Proof? Michel Pireu     | Business Day Tuesday, October 2, 2018
A while back MoneyInc.com published a list of 10 facts that they claimed prove you have no reason to be afraid of the stock market. The immediate concern with such a claim, of course, is that any fact that allegedly proves anything is already something to fear. As Samuel Arbesman points out in his book The Half-Life of Facts, “facts change all the time. Smoking has gone from Doctor recommended to deadly. Meat used to be good for you, then bad, then good again; now it’s a matter of opinion. We used to think the earth was the centre of the universe, it has since been demoted. We have gone from being earthbound to having humans walk on the moon.”

And if you thought there was another category of facts – consisting of those things we can see with our own eyes, that can’t possibly be disputed or possibly change; that our earth, for example, only has one moon – you’d be wrong. Scientists now believe that the Earth has thousands of moons. Some the size of a car, others the size of a washing machine, the majority no bigger than basketballs. Computer simulations of the paths of the roughly ten million asteroids in the Solar System suggest that about 18,000 of them are going round the earth at any one time.

Fortunately, MoneyInc’s facts are somewhat easier to challenge than the number of mini-moons circling earth, given that they’re mostly assertions. Starting with the claim that, “Yes, it’s true that the market crashes from time to time [but] each time the market has fallen throughout history, it’s gotten right back up and become even stronger than before it fell. It’s all a matter of physics after all: anything that comes up must come down, and when you’re down, there’s no other way but up.”

Unfortunately, there are other ways to go when you’re down; you can go down still further or you can stay down.

Besides, relying on history is a little like relying on facts. As it turns out, Vikings didn’t have horns on their helmets. Nero didn’t fiddle while Rome burnt. Marie Antoinette didn’t say “Let them eat cake.” Lady Godiva didn’t ride naked through Coventry. Isaac Newton wasn’t hit by an apple. Einstein didn’t fail maths at school. The Dow Jones Industrial Average (the Dow) that began life in 1885 at 40.94 didn’t look anything like the one that broke through 25,000 earlier this year.

In 1885 the Dow consisted of two industrial companies and ten railroads. Within a few years, that had been expanded to twenty and in 1928 to 30, which continues to be the rule today. But while the number of companies that make up the index hasn’t changed in 90 years the companies themselves have. The editors of The Wall Street Journal decide which companies are included in the Dow Jones Industrial Average. There are no rules for inclusion, just a set of broad guidelines that call for large, respected, substantial enterprises that represent a significant portion of the U.S. economy. Following the credit crisis of 2007-2009, the Dow underwent significant changes as companies failed, were merged, or were simply dropped from the index. Had your portfolio consisted of those companies you would have found that while the “market” has re-bounded your portfolio hasn’t. Likewise, if GE, AT&T, Alcoa, Bank of America, or Hewlett-Packard were a big part of your portfolio they’ve now been replaced by Walgreens Boots Alliance, Apple, Goldman Sachs, Nike, and Visa.

And yet we continue to use indices like the Dow Jones Industrial Average to show that the market always goes up over time.

The next ‘fact’ from MoneyInc as to why you shouldn’t fear the market is that, “Whatever might happen to your money tomorrow, you’ll have to trust that it will be okay in the long run, and if not okay, it might be better. You have to start thinking in terms of decades rather than just months or even years. [That] there’s no need to be afraid of how things will end up tomorrow if you can look forward to the next couple of decades.”

But, again, if you were left holding stocks in Sears, JC Penney, Snap, the Fossil Group or any of the other recent market failures, you’ll find the money you invested, isn’t “okay”, nor will it be in the next couple of decades.

This brings us to the next fact from MoneyInc which is that, “There’s no need to be afraid of losing all your money in one go because you don’t have to invest your money in one place … A well-diversified portfolio is the best way to grow your money and is one of the best ways to protect yourself from losing.”

As Philip Fisher likes to point out, “Buying a company without having sufficient knowledge of it may be more dangerous than having inadequate diversification … Investors have been so oversold on diversification that fear of having too many eggs in one basket has caused them to put far too little into companies they thoroughly know and far too much in others which they know nothing about.”

“Do you really like a particular stock?” says Bill Gross. “Then make the idea count. Good investment ideas should not be diversified away into meaningless oblivion.”

Which means diversification may not be the best way to grow your money. Nor is it sufficient reason not to fear the market.

Three more facts from MoneyInc that “prove” you have nothing to fear from the market: It’s Regulated, stocks beat inflation and, if you’re scared, it’s because you don’t know enough.

“It may be true that regulations can’t protect everyone. That said, regulations do protect a lot of people and their money on a daily basis … They are there for everyone’s benefit.”

Unfortunately, as someone once pointed out, most regulations are the direct result of the concern felt after a major scandal which has either dramatically illustrated the incompetence of the existing law or a significant gap in regulation.

“The only way to beat inflation is to get enough return on your investments [and] stocks may be riskier, but we all know that the higher the risks are, the better your returns will be.”

That’s despite the evidence to the contrary, such as the 2010 study by Malcolm Baker, Brendan Bradley and Jeffrey Wurgler that showed portfolios of low-risk stocks outperformed portfolios of high-risk stocks by a significant margin.

”If you knew the stock market like the back of your hand, you’ll know there’s absolutely nothing scary about it.”

If you ever come to think you know the market “like the back of your hand” you’re delusional. The more you get to know the market, the more (good) reasons you find to fear it. In fact, the only thing to fear would be a lack of fear. To paraphrase Ted Mosby, if you’re not scared you’re not taking a chance. If you’re not taking a chance then what the hell are you doing in the market?
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