Tags: Arends | stock | market | myths

MarketWatch's Arends: Common Wisdom About Stocks Is Probably Wrong

By    |   Monday, 14 July 2014 12:47 PM

Investors are more than willing to embrace myths when it comes to the stock market.

MarketWatch columnist Brett Arends identified some of the most popular fallacies about stocks.

The myth that "on average stocks earn 10 percent a year" is a persistent one often spread by financial firms, Arends writes.

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"These numbers include phony profits caused by inflation, and one-off gains from an upward revaluation of stocks which, by definition, cannot be repeated," he explains.

Instead, the real return is about 4 percent per year, including dividends. "If we are lucky."

Even the old saw that economic growth is good for stocks is not right, according to Arends.

For instance, from 1968 to 1982, the U.S. economy grew by 50 percent, but most investors lost money in stocks during that time span. Meanwhile, many U.S. stocks have gone up remarkably since 2009, even while the economy at times has shown historic weakness.

"Economic research has shown that, if anything, the fastest-growing economies have tended to produce lower, not higher, stock market returns," he argues.

One of the newer stock market myths is that investors cannot beat the returns of major indexes like the S&P 500, so they should simply stick with index funds.

"There is a lot of research showing that over time you could have beaten the index simply by investing solely in 'value' stocks, namely those which were inexpensive in relation to fundamental measures such as net assets or dividends," Arends writes.

"You could also have beaten the market by investing in stocks of 'high-quality' companies, or in stocks with lower volatility, than if you had invested in the standard index."

The beliefs that corporate balance sheets are once again strong and that U.S. consumers have rebuilt their finances are also false, according to Arends.

To be sure, the Federal Reserve estimates nonfinancial corporations now carry debt equal to about 50 percent of their net worth — near record levels.

Meanwhile, the fact U.S. households have slashed their total debt by 6 percent since 2008 hides an ugly truth.

The "bulk of that reduction hasn't come from people paying off debts, but from just writing them off. Much of this modest overall debt reduction has come from mortgage defaults, 'soft' defaults such as housing short sales, credit card defaults and personal bankruptcies," he proclaims.

Financial blogger and author Barry Ritholtz believes one of the most current stock market misconceptions is that "stocks are very expensive, overbought and perhaps even in a bubble."

But he writes in his Bloomberg View column that JPMorgan Chase data show current U.S. equity prices actually are very close to their long-term average price-earnings ratio of 15.5.

"Stocks may be cheap, expensive or fairly valued. Your take on how expensive or cheap stocks are is a Rorschach test — it reveals as much about the observer as it does about equity valuations," he states.

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Investors are more than willing to embrace myths when it comes to the stock market.
Arends, stock, market, myths
Monday, 14 July 2014 12:47 PM
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