Investing is one of the most misunderstood topics out there and that can be a real danger as mistakes made in the stock market can result in real and painful (sometimes devastatingly so) losses.
To help clear the air, here are three of the most common investing myths – in no particular order – and why they are wrong.
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Myth 1: “Investing is gambling”
The stock market is just a platform for us to buy and sell shares of different companies. How we use it is up to us.
Some like to abuse the market by treating it like a casino to scratch their gambling itch. Just as a pair dice can be used to play a fun game of Monopoly or be used for gambling, investing is gambling only if you make it so.
As long as we make prudent decisions and stick with the view that every share is a piece of a business, which can be valued based on its assets, management, profits, cash flows, etc., investing can hardly be associated with gambling.
Myth 2: “The stock market is rigged and only insiders can profit from it”
This myth is mostly repeated when we hear stories of insider trading and how investors get badly burnt due to following hot tips that went wrong.
But here’s the thing, a retail investor would still have been able to do reasonably well if he or she had simply stuck to a plain vanilla market index like the Straits Times Index (SGX: ^STI), a collection of 30 of some of Singapore’s largest listed businesses.
Since its inception in 2002, the SPDR STI ETF (SGX: ES3), an exchange-traded fund which can be bought by retail investors easily and which tracks the Straits Times Index, has generated a total return (inclusive of reinvested dividends) of 8.6% per year.
That’s way better than the interest on fixed deposits and even the yields on many bonds. And yet, it’s entirely and easily achievable for any retail investor who had zero insider knowledge. All the investor needed was patience.
Myth 3: “Stocks that go up must come down” / “Stocks that go down must come up”
There are many investors who hold the view that stocks that have appreciated will eventually fall and that shares that have fallen by a great deal should rebound in the future.
This can’t be further from the truth.
Over the long run, share prices of companies reflect the fundamentals of the companies’ businesses. Therefore, as long as a company’s business continues to do well (do poorly), the strong (weak) business performance will act like “gravity” to pull its share price up (down) over time.
The experience of a company like Dairy Farm International Holdings Limited (SGX: D01) is a great example.
Source: S&P Capital IQ
As you can see in the chart above (click for a larger image), Dairy Farm’s share price (green line; left vertical axis) has been climbing over the past decade along with its growing earnings per share (purple bars; right vertical axis).
The stock market is a greatly misunderstood platform for many investors. What I’ve shared are just a few of the many myths that surround it. Once investors realize what’s true and what isn’t, they can start to make better investing decisions.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns Dairy Farm International Holdings.