The stock market isn’t what many people think it is. Beliefs surrounding the market run the gamut from the pessimistic “investing in stocks is just gambling” to the euphoric “the market is never wrong.”
Let’s look at seven common opinions about the stock market.
No. 1: “The stock market is nothing more than gambling.” Unlike gambling, the house is on the investor’s side. For example, when a stock price rises, both company executives holding shares and the individual investors win.
Gambling operates differently. When the individual wins, the house loses. So, the house makes sure the odds are stacked in its favor.
No. 2: “If the stock market is such a great deal, why aren’t you rich?” The first problem with this view is that it doesn’t define rich. Many people who study the market and invest according to sound rules will generate wealth that they otherwise would not have had. They may not become a billionaire but they will be better off.
The second problem with “Why aren’t you rich?” is shown by asking a counter-question: “If you’re so rich, why aren’t you smart?” The two aren’t related.
No. 3: “All you need to do is find the next big thing and hold on.” The problem with this view is that it doesn’t contain a sell strategy. Every great stock ultimately becomes a sell. An investment strategy that only addresses buying is half a strategy. Half strategies seldom work for long.
No. 4: “You can’t time the market.” This brings to mind musician Miles Davis’ famous comeback. Someone once complained to him that, “You can’t dance to your music.” To which, Davis replied, “No, you can’t dance to my music.”
Investors who know how to read a stock chart can time their exits and entries, and they can time the market itself. An investor won’t hit the exact high or low but can get close enough to be useful.
No. 5: “The stock market is all luck.” Some brilliant scholars have made the argument for pure randomness (though they never apply it to their own field of study). If the market were all about luck, no amount of experience, portfolio management techniques and study would improve an investor’s performance. Yet, virtually every veteran investor can look back at mistakes made 15 years ago that they would not make today.
There is a learning curve in the stock market. But there is nothing to learn in a luck-based venture, such as a lottery.
No. 6: “Insiders have too many advantages over the individual investor.” Actually, the individual investor has one very important advantage over the pro. He can enter and leave a position quicker and with less price disruption. Also, stock information is much more widely available today than it was before the internet.
No. 7: “The market is never wrong.” This has its roots in the time-honored advice not to fight the trend. Generally, that’s good advice. But the market can be temporarily wrong. When a stock reacts to a rumor that’s false, the market must correct the error. Often that is done very quickly, which is why trying to outsmart the market is a loser’s game.
A climax run is another situation where the market’s enthusiasm can be wrong.