6 'facts' market bulls are wrong about

Take another look at some of those rules investors are supposed to abide by.

By MSN Money Partner Jul 14, 2014 3:04PM
Image: Stock investor © Tom Grill/CorbisBy Brett Arends, MarketWatch

At the start of the soccer World Cup a month ago, everyone knew, they just "knew," that Brazil was going to walk away with the tournament.

Brazil hadn't lost a major game at home in decades, said the experts.

The Brazilians had the best attack, the best defense, the best team -- the best everything, they said.

And these weren't just opinions. These were analyses. Quantitative Analysts had produced algorithms -- indeed, Proprietary Algorithms -- using vast quantities of data to prove their point. And if you can't trust a Proprietary Algorithm, what can you trust?

Really, what else was there to do but to prostrate ourselves in awe before the quants and begin chanting in worship once again "Algo akbur! Algo akbur!" -- "The Algorithm is Great! The Algorithm is Great!"

Oh well.

So much for the conventional wisdom. So much for the quantitative experts and their spreadsheets.

Brazil's humiliating exit in last week's semifinal 7-1 rout was among the most extraordinary events in World Cup history. No one -- least of all me -- predicted any such thing.

But Brazil nearly exited the cup much earlier. The Brazilians came within inches of being defeated by Chile in the second round, and might, indeed, have lost to Colombia as well in the quarterfinals.

The soccer World Cup is over. But the money World Cup -- also known as financial markets -- continues, as ever.

And while we're on the subject, here are six other things that everyone "knows" to be true. Which actually aren't.

1. 'On average stocks earn 10% a year.'

Actually, depending on the Wall Street marketing department you're listening to, this may be downgraded to 9 percent or upgraded to 12 percent. Regardless, it's total balderdash.

The 12 percent figure is derived from a meaningless piece of statistical chicanery called the "arithmetic mean." It can be dismissed.

Since the 1920s the compound return has been around 9 percent, but this, too, is grossly dishonest. These numbers include phony profits caused by inflation, and one-off gains from an upward revaluation of stocks which, by definition, cannot be repeated.

Bottom line? The best, most honest guess is that stocks are likely to earn you, after inflation, the net dividend yield plus roughly 1 percent to 2 percent. There's some dispute about the net dividend yield because of the question of stock buybacks, but overall we're looking at real returns of maybe 4 percent a year, if we are lucky.

2. 'There's a lot of money on the sidelines waiting to come in to stocks.'

You'll hear this repeated over and over and over again by stock market scalpers.

But there is absolutely no money on the sidelines waiting to come in to stocks. None. Zip. Nada. Rien. How do we know? Easy. Every time somebody buys a stock, somebody else has to sell it.

Think about it.

You've got $100 "on the sidelines" and you want to "put it to work" (yeah) in stocks. So you use it to buy $100 worth of stocks from, say, me. What happens? Before the deal you've got $100 "on the sidelines" and I've got $100 worth of stocks. Afterward you've got my stocks, and I've got your $100 in cash. Back on the sidelines.

3. 'Economic growth will be good for stocks.'

While the economy was flat on its back, the hucksters told you that this would keep interest rates low, and that was good for stocks.

Now that the economy seems to be recovering they'll tell you this is great for stocks, too.

The real problem? There is no link between economic growth and the returns from the stock market. No, really.

From 1968 to 1982 the U.S. economy grew by 50 percent even after adjusting for inflation. Yet over that period investors actually lost money in real terms (even before you count taxes and fees).

The Japanese economy is a third bigger than it was in 1989, but anyone who invested in the Nikkei 225 index back then has lost their shirt.

Economic research has shown that, if anything, the fastest-growing economies have tended to produce lower, not higher, stock market returns.

The U.S. stock market has boomed in the past few years, in large part because the aggressive actions of the Federal Reserve have driven down the short-term costs of borrowing. If the economy picks up the cost of borrowing will rise. Do the math.

4. 'You can’t beat the index.'

It has become a new mantra, almost a new religion: Financial experts will tell you that the market is so "efficient" at setting prices that you cannot outperform the index -- such as the  Standard & Poor's 500 Index ($INX) -- without taking on more risk.

