Stock Market Myths

GAMBLING: The stock market is a form of gambling

  1. Why was the stock market created?
  2. It was created to raise CAPITAL for companies to expand.

Example: Let us say ABC Co was in the oil rig-building business. It has an opportunity to drill in the North Sea. To do so it needs a specialized oil rig which will cost $ 1.5 billion to build.

ABC Co. has $ 250 million that it can draw from its bank account. Where will it go for the remaining $ 1.25 billion need?

Banks will NOT lend ABC Co the $ 1.25 billion because they will not accept the ‘risk’. (Risk? Yes, what if they do not strike oil, how will the repayment of the loan be made?)

 However, the banks may be interested in debt financing such as bonds assuming that they are comfortable with ABC Co risk i.e. assuming ABC Co is a well-run company with excellent financial capacity.

A group of (say) 10 banks may be willing to ‘underwrite’ up to $ 250 million with each bank being exposed to $25 million of ABC Co risk. So far, we have accounted for $ 500 Million ($ 250 Million from Cash Account & $ 250 million from Bonds – Bank Debt)

For the remaining requirement of $ 1 billion, ABC Co will likely issue shares – let us say at $10 per share i.e. 100 million shares to the public (via Institutional investors e.g. Merrill Lynch; Goldman Sachs etc.) – raising $ 1 billion from the ‘market’.

Summary:

Cash from ABC Co                                                                            $ 0.25 billion

Bank Debt (Bonds)                                                                           $ 0.25 billion

Money Center Banks: Equity Market                                           $ 1.00 billion

Total                                                                                                      $ 1.50 billion

The Money Center Banks will then sell their portion into the ‘secondary’ market (commonly called the stock market i.e. to the public) to reduce their ‘exposure’ while keeping the fees (paid by ABC Co) that they generated for putting the ‘deal’ together!

Why would the ‘public’ buy ABC Co shares?

This is usually based on PERCEPTION i.e. The assumption (based on one’s own research) is that the North Sea rig will hit a ‘gusher’ and generate lots of profit for ABC Co. In that case, the $ 10 ABC CO shares will increase in value to – let us say $ 20 per share which will give the investor (who took a risk ), a 100% return on his original investment. While this is an unlikely scenario (i.e. a 100% return), the point is that investors get a higher return from stock market investments (either through share price appreciation or dividends or both) than in any other form of wealth building strategies.

RISKY BUSINESS:  The stock market is very risky. Any venture is risky when entered into without knowledge.

  1. Would you drive a car without having learnt to drive?
  2. Would you fly a plane without having learnt to fly?
  3. Would you put your money in a bank that has no offices in Canada?

No – all of the above would be risky.

ONLY FOR SMART PEOPLE:

 You need a PhD in finance to understand stock market investments.

This is a myth propagated by the financial services industry so that you are beholden to them. That is the reason they have ‘certified’ financial planners who are really salespeople in camouflaged in “expert” clothing. Anyone who has the ‘knowledge’ and the ‘discipline’ can invest in the stock market with CONFIDENCE and CONSISTENCY.

YOU CANNOT “BEAT” THE STOCK MARKET:

Beating the stock market’s own performance is not possible, and those individuals that do actually accomplish this feat will not have their “luck” last for long. Do not bother trying to outsmart the stock market, just accept that you are not going to outsmart the millions of other investors who believe the stock market is not beatable. The stock market is able to be beaten in terms of your own performance! Investors and traders, do it every year, and some do it every year consistently. Most investors simply do not have Knowledge & Discipline to actively manage their portfolios and thus do not have the ability to outperform the stock market over the long term, which is why this myth refuses to die.

ZERO-SUM GAME:

i.e. When someone makes money, someone else losses it This is the belief that the stock market is a zero-sum game. So, when one investor losses money on a stock, someone else has gained that money. In essence, it is the belief that money never grows in the stock market but is simply transferred from the ignorant to the savvy investor. The stock market is not a zero-sum game i.e. the pie is NOT perpetually the same size. New countries are entering into the economic cycle annually – think China, India S. Korea 50 yrs. ago – they were ‘no bodies’ then. What allows the stock market to go against this belief is that over the long term investors can all profit as long as the stock market is constantly going bigger. So even if I lose some money on a few stocks this year and gain on some others, if I invest for the long term, I will be profitable as will all other investors since prices are continuously going higher over the long term.

CONCLUSION: The wealth management industry has no skin in their game. And it really is a game for them (with your money). And in most cases, ‘the middle people’ have no obligation to put your interests first, no fiduciary duty. Do not outsource the job of managing your retirement portfolio to a “professional”. Most are infected with modern portfolio theory and do not realize that only four percent of companies provide most of the return. They want to sell you scores of securities (ETFs). And professionals do not beat the market. As a result, they have changed the yard stick. Nasty people! Now they have their own benchmark so folks will not notice professionals are losers, most of the time. Learn to invest on your own. It is easier selecting a few quality dividend growth stocks (and that is all you need) than being sold one of over one thousand ETFs. Most are third class. The ETF you are sold depends upon the advisor latched onto you. Learn to invest directly in companies yourself, not through middlemen (the so called wealth managers) whose income is from other people’s money (annual fees). It is rather easy, really, to do it yourself. There are only a handful of great Canadian companies to select from. With ETFs, on the other hand, there are over a thousand.

Leave a Reply

Your email address will not be published. Required fields are marked *