If pushed, I would say that I'm a stock-market contrarian. In other words, I prefer to ignore conventional wisdom and go against the herd.
I've looked at and rejected most of the popular myths surrounding investing and building wealth. Here are seven pieces of market mythology which I remain skeptical about:
1. Investing is gambling
If only I had a pound for every time that I've heard this old chestnut.
It's true that investing and gambling share one thing in common: that your return will be variable, and largely depend on a combination of luck and skill. However, gambling comes with a built-in bias for failure. For example, the National Lottery and scratchcards pay out less than half of ticket sales in prizes, which means that punters playing these games lose more than £2.5 billion a year.
On the other hand, investing in companies is not like buying lottery tickets. If a company thrives, this generally leads to higher share prices and bigger dividend payouts, thus enriching owners (the shareholders). Hence, although there is no guaranteed 'positive expectation' from investing in shares, at least there's no certainty of loss in aggregate.
2. Shares are for the rich
It's entirely true that rich people are far more likely to own shares than the general populace. Also, the rich tend to have a lot more of their net wealth tied up in equities than the rest of us. Perhaps they got rich from buying shares, inherited them, or simply recognize that owning stakes in solid businesses is a good idea.
However, you don't need to be rich to buy shares. Thanks to the Internet boom, low-cost share-dealing services and ultra-cheap index-tracking funds are now well within reach of the masses. Indeed, with charges as low as 0.3% a year and minimum monthly contributions of £10+, index trackers should be at the heart of any investor's portfolio.
3. You need to be clever to get rich
Absolutely not! Indeed, I've met a whole host of highly qualified and academically talented people who have made little or no personal wealth. In the words of investment idol Warren Buffett, "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ."
In my view, to succeed as an investor, you need determination, diligence, and patience much more than you need raw brainpower. These traits are far more useful than a high IQ when it comes to turning income into capital over decades.
4. Shares go up in the long term
This is undoubtedly true, but the key is what you mean by "long term." Indeed, as leading economist Lord Keynes once remarked, "In the long term, we are all dead."
Even over very long periods, shares can markedly underperform cash and bonds. For example, between 1969 and 2009 (almost my entire life so far), US investors would have been better off in bonds, not shares.
Here's another practical example: I've been investing since the spring of 1987, when the FTSE 100 was around 2,000. Today, the blue-chip index stands around 5,400. Thus, over 23 years, the Footsie has risen by 170%, which equates to yearly growth of 4.4%.
Even after adding in 2%-3% for dividends, the average investor would probably have matched or beaten the market simply by saving in cash over my adult life so far. So much for shares beating cash!
5. Good companies make good investments
Broadly speaking this is true, as many great companies of the modern age -- the likes of Apple, Coca-Cola, Microsoft, Procter & Gamble and Tesco -- have produced mega-returns for patient shareholders. However, there are exceptions to every market rule, with many award-winning and highly regarded companies proving to be awful investments in recent years.
For example, in the past decade, shares in Vodafone (NYSE: VOD) are down 54%, versus a 15% decline in the FTSE 100. Over the same period, BP (NYSE: BP) is down 29% and HSBC (NYSE: HBC) is down 27%. Thus, big, iconic companies don't always produce equally big returns for shareholders.
6. Elephants don't gallop
"Elephants don't gallop" was Jim Slater's explanation for why he prefers small-cap investing.
Alas, over the past 10 years, the FTSE SmallCap Index is down 17%, versus a 15% decline for the FTSE 100 index. In addition, FTSE 100 members pay much higher dividends than smaller companies, so you'd have been much better off in blue chips than tiddlers over the past decade.
Also, if elephants don't gallop, what about the 300% rise in the share price of Reckitt Benckiser over those 10 years? Other 'galloping elephants' include Diageo (NYSE: DEO), up 84%; Unilever (NYSE: UL), up 83%; and Tesco, up 76%. Clearly, some elephants do have a turn of pace.
7. Shares hedge against inflation
This is yet another popular belief that doesn't bear close scrutiny. At times, the stock market fell steeply while inflation rose. At other times, the market has risen while inflation has been falling. Overall, there appears to be little correlation between inflation and the stock market.
For instance, the FTSE 100 is roughly at the same level today as it was at the beginning of 1998. However, since then, the cost of living has risen by 40%, as measured by the Retail Prices Index. Thus, even after taking dividends into account, shares have been a poor hedge against inflation since the late Nineties.
That's seven down and seven to go, so watch out for part two of this article...
More from Cliff D'Arcy:
Cliff owns shares in GSK.
