Full disclosure – I have no way of truly confirming this is investing’s greatest myth but I certainly see a lot of financial press coverage of this area and an implications the myth exists and is widely believed. The myth is that stock market returns correlate to the growth or decline of the economy. Other than over very long time horizons this is completely false. This article dispels the myth based on a historical review of GDP (Gross Domestic Product) and stock market growth in the US.
~ LINK TO ARTICLE ~
“One thing I love about customers is that they are divinely discontent.
Their expectations are never static – they go up!”
~ founder of Amazon ~
I just finished reading Richard Thaler’s book called “Misbehaving” which reviews the history and studies done on Behaviourial Economics – how human behaviour (regarding financial decisions) effects the economy. Richard coined a phrase called “myopic loss aversion” which suggests the more we look at our portfolio, the more we are likely to focus on the losses (due to the constant but temporary volatility) the more we see losses, the more we experience loss aversion and the greater the chance we’ll do something typically not best for our long term success. If you are looking at your portfolio more than once a quarter and finding you get upset at what you see, I recommend you read this article from Ben Carlson.
I’m a believer in the value approach to investing – not that I don’t also recommend growth investments – its just the value approach makes more sense to me and, historically has outperformed. This link is an interview with Charles Brandes, one of the great value investors of our time:
“Despite being one of the longest and strongest bull markets of the post-war era…the U.S. stock market is still at worst fairly priced and even cheap relative to its post-war trendline. By comparison, the other two major bull markets since WWII (i.e., during the 1950s–60s and again in the 1980s–90s) both ended only after U.S. stocks rose significantly above trend for several years…
“Indeed, the total U.S. stock market is currently priced comparably to the early-1950s or the early-1980s. Perhaps equally important, even the popular S&P Index is not nearly as richly-priced today as it was in the 1960s or the 1990s.”
~ Jim Paulsen ~
“Is the trend a friend?”
August 31, 2016