A Spot-On List

Generally speaking, just as not all of the songs included on an album (showing my age there -- I guess I should say CD or digital collection, right?) are hit-worthy, not all of the items featured on "top," "best of," and other lists that purport to explain or support a theme or concept belong there.

There are exceptions to the rule, of course, when it comes to recorded music (your suggestions are welcome, by the way). The same might also be said about the spot-on list of "Ten Stock-Market Myths That Just Won't Die" put together by the Wall Street Journal's Brett Arends. Here are four of them:

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!"

...

3 "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.

...

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.

Click here to see the rest.

Comments

[roger]

Symphony #6 in E minor ( pathetic) by:
Pyotr Ilyich Tchaikovsky,would be a good
emotion builder while reading your blog.
Probably would not be appreciated by the
younger generation. :)

[Sackerson]

Hi, Michael. As an independent financial adviser, I did most of what Brett Arends recommends above (including discussing Tobin's Q on my blog), which is why I drive a very old car. But I must qualify the example given in #4 of the position of the Dow in 1982: that's the point at which the real (CPI-adjusted) recovery began, following a decline since 1966. Shame the economy was powered from then on by monstrous monetary inflation.

[JR]

'Album' is correct as it does not refer to the medium, but to the collection. Record, tape, disc or CD referes to the medium.

It is the same for 'wealth': it refers to an allotment of energy, whereas gold/silver or other physical assets are the medium of it.

[Kevin@OutOfYourRut]

How much of this is brokers reciting the company line and how much is the willingness of the public to believe it. Without the latter, the former would be little more than hot air.

The investing public buys the rhetoric for the same reason it gambles and pours money into get rich quick schemes--for the promise of easy money. You only have to stretch the truth a little to get people to come to that feeding trough.

[Doug L.]

I believe it is the confirmation bias that causes people to seek out information that confirms what they already (want to) believe, while ignoring information to the contrary. This definitely plays into investing.

[Give thanks if your escaping this]

Monday, July 26, 2010
[Video] Dateline NBC: America's Increasing Ranks of Poor

NBC's Ann Curry travels to Ohio where the hardworking poor, with deep traditions in mining, manufacturing and military service, are increasingly seen in food pantry lines ashamed and angry.

http://tinyurl.com/2e92cxb

[sharonsj]

After watching my father try for years to make money in the market and failing (on his broker's suggestions, of course), I stay far away from it. Instead, I spent this morning at the weekly flea market buying silver jewelry!

[David T]

Um... the TED Spread is what right now, 34? I don't get the worry. Tell me to get out when it hits 100...