5 Myths About Investing and The Stock Market

Here are 5 myths about investing in the stock market explained. The insights in this post will change a traditional view on investing, trading stocks or ETFs and about how the stock market works.

Myth #1: The way to forecast if a stock is a good buy is by studying the graph.

Behind door number one is one of the most common myths I see today. Many people will look at the stock’s price graph and if it’s been going steadily up over a period, they will buy the stock. The belief is that the past price and upward trend on the graph indicates success and that the stock is likely to continue trailing upwards. But the past doesn’t equal the future and the price of the stock is not equal to value of the business behind the stock. 

If you’re currently buying stocks this way, a good way to make a small change is to add in a few steps before you buy the stock: Check the company behind the stock. Is it profitable or reporting a loss? Does the company have debt? And does the management have integrity? Click the links to dive more into these topics or search my blog for additional information. I also suggest learning more about stock market investing by reading books, watching educational content, or investing in a course – that’s how I learn best and maybe it’s the same for you.

 

Myth #2: You must be an expert to invest in stocks

Some people never get started because they believe they need to be experts to invest. But you don’t have to be a math professor, have a high IQ, or know anything about graphs to start buying stocks. What you need is common sense. Behind a stock there’s a business and just like with your own finance you want to make sure it’s a healthy company behind that stock ticker. If you hear on the news that a stock is falling because the company is going bankrupt, your common sense is the key. You can decide if it’s a good idea to buy the stock or if you would be gambling with your hard-earned money. “The stock is cheap. It could turn around go up” seems to be the rationale in certain social media groups. There are ways to invest with much more certainty of the outcome – buying stocks doesn’t have to be risky bets.

I’m here to share what I know about common sense investing and a good place to start is this article: Which Stocks Will Be Trendy in The Future? 

 

Myth #3: Buying ETFs is a safe investment

An Exchange Traded Fund (ETF) is a group of stocks and buying one ETF means that you buy all the stocks in that fund. Think of it as a bag of jellybeans. You have all kinds of different flavors of stocks in the fund – some are delicious, others can be bitter to swallow. Good stocks and bad stocks can be pooled together.

Some ETFs are highly risky and speculative, and some are not. A lot of people don’t know that it’s fairly easy to see what’s in the fund, but all you have to do is find the ETFs' Factsheet and here you have a lot of information about the ETF. Is the bag full of fruit flavored jellybeans or have you gotten a bag with weird and gross flavors? The information is in the factsheet. 

Another caveat about ETFs that’s worth being very aware of is the passive investment bubble that Warren Buffett mentioned at the annual meeting back in May and Mike Burry wrote about in a Tweet in October 2022. Michael Burry is one of the few people who predicted the 2008 subprime home loan default, and you can read his story in Michael Lewis’ brilliant book “The Big Short” (also a movie – Michael Burry is portrayed by actor Christian Bale). Burry is predicting a new bubble and this time it’s with ETFs. 

Tweet from Burry: “Difference between now and 2000 is the passive investing bubble that inflated steadily over the last decade. All theaters are overcrowded and the only way anyone can get out is by trampling each other. And still the door is only so big.”

Tweet from Mike Burry (now deleted)

Many people have invested in ETFs – it’s an incredibly popular form of passive investing. Due to the popularity a situation could arise, where masses of ETF owners want to sell their ETF holdings and everyone trying to get out of the investment at the same time. We could potentially face a new financial crisis as everyone tries to exit and the price of the ETFs will drop like an elevator. We don’t know what the future holds but this is one of the pain points that the best investors warn about these days.

*Disclosure: I do not own ETFs. I’m disclosing this because it could indicate a bias and it’s important for you to know.  

 

Myth #4: You Must Buy Stocks in Different Companies to be Diversified

Though diversification is important, it’s even more important to know if you really are diversified or living in an illusion of being diversified. Owning stock in multiple industries or buying ETFs does not necessarily mean that you’re diversified. Read on and I will explain more.

An example hot off the press: In order to diversify you’ve bought 3 different ETFs. That way you believe that you’re covered in case the stock market crashes. A student in my investing course had gotten this advice from a friend, who had suggested three ETF’s she should invest in. When I opened the ETFs' factsheets, I saw that 78% of the portfolios in these ETFs was the same stocks (ex. Apple was a large holding in all 3 funds). In this case the student was under the impression of being diversified but learned what to look out for. PS: The ETF Factsheet is easy to find and will give you the overview you need.

John Maynard Keynes was a successful investor and throughout his career he concluded that you could own too many stocks.
A great investor knows a lot about the stock and the business behind it. To keep track of 100s of businesses is difficult. Keeping track of a handful of healthy businesses is easier.
Keynes said to his critics who were mocking him for not being diversified: “I was suffering from my chronic delusion that one good share is safer than 10 bad ones.”
Read more about the illusion of being diversified.  

Myth #5: Hire a Financial Advisor to Invest for You

This one is one of the lessons I learned myself early on. We sought advice from an independent financial investor and followed their advice. After becoming financially literate I found out that we paid high fees for an actively managed fund that had the same stocks as a well-known stock index. I could’ve invested in the index and paid far less in fees.

The thing about financial advisors is that they get paid no matter how the fund performs, and they don’t necessarily have your best interest at heart. No matter how the fund performs, you pay a fee. If they lose your money on bad bets, you still have to pay them their fee. It’s like you going to work and getting paid no matter whether you perform on your tasks or not.

You have your own best interests at heart. Read investing articles and you can learn a lot about investing in a short period of time. Decide to become a master of your own finances. And you’ll be able to see which funds are gold and which you should stay far away from. Once you learn how to invest, you’d want to do it yourself and not let anyone invest for you.

 

Are you looking for an instructor that can help you simplify investing in stocks? Feel free to reach out to me or book 3 training sessions for beginners.