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Investor Information: Market Myths

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There are many myths surrounding the stock markets. Below are some of the more popular or common myths surrounding investments on the Securities Exchange.

Myth 1

You will be lucky if your investment in shares does better than inflation. [ More... ]

According to research done by Prestige Bulletin, a high profile stock analysis publication issued to their subscribers, the JSE overall index achieved 17% per annum compound growth over the past 22 years since 1985.

We know of no other asset class investment that would have given one a better return over the same period.

In fact, depending on the value content of the stocks contained in a portfolio, it would be very unlikely to do worse than inflation over an extended period of investment. [ Less... ]

Myth 2

Most investors on the stock market cannot even succeed to outperform the All Share index average. [ More... ]

Any portfolio based on good value rated stocks and where acceptable investment and trade disciplines were adhered to, will without a doubt outperform the All Share index average over any extended investment term. [ Less... ]

Myth 3

There is too much risk involved with investments on the stock markets. [ More... ]

The risk is not contained in the Securities Exchange as the risk actually relates to what investors base their investment decisions on and what trading decisions they take as well as what investor behaviour they display during the term of such an investment.

If one does what the smart investors do (Refer "Smart Investors") one can almost totally manage the so called risks involved.

One should also remember that "risk" is a relative term or concept. Even in the "very safe" money market asset class investments there is a higher than average risk of not beating inflation over an extended period of time which is very much the same as showing a negative yield on one's investment. [ Less... ]

Myth 4

The stock market is very complex and it should be left to the experts who understand the intricate ways how these markets operate.
[ More... ]

There is very little complexity in normal trading on the securities market. If you have a reliable source to assist you in identifying real value and you adhere to the most basic investor behaviour as shown under "Smart Investors" you almost cannot go wrong.

It is interesting to know that the research conducted by the team during the past years clearly indicated that the so called "experts" are probably not as reliable as many think they are.

The research findings seemed to indicate that they may be wrong with their predictions more often than they are right.

After all, at the end of the day, the most important thing to understand is that nobody cares about your money as much as you do.
[ Less... ]

Myth 5

One could easily lose all one's money if one gets it wrong on the stock markets. [ More... ]

If you invested in good quality stocks with solid embedded value and you can afford to wait a while there is almost no way in the world that you could lose all of your investment.

In fact, for one to lose almost all one's money on the stock markets one would have had to be invested in other stock market derivative products and instruments and even then almost all one's "calls" would have to be totally wrong.

Research has shown that if you complied with only two critical principles of the stock market, namely buying into value and exercising enough patience, it is almost impossible not to make a profit. [ Less... ]

Myth 6

It is more tax effective and safer to use Collective Funds (Unit Trusts) if one wants to participate in stock market investments.
[ More... ]

Some reasons why this myth is just that:

      As to the tax angle, those that spread this myth assume that you are taxed as a trader or speculator or that you sold the stock
       within three years from buying it.
      Even so, it still may not be more tax effective as the tax on profits still has to be paid.
       With collective funds the tax gets paid at a different place in the chain by the collective fund who earned the profits. So you get
       your share of the profits after they deducted the tax they had to pay on it.
      The impact of compounded costs, such as intermediation fees charged by collective funds can be devastatingly negative to the
       eventual end value of your investment. (Refer Tyranny of Costs).
      Because of the substantial size of most collective funds they are unable to invest in some smaller, lesser known jewel stocks that
       may contain excellent value.
       There are simply not enough of those shares available for the funds with their substantial financial resources and volume needs
       to buy on the market.
      It also takes them considerably longer to achieve a desired position with a specific stock, again due to their portfolio sizes and it,
       therefore, also takes much longer to sell such a stock if they have to.
       This means that they, on average, buy at a higher price than you would and they also, again on average, sell at a lower price than
       you probably would. [ Less... ]

Myth 7

Rather than taking one's chances with the stock markets it is much safer and there is also more potential for growth in investing directly into physical property and other real estate opportunities. [ More... ]

Make no mistake, physical property as an asset class is not the worst investment you could make.

Whilst a bit tricky to fairly assess, it seems that an investment made in a portfolio of sound listed property companies on the JSE would have comfortably outperformed most direct investments made in other physical property investment opportunities during the same period.

Example:

A portfolio of the six most popular listed property stocks (Apex-hi, Grayprop, Hyprop, Liberty International, Octodec and Spearhead) created in 2000 and cashed in during 2006 would have provided a compound annual return of almost 29% per annum.

It is very doubtful that anybody who invested in more than one physical property could have obtained a better return over the same period.

It is also important to realise that the dividends earned in the above portfolio from these stocks during the term would in all probability have been more than the rent collected from physical property bought for rental purposes.

Apart from the above, the things an investor in physical property should really be concerned about are the things, such as:

      The high costs involved in buying and selling a property (could be as high as 15%)
      The expenses in owning and maintaining such a property (rates, repairs, etc.)
      The problems one may experience with rent collection
      The legal hassles one may experience with tenant eviction
      The physical damage and property neglect often caused by tenants
      The potential difficulty in selling the property if you wish to do so

Instead, if one invested in listed property on the JSE none of the above problems apply.

You can sell when you want to, there is no maintenance, rates, insurance or any other expenses involved and the total costs involved in such a transaction would probably be less than 2% of the value involved. [ Less... ]

Myth 8

There is very little benefit in hearing good news that may influence the price of a stock as it already would have been priced into the share price by the time you hear it. [ More... ]

Research showed that this is only partly true and that stock prices still often respond a lot even after the information became commonly known.

The most probable reason for this is the fact that share prices are mostly influenced by the volume activities of the big players and even if they heard the news first, it still takes them time to achieve their new desired position with the particular stock.

More importantly, one should not confuse news with market hype or market noise.

Unless the news relate to the fundamentals and business activities of the company it should be seen as a probability factor and this only forms part of the total equation involved in predicting future performance of a company and it, in any case, often only benefits the short-term trader. [ Less... ]

Myth 9

Stock movements are unpredictable and share prices move at random, you may as well throw a dart at the names of the different stocks for selection.
[ More... ]

Few things can be further from the truth.

There is not much hope for anyone using the above approach to beat another investor on the markets over an extended period of time if such an investor uses a tested strategy based on homework done, value, potential and timing.

The primary reason being that with the "dart board" approach you have no insight to any odds and very little, if any, influence on the probabilities.

Identifying solid promising companies with great performance prospects is a science and it has very little to do with luck, unless you want to define "luck" as where homework and opportunity meets. [ Less... ]

Myth 10

It will cost a fortune to employ or obtain the services of an expert team of financial wizards and enterprise analysts to reliably assess the embedded value and prospects contained in companies that one may want to consider for investment. [ More... ]

As unlikely as it may sound, you can now obtain such a service from the Valana team at a cost of less than the price of a newspaper or a soft drink for an annual report on each company that published a financial statement during the year within 24 hours after the financials have been published.

Warren Buffet is rumoured to once have commented on the term of an investment: "If you want to enjoy sitting in the shade of a tree it would have had to be planted a long time ago". [ Less... ]