Updated: December 12, 2010 15:31 IST

Shattering harmful market untruths

D. Murali
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Expect average returns. One big bear and you are done. GDP makes stocks grow. Low P/Es mean low risk. Oil and stocks seesaw. High unemployment is a killer. Stop-losses stop losses.

These are some of the ‘widespread and frequently harmful market untruths, and misconceptions most investors fall prey to,’ discussed by Ken Fisher in ‘Debunkery’ ( A huge part of successful investing is just avoiding common errors most folks make repeatedly, rues Fisher.

Investing is not a certainties game, because capital markets are far too complex, he reminds. “Instead, investing is a probabilities game – like medicine, engineering, and most sciences… There are no fail-safes, no guarantees. And yet, for some reason, investors demand absolutes from investing. This leads to serious errors.”

The problem with gut

Take, for instance, ‘bunk’ 7, ‘Trust your gut,’ a ‘very basic bunk’ produced by the brain, making it difficult to deal with counterintuitive problems like publicly-traded markets, the author frets. He underlines the common human fallibility of conveniently forgetting the cases of all our wrong choices and remembering only the ones that let us crow about being a genius. “Many investing newsletters make this a regular practice, saying, ‘If you’d bought these six stocks we recommended, you’d be up a bajillion per cent!’ They conveniently don’t mention the other 874 stocks they touted that did badly.”

Tracing the ‘gripping feeling to react NOW’ – or ‘just do something,’ or ‘fight or flight’ response – to what worked for our long-distant ancestors, Fisher cautions that the mind can be a cruel trickster when it comes to markets. “Your Stone Age brain may be good with physical risk, but it is also the same one that governs your investment gut – and it’s a truly lousy investment manager.”

You may live long

An insight of value to senior citizens is bunk 3, ‘Retirees must be conservative.’ The author is aghast that many folks in their late 50s and 60s – approaching retirement or already in it – have been coached by media and even industry professionals to think about their investing time horizons in a way that is all wrong.

How so? Because most people naturally think that their investing time horizon ends when they retire, or when they stop contributing to their retirement funds, or when they start taking cash regularly from their portfolios, he reasons. “They think that’s when they should reduce most if not all volatility risk – getting ‘conservative.’”

Such a view, warns Fisher, can frequently mean an unnecessary and sometimes serious reduction of quality of life later on. Folks live longer than ever now, yet many invest, by and large, like they expect to die at age 70, he notes. “Thanks to better nutrition and mind-blowing technological and medical innovations, folks just live to riper old ages today than even leading-edge thinkers fathomed 40 years ago.”

The reassuring message of the author to those who are 65 years old is that they do not have a short time horizon, but a long one; longer still if they come from a long-living family and are in good health, and further longer if their spouse is younger!

Angry at investors who invest for too short a time horizon, Fisher calls them ‘wife haters,’ because ladies have longer life expectancies so they tend to end up with the dough in the end, and a conservative approach may set the widows up for aged poverty. “It’s later in life that you’ll want the additional comforts money can buy. Seen that way, investing too ‘conservatively’ can be pretty darn risky and not conservative at all.”

Custody vs decision-making

What can be apt for the current times of multiple mega scams hogging primetime coverage is ‘bunk 11’ which reads, ‘A good con artist is hard to spot.’ No, it can be very easy to spot a potential fraudster, says Fisher, drawing a reference to his earlier book, ‘How to Smell a Rat,’ which spoke of five key signs of financial fraud, such as that stated returns are consistently great, and that you hired the adviser based on a recommendation or through an intermediary without doing any real due diligence yourself. In his view, ‘the biggest, baddest, reddest flag’ is that your adviser has custody of your assets.

The author’s advice is simple: When you hire an adviser to make decisions for you, don’t give him access to the money, thus separating custody from decision-making. Insist your money be deposited in a wholly unconnected, third-party, large, reputable, nationally-known custodian, he instructs. “Then give your adviser – not associated with that entity – written authority to make decisions for the money and trade that account but not take money from it. The custodian holds the assets as a watchdog, and the separation of powers promotes integrity – and you don’t get Ponzied.”

Gold gyan

Bitter news to the lovers of the yellow metal is ‘bunk 35,’ that with gold you are golden. Posing the question whether gold is a safe investment, Fisher cites data to show that gold’s long-term returns are not really so great. Since late 1973, when gold began to trade freely, “$10,000 invested in the S&P 500 became $365,200 – or $256,900 more than the same amount invested in gold.”

More worryingly, if you strip out the six periods of sizable gold booms, that lasted anywhere from 4 to 22 months and take up 15 per cent of the total period, the gold returns were an annualised -3.6 per cent loss, he informs. “For example, gold lost money from 1982 until 2005 – 23 years. Can you stomach a money loser that long?”

To thrive with gold you must time – both in and out – near perfectly, or be content with long periods of losing results, the author observes. It goes sidewise choppily and down for very long periods, then skyrockets and then again disappoints, he adds. “Feel free to buy gold – for earrings, necklaces, and electrical wiring. But for your portfolio, gold has less lustre unless you’re a super-duper timer.”

Hard to be passive

A disturbing chapter to novices can be ‘bunk 17’ – that passive investing is easy. No, it is very hard, alerts Fisher. Tactically, it is easy, but psychologically, it is tough, he elaborates. Though theoretically you can buy an ETF (exchange-traded fund) that matches your benchmark (and ‘set it and forget it’), what goes bad is the tendency of investors to ‘keep inning and outing of the funds and ETFs at all the wrong times.’ Even in buying passive funds they typically buy high, do not hold long enough, then bail out at the wrong times, laments the author.

Referring to a finding of the DALBAR study, that the average holding period for all equity mutual funds is 3.2 years, Fisher says, “To do passive right, you can’t sell your funds and change your strategy every 3.2 years – not unless you’re the most exquisite of market timers.” For passive to work, his counsel is that you must truly set it and forget it for your entire investing time horizon.

Impact of terrorism

The book wraps up with ‘bunk 50’ which reads, ‘Terrorism terrorises stocks.’ The good news, however, is that while thugs can be deadly, they have not taken down the vibrant economy, or capital markets, avers Fisher. To those who wonder how markets can be so dismissive of terrorism, when it is such a new, terrible, and very real threat, his answer is the markets are inherently counterintuitive. “Fact is, sadly, terrorism is tragic, but not a very new threat nor very significant in the grand scheme of the global economy.”

Acknowledging that terrorism’s human impact can be massive, the author condemns as ‘cowards’ the terrorists who hit civilians. “But fortunately, so far, their market impact has been relatively minimal at worst – fleeting at best. Capitalism is too strong a force to be kept back by cowardly thugs.”

Imperative addition to the investors’ shelf.


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