In Part 1 of this series on investing myths, I laid out 5 common investing beliefs that keep many people from making as much money as they could on their investments. Is it so:
- The stock market must go up to make money.
- Investing in the stock market is risky.
- Over 20 years the stock market always goes up.
- The best way to make money in stocks is to buy and hold.
- News and research groups have the best stock picks.
I dispelled each of these myths and explained that they are the result of poor education. The problem with poor education is that it leads to a false understanding of the truth, and as many people have learned over the past year in the investing world, not knowing the truth can be financially devastating.
In this article, I am going to expose 5 more myths about the world of stocks and investments, and share with you how you can not only correct your misunderstandings, but also benefit from your new knowledge.
Myth #1: Investing in stocks is like gambling
The myth that investing in stocks is like gambling is one of the oldest and most pervasive myths surrounding the stock market. In fact, many people don’t even realize they have this belief. Unknowingly, though, it shows up in their words when they say things like, “You’re betting the stock will go down” or “You’re betting the stock will go up.”
The idea that a smart investor is gambling is ridiculous. However, it has crept into an uneducated public to the point where many anti-gambling religious groups and social media have led their followers to believe that the stock market is so riddled with gambling that it would be better to play the lottery. In fact, nothing could be further from the truth.
The real fallacy here is the assumption that the investor is gambling. As someone who spends his life in the investment community, let me assure you that intelligent investor would ever bet. Gambling is the exact opposite of what investors do. Investors spend their lives learning and educating themselves about the investment they are about to do. They then proceed to invest, confident that their education was the right one. If the investment goes against the investor, the honest investor still won’t say, “I bet bad.” The honest investor will say, “What can I learn from this?”
Anyone who proceeds to any area of life without having the proper education could be seen as a gambler. But the more appropriate term would be nonsense. To illustrate this point, let us take a person learning to drive a car. If the person has never driven a car before, he can say, “Since a lot of people do it, so can I.” But the foolishness comes when the person gets behind the wheel of a car and tries to drive without first learning anything about how to drive a car. We could easily say that this person was playing with his life, but the truth is that it is just nonsense.
Investing in the stock market is the same way. Millions of people hear how huge amounts of money are made in the market. They see TV commercials for cheap stockbrokers and one day they think, “I can do that too.” The truth is, they CAN do it too, but only after they learn HOW to do it. For the educated investor, putting money in the stock market is an educated, analytical, and thoughtful decision. And yet, for the uneducated investor, taking the same action is…well, silly. Educating yourself first is the best way to successfully invest in the stock market. destroyed myth
Myth #2: “Predicting” the stock market is impossible
Right after the assumption that investing in the stock market is gambling, a follow-up myth arises: “Predicting the stock market is impossible.” Once again, this fallacy boils down to a lack of education. Predicting the stock market may be impossible for YOU, but not specifically for every person. In fact, since the beginning of the stock market, many investors around the world have successfully “predicted” the next moves. The author of this article is one of them (it would be me!). Predicting the stock market is not as mystical as you might think. In fact, the market moves in very predictable repeating patterns, over and over again. And once a person is trained to observe and recognize those patterns, that person can also predict the next move with reasonable certainty. destroyed myth
Myth #3: Mutual funds are the safest way to make money in the stock market
I guess to dispel this next myth you have to define what “safe” is. My definition of “safe” with respect to investment is an investment that has the ability to be profitable, not because of market conditions but in spite of market conditions. In other words, if the market goes up, I want an investment that can make money. If the market goes down, I want an investment that can make money. However, mutual funds are not one of those investments. It amazes me why financial advisors continue to sell these investment vehicles to potential retirees without knowing it. It is an investment that can ONLY make money if the market goes up. And to cover the weakness of the investment, the sales pitch goes like this: “For 20 years, the market always goes up…” Well, what if I need to retire in 19 years and that’s not a positive year?
To me, the dumbest investment a person can make is one that simply makes a profit based on the direction of the market. As such, I believe that mutual funds are not only a poor choice for a safe investment, but I consider a mutual fund to be a very risky investment. If you don’t believe me, ask most Americans who have lost close to 50% of their retirement recently how they’re doing and if they feel mutual funds are a safe investment option. destroyed myth
Myth #4: 24% annual growth is exceptional performance
Okay… I’ll give you this. The twenty-four percent annual rate of return is exceptional, if you’re used to putting your money in a bank savings account. But a smart investor would never tie up his money for a whole year just to get a 24% return! Can you imagine any investor who would be willing to contribute risk capital for a business that only promises 24% of the money? Of course you can’t! And the stock market should be no different. In fact, that is what you are doing when you invest in the market. You are lending investment capital to the company while they continue to do business. But I guarantee you that his business generates more than 24% profit every year. Chances are the business is making about 100-200% profit EVERY MONTH! And if you’re putting up capital, you certainly deserve your fair share of that profit.
Mutual funds and investment services are loaded with fees, transaction costs, and sales bonuses for people who get you to give up your money for them to invest. And they get paid even if they lose money, and YOU are the one who pays for everything. By the end of the year, you’re lucky if you have 24% left over. And those vendors who get paid? Well, their job is to sell you on the idea that 24% is a great return.
I myself would never make such an investment. When I place trades in the market, I look for consistent monthly cash flows that equate to a return that would blow your mind if I told you. And ALL smart investors are looking for the same kind of return. How much? Hmmm, let’s say investors think in terms of monthly returnsnot annual returns, and we’ll leave it at that. destroyed myth
Myth #5: Learning to make money in the stock market takes years of education.
Of all the myths I debunk, this is probably the saddest. It’s sad because people really believe that they can’t learn how to make big monthly income in the market. They ask questions like, “Well, if it’s so simple, why doesn’t everyone do it?” This is probably the most logical and natural question. The only answer I have is: “They don’t know how.” But I have seen hundreds of my own students learn how to consistently make money in the stock market after just 2-3 months of focused training. How much training? Generally 4-8 hours a week. That’s less time than the average American spends trying to build a network marketing business that seems to be going nowhere.
The truth about investing is this: successful investing boils down to nothing more and nothing less than education. For the person who takes the time and energy to learn, becoming a successful investor is not far out of sight. In fact, I believe that almost anyone can learn to successfully invest in the stock market in a year or less.
Just think of a year! That’s less time than it has taken most Americans to see their stock portfolios plummet while relying on “all-knowing” financial advisers. One year is less time than it takes to earn a master’s degree. One year – that’s all it would take for a person like you to learn successful investing too. destroyed myth
I hope you’ve seen how these 10 myths may have helped shape your ideas about the stock market as a risky place to invest. I hope that the next time you hear your favorite Uncle Jimmy, or some TV announcer, perpetuate these myths, you’ll quickly dismiss them as such and say to yourself, “I know better!”
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