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Intro to Stocks Two Arrows

Myths of the Market
by WealthEffect Staff

 
 

Agility is as important as ability
 
  Markets are irrational  
  A little knowledge is better than none  
   
Myth #1: Agility Is As Important As Ability

Look at any stock and you'll see that you could make a fortune by continually buying it at its lows and selling at its highs. But who's to say that you won't be buying it at its highs and selling it at its lows? You will probably be lucky to be right half the time; which means that, after commissions and other costs, your broker is much likelier to make money than you.

Trading in and out of stocks is a loser's game — it is also irrelevant to investing. Trying to outguess what all the other investors will do in the short run is like trying to win a car race by watching the other drivers instead of the road. Better to rely on common sense and find a company with a promising long-term future.

Myth #2: Markets Are Irrational

On any given day, yes. Markets are made up of people, and people are driven by fear and greed. But, over time, value wins out. As Benjamin Graham pointed out, in the short term, the price of a stock might be a popularity contest, but eventually, a company's shares will reflect their true worth.

Look for attractive stocks, and don't concern yourself about when they will move higher. If you are right in your choices, the market will get around to balancing the scales, occasionally with a vehemence that you would not have thought possible. Peter Lynch, the most successful mutual fund manager of all time, has pointed out that his best-performing stocks often didn't pay off until the third year.

Myth #3: A Little Knowledge Is Better Than None

Not in the stock market. Without a clear idea of what you are doing and how to do it, you are much better off throwing darts at the stock page. Don't get caught up in the investment advice overload that is more likely to leave you confused than brilliant.

One fellow captured this point in characterizing a popular financial magazine as the most expensive he'd ever read: The cost far exceeded the price. Television is no better — worse, really — because its dedication to covering every subject quickly is matched only by its obsession with short-term results.

One adage of the market is that: "What's obvious is obviously wrong." A little knowledge will have you chasing the herd, riding the fears and greed of the moment rather than profiting from them. Like freshmen psychology students and white belts in karate, a partially informed investor is a menace to himself and his loved ones.

Suggestion: Spend some time at Picking Stocks to see how the ideas you've been reading in this section are put into action. Or, if you want to cut to the bottom line, go to Strategies or to the Wealth Effect Portfolios.