DEMISTIFYING THE GREATEST STOCK MARKET MYTHS

The stock market is the leading source of capital growth and financial wealth. That is where the money is! It’s a prime model of free market capitalism operating on the law of supply and demand. In order for you to buy shares of stock in the secondary market, someone must sell those shares. If the prices rise after you buy, that seller has lost potential profit; you have profited from his mistakes. In essence, you will only profit if others make mistakes and others will profit from your mistakes. So for you to gain from the lost potential profit of a seller, you need to have information, these stock market myths will attempt to show you or strike your conscience on why you do not profit from the mistakes of others.

The Myths are as follows;

MYTH #1 INVESTING IN STOCKS IS JUST LIKE GAMBLING.

This reasoning causes many people to shy away from the stock market. To understand why investing in stocks is inherently different from gambling; we need to review what it means to buy stocks. A share of common stock is ownership in a company. It entitles the holder to a claim on assets as well as a fraction of the profits that the company generates. Too often, investors think of shares as simply a trading vehicle, and they forget that stock represents the ownership of a company. In the stock market, investors are constantly trying to assess the profit that will be left over for shareholders. This is why stock prices fluctuate. The outlook for business conditions is always changing, and so are the future earnings of a company. Assessing the value of a company isn't an easy practice. There are so many variables involved that the short-term price movements appear to be random (academics call this the random Walk Theory); however, over the long term, a company is only worth the present value of the profits it will make. In the short term a company can survive without profits because of the expectations of future earnings, but no company can fool investors forever - eventually a company's stock price can be expected to show the true value of the firm.

Gambling, on the contrary, is a zero-sum game. It merely takes money from a loser and gives it to a winner. No value is ever created. By investing, we increase the overall wealth of an economy. As companies compete, they increase productivity and develop products that can make our lives better. Don't confuse investing and creating wealth with gambling's zero-sum game.

MYTH #2 :THE STOCK MARKET IS AN EXCLUSIVE CLUB IN WHICH ONLY BROKERS AND RICH PEOPLE MAKE MONEY.

Many market advisors claim to be able to call the markets' every turn. The fact is that almost every study done on this topic has proven that these claims are false. Most market prognosticators are notoriously inaccurate; furthermore, the advent of the Internet has made the market much more open to the public than ever before. All the data and research tools previously available only to brokerages are now there for individuals to use. Actually, individuals have an advantage over institutional investors because individuals can afford to be long-term oriented. The big money managers are under extreme pressure to get high returns every quarter. Their performance is often so scrutinized that they can't invest in opportunities that take some time to develop. Individuals have the ability to look beyond temporary downturns in favor of a long-term outlook.

MYTH #3: BUY STOCKS ON THE WAY DOWN AND SELL ON THE WAY UP.

There’s an old adage that says the way to make money in the stock market is to buy low and to sell high. That, of course, is an irrefutable truth. The only problem is that many investors confuse this bit of conventional wisdom with the assumption that if the price of a stock is going down it is low, and if it is going up it is high. Consequently, they buy stocks on the way down and sell on the way up. There’s hardly a worse thing an investor could do.Stocks are bought on the expectation that they will go up. If a stock is going up in price, it is fulfilling that expectation. When the price is going down, it is denying that expectation. Therefore, it is logical to buy a stock when its price is going up.

MYTH #4: FALLEN STOCKS WILL ALL GO BACK UP EVENTUALLTY.

Whatever the reason for this myth's appeal, nothing is more destructive to amateur investors than thinking that a stock trading near a 52- week low is a good buy. Think of this in terms of the old Wall Street adage, "Those who try to catch a falling knife only get hurt."Suppose you are looking at two stocks:

XYZ made an all time high last year around shs 150 but has since fallen to 100 per share.
ABC is a smaller company but has recently gone from shs 15 to 20 per share.

Which stock would you buy? Believe it or not, all things being equal, a majority of investors choose the stock that has fallen from shs. 150 because they believe that it will eventually make it back up to those levels again. Thinking this way is a cardinal sin in investing! Price is only one part of the investing equation (which is different from trading, which uses technical analysis. The goal is to buy good companies at a reasonable price. Buying companies solely because their market price has fallen will get you nowhere. Make sure you don't confuse this practice with value investing, which is buying high-quality companies that are undervalued by the market.

MYTH #5: HAVING JUST ALITTLE KNOWLEDGE ,BECAUSE IT IS BETTER THAN NONE IS ENOUGH TO INVEST IN THE STOCK MARKET

Knowing something is generally better than nothing, but it is crucial in the stock market that individual investors have a clear understanding of what they are doing with their money. It's those investors who really do their homework that succeed. Don't fret, if you don't have the time to fully understand what to do with your money, then having an advisor is not a bad thing. The cost of investing in something that you do not fully understand far outweighs the cost of using an investment advisor.

MYTH #6: STOCKS ARE A HEDGE AGAINST INFLATION

For many years stockbrokers and mutual fund salesmen have been saying that stocks are a hedge against inflation. Well, they are and they aren’t. It depends on how you look at it
A true inflation hedge is one that goes up in value with higher inflation...like a house, or gold, or collectibles. But, the fact is, inflation is the stock market’s number one enemy. When inflation goes up, interest rates go up and two things happen. For one thing, investors say, "Golly, I can make all that money on high interest rate bonds so why should I invest in stocks." So they take their money out of the stock market, and stock prices go down. The second thing that happens is that the cost of doing business goes up. So corporate earnings go down, and stock prices go down.So why in the world would anybody say that stocks are a hedge against inflation? It’s because they can make money in stocks faster than inflation will eat it up. All they have to do is invest in stocks which have earnings growth rates higher than the sum of inflation and long-term interest rates. When they do that, the price of the stock will go up faster than inflation. And they will be whipping inflation by staying ahead of it.

MYTH #7: YOUNG PEOPLE CAN AFFORD TO TAKE HIGH RISK

Of all the myths in the market, this may be the cruelest and the most foolish. Everyone knows that the elderly are not supposed to take risks. They must be very conservative because their earnings power is limited. They can’t afford to lose their money! Well, who decided that young people could afford to lose their money?If any group needed to watch every penny, it’s the young. They need money to start a family, buy a house, buy furniture, save for the future and on and on. Furthermore, young people usually are at the low end of the earnings scale. They have precious little disposable income.Young people have an invaluable asset on their side, however. Time. They don’t need to take risk. They can invest in tried and true companies that make money year in and year out. At 10%/year growth, their investments will double every seven years. By the time a baby is off to college, that initial safe investment has increased by a factor of eight.

When you have time, you can afford patience. Patience pays off in the market

A partially informed investor is about, as effective as a partially informed surgeon; he or she will only hurt themselves and those around them

So Which part of the puzzle do you fit in

BE INFORMED

The Editor,

My Kenyan Money,

Alex Bunde

mykenyanmoney@gmail.com

‘It was a way of life. You'd wake up in the morning, and you'd trade until you had enough money for breakfast. Then you'd trade some more until you had enough for lunch. If you wanted dessert, you kept trading until you had enough for pie. Then you'd trade 5% extra to pay the sales tax. After that, you'd keep on trading to get cab fare home. A lot of guys made a comfortable living doing that.’

The legendary stock trader Leland Filch, known everywhere as the notorious Shmendrick of Wall Street- on stock trading in the 1920s