone else but rather yourself.

So yes, the market may be subject to some manipulation, but the greatest harm is done by the ignorance and emotions of inexperienced investors to themselves, those who:

  • buy a company’s stock on a whim or a “tip” instead of doing a lot of research about the company AND the industry it’s in AND that company’s position within that industry.
  • buy only one stock instead of at least a dozen quality stocks.
  • buy penny stocks instead of the stock of companies that have actual winning track records regardless of share price.
  • sell their winners after a small gain and hold onto losers after a large loss.
  • keep buying a losing stock on the hopes that the price will rebound someday instead of waiting until after a solid bottom and turn-around in that price due to something tangible that has happened with the company.
  • panic about a short-term issue being faced by a successful, growing company instead of considering its future long-term prospects.

The stock market is designed to be a slow-cooker, but uneducated investors treat it like a deep-fryer and then wonder why they get burned

The bottom line is that expecting everything fast is a sure recipe for stock market failure.  Expecting fast returns.  Making fast decisions.  The stock market is designed to be a slow-cooker, but uneducated investors treat it like a deep-fryer and then wonder why they get burned until/unless they make the time to learn about how it really works.

MYTH:  You need a lot of money to buy stocks

Maybe one/all of the above arguments has you convinced that perhaps it’s worth the time and effort to learn more about the greatest potential wealth-generator available to any ordinary citizen of a capitalist economy.  But maybe now you’re hung up on thinking that somehow you need to invest $5,000 into each of a dozen stocks that you think you need to buy in order just to get started.

If you don’t have tens of thousands of dollars just lying around, relax:  many institutions, starting with your local bank, allow you to start out by putting as little as $25 per month into a mutual fund (which is like a basket of several stocks).  If I was you, I would raise the bar and put 10-percent of your take-home income into that mutual fund.  Better yet, split up your 10-percent and put it into three or four different mutual funds automatically every month.

After you’ve built up about $5,000, cash out $1,000 worth of one of those funds and buy your first stock.  Then repeat with more $1,000 purchases until you own about a dozen stocks.  The mutual fund(s) can thus serve as a springboard into owning individual stocks.

This is just one strategy that you can use to diversify.  You can read on this blog and elsewhere about where to get some great advice, but you should also go to http://www.fool.com and http://www.fool.ca if you want some advice about leading companies in the North American markets.  These are free resources, but subscribing to their Stock Advisor service is highly recommended to learn which of all the stocks mentioned come highly recommended.

Your money might take a lot of time to build up, but no true wealth ever comes fast or easy – or at least any wealth that lasts.  Just ask almost anyone who has ever won a lottery.

So are the above myths true?  Again, it depends upon what source you consider, that of the winner or of the loser.  Entering the stock market is definitely not for the faint-of-heart so learn about it as much as you can, but don’t let fear prevent you from moving forward if it still intrigues you.  The saying is often true, “With great risk comes great reward,” and no businessman, actor, athlete, inventor, or investor ever achieved anything so long as fear kept them from doing anything.

One last thing:  be sure to click the Follow button near the top of this page.  Also, if you’re a brand-new stock investor – or still thinking about it – then I highly recommend starting with my 5-part Stock Starter Series.  To new beginnings!

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