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Topic : Playing Safe In The Stock Markets...
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By : Rashmi Chawla, Cust. Service Manager, Leading Bank
Industry : Investment Banking Functional Area : Personal Finance
Activity:  9 comments  665 views  last activity : 07 30 2010 08:28:40 +0000
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The most common & shocking myths that will never die.....

1 "This is a good time to invest in the stock market."

Really? Ask your broker when he warned clients that it was a bad time to invest. October 2007? February 2000? A broken watch tells the right time twice a day, but that's no reason to wear one. Or as someone once said, asking a broker if this is a good time to invest in the stock market is like asking a barber if you need a haircut. "Certainly, sir -- step this way!"

2 "Stocks on average make you about 10% a year."

Stop right there. This is based on some past history -- stretching back to the 1800s -- and it's full of holes.

About three of those percentage points were only from inflation. The other 7% may not be reliable either. The data from the 19th century are suspect; the global picture from the 20th century is complex. Experts suggest 5% may be more typical. And stocks only produce average returns if you buy them at average valuations. If you buy them when they're expensive, you do a lot worse.

"Our economists are forecasting..."

Hold it. Ask your broker if the firm's economist predicted the most recent recession -- and if so, when.

The record for economic forecasts is not impressive. Even into 2008 many economists were still denying that a recession was on the way. The usual shtick is to predict "a slowdown, but not a recession." That way they have an escape clause, no matter what happens. Warren Buffett once said forecasters made fortune tellers look good.

4 "Investing in the stock market lets you participate in the growth of the economy."

Tell that to the Japanese. Since 1989 their economy has grown by more than a quarter, but the stock market is down more than three quarters. Or tell that to anyone who invested in Wall Street a decade ago. And such instances aren't as rare as you've been told. In 1969, the U.S. gross domestic product was about $1 trillion, and the Dow Jones Industrial Average was at about 1000. Thirteen years later, the U.S. economy had grown to $3.3 trillion. The Dow? About 1000.

5 "If you want to earn higher returns, you have to take more risk."

This must come as a surprise to Mr. Buffett, who prefers investing in boring companies and boring industries. Over the last quarter century, the FactSet Research utilities index has even outperformed the exciting, "risky" Nasdaq Composite index. The only way to earn higher returns is to buy stocks cheap in relation to their future cash flows.

As for "risk," your broker probably thinks that's "volatility," which typically just means price ups and downs. But you and your Aunt Sally know that risk is really the possibility of losing principal.

6 "The market's really cheap right now. The P/E is only about 13."

The widely quoted price/earnings (PE) ratio, which compares share prices to annual after-tax earnings, can be misleading. That's because earnings are so volatile -- they're elevated in a boom, and depressed in a bust.

Ask your broker about other valuation metrics, like the dividend yield, which looks at the dividends you get for each dollar of investment; or the cyclically adjusted PE ratio, which compares share prices to earnings over the past 10 years; or "Tobin's q," which compares share prices to the actual replacement cost of company assets. No metric is perfect, but these three have good track records. Right now all three say the stock market's pretty expensive, not cheap.

7 "You can't time the market."

This hoary old chestnut keeps the clients fully invested. Certainly it's a fool's errand to try to catch the market's twists and turns. But that doesn't mean you have to suspend judgment about overall valuations.

If you invest in shares when they're cheap compared to cash flows and assets -- typically this happens when everyone else is gloomy -- you will usually do very well.

If you invest when shares are very expensive -- such as when everyone else is absurdly bullish -- you will probably do badly.

"We recommend a diversified portfolio of mutual funds."

If your broker means you should diversify across things like cash, bonds, stocks, alternative strategies, commodities and precious metals, then that's good advice.

But too many brokers mean mutual funds with different names and "styles" like large-cap value, small-cap growth, midcap blend, international small-cap value, and so on. These are marketing gimmicks. There is, for example, no such thing as "midcap blend." These funds are typically 100% invested all the time, and all in stocks. In this global economy even "international" offers less diversification than it did, because everything's getting tied together.

9 "This is a stock picker's market."

What? Every market seems to be defined as a "stock picker's market," yet for most people the lion's share of investment returns -- for good or ill -- has typically come from the asset classes (see No. 8, above) they've chosen rather than the individual investments. And even if this does turn out to be a stock picker's market, what makes you think your broker is the stock picker in question?

10 "Stocks outperform over the long term."

Define the long term? If you can be down for 10 or more years, exactly how much help is that?

Hope the information was useful......happy & safe investing....



9 comments on "Stock-Market Myths That Just Won't Die "
  Commented by  Tauseef Iqbal, MBA/PGDM student, Jamia Hamdard    | 08 08 2010 03:56:27 +0000
the facts r true but if the investment is done for a longer period then stocks are a very good option....................people usually buy when the market is on a higher side but maintain a distance when the market is at lower side.....stocks are for  long term investment....
  Commented by  manikanta raj, Assistant Manager Finance, project financing, leading Financing company    | 08 07 2010 09:16:16 +0000
thanks rashmi the information brought by u is really useful at all the levels of investment.
  Commented by  vinod kumar, MBA (Finance) student, Punjab College of Technical Education Ludhiana    | 08 02 2010 17:24:51 +0000
yeh definitly...For making investment in stock market this is not right time. because market repeats its history and move in a cycle. This is good time to sell the stocks for those who invested 1, 1.1/2  or 4, 5 years back in some shares. because most of the stocks are at their peek. 
  Commented by  suchita Ambardekar, Director on Board, Vir Rubber Products Pvt Ltd, Vir auto enterprises Pvt Ltd    | 08 02 2010 08:01:03 +0000
Nice piling of myths rashmi,

Yet all said and done. Equity still remains and has out performedover long term, along with the real estate.

In financial market and any kind of investing, if done with complete discipline and realistic time horizon, then it definately yields results.

As one should not be one,s own doctor...and take medicine. One should get proper advise for investing in any asset class.

Yet Nice compilation from Rashmi....If you agree, we can have a counter debate on every point raised here and prove otherwise...
Yet nice compliation from Rashmi...If u do not mind...then ...
  Commented by  Mahesh H., Assistant Professor, Vishwakarma Global Education    | 07 31 2010 06:46:02 +0000
Every investor must read. I will revert back to thsi topic after a while, because I experienced all the above and also teach this subject (not this way) in Mgt school.
  Commented by  G A Narayan, Real Estate Consultant    | 07 30 2010 16:23:24 +0000
I agree with Ankit Nagpal. Invest in Real Estate and if in Chennai please contact me ;-)
  Commented by  Ankit Nagpal, Owner & founder, Soft Solutions    | 07 30 2010 14:01:30 +0000
invest in real estate.
  Commented by  Archana Singh, Relationship Executive, ICICI Bank    | 07 30 2010 11:15:39 +0000
I agree with  Rashmi & Japan with you also. These are the hardcore myths which will never die..
  Commented by  Japan Shah, Assistant Professor, Oxford School of Management    | 07 30 2010 11:11:00 +0000
Very True Rashmi.. Whenever we hear these terms we must stay away from markets..
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