Trouble is, this is wrong.

There is a lot of research showing that over time you could have beaten the index simply by investing solely in "value stocks, namely those which were inexpensive in relation to fundamental measures such as net assets or dividends. You could also have beaten the market by investing in stocks of "high quality" companies, or in stocks with lower volatility, than if you had invested in the standard index.

What people forget: The standard indexes are very peculiar. They are heavily biased toward the most popular stocks, as those have the highest market values. So when you invest in an index fund, a large chunk of your money goes into a few names. Just picking stocks at random, and investing in them equally, has produced better returns than the index.

5. 'U.S. corporate balance sheets are in great shape.'

Really? Perhaps this explains why, according to the Federal Reserve, U.S. (nonfinancial) corporations today owe a record $9.6 trillion -- twice as much as at the start of the millennium, and a rise of 27 percent, or $2.1 trillion, in the last five years. Indeed, so far this year U.S. nonfinancial businesses have been borrowing nearly $10 billion a day, including Sundays.

Naturally, assets can go up as well as liabilities. Some companies, indeed, are holding large piles of net cash -- mainly overseas, to avoid the taxman. But overall, according to the Federal Reserve, nonfinancial corporations now carry credit market debts equal to about 50 percent of their net worth, near record levels.

The equivalent figure in the early 1950s? About 21 percent.

6. 'U.S. households have rebuilt their balance sheets since the financial crisis.'

Sure, why not? Actually, since the start of 2008 households, overall, have slashed their total debts by. er. about 6 percent. Wow.

Oh, and the bulk of that reduction hasn't come from people paying off debts, but from just writing them off. Much of this modest overall debt reduction has come from mortgage defaults, "soft" defaults such as housing short sales, credit card defaults and personal bankruptcies.

And despite that, overall household debts have actually been going up for the past two years. As fast as some people have been walking away from debts, others (or perhaps the same ones) have been borrowing more. Ten years ago, in the bad old spendthrift days before the crisis, U.S. families owed $10.5 trillion. Today? Er. $13.2 billion.

As soccer fans have just been reminded, just because everybody "knows" something doesn't mean it's so.

More from MarketWatch

Jul 14, 2014 7:23PM
He lost me at number 2. Did the article get any better after that? He doesn't seem to recognize that the price of objects (cows, copper, stocks, whatever) tends to go up if more people are lining up to buy them. 
Jul 14, 2014 4:40PM
The so called experts are always getting it  Wrong concerning what will happen in Sports and Markets. They are always frontrunners. They always state the Obvious. This article is actually bringing up some good points. Dismiss it at your own Peril.

Debt and Leverage caused the Great Recession. Yet We have seen Global Debt Soar over 40% since then. The Global Feds are only delaying the inevitable end of over Pump Priming Global Markets. They are the problem. Only when this House of Cards comes tumbling Down will most folks acknowledge that very FACT. By then it will be Far Too Late.
Jul 20, 2014 8:52AM
Another typical MSN Money article.  Lot of words, no substance.  A lot more opinion than fact.
Jul 20, 2014 6:32PM
Very good article, the crux of it is clear. Nothing is worth it's actual value, but it's only worth what someone is willing to pay for it. End of story.
Jul 20, 2014 5:24PM
Number #7  "Things are going to keep going great"
Jul 20, 2014 4:45PM
Hey guys you do know that it is really a bull chit market don't you ?
Jul 20, 2014 3:53PM

7th "Fact Market Bulls Are Wrong About:

       The Bull Market is here to stay..





Jul 20, 2014 7:52PM

And the biggest myth of all (my favorite);  "THIS TIME IT'S DIFFERENT"

Run away, far away when you hear people start using this phrase.

Jul 14, 2014 4:57PM
Anthony is this you using a pseudo name ?

This is just more proof that anyone, including me, can write any pile of crap on the internet and get it published whether it is true or not is irrelevant.

Thanks for another pile , 

Say " Good Night " Anthony.
Jul 20, 2014 9:07AM

The economic crash was caused by people borrowing money that they couldn't pay back.

This administrations response is to prop up the stock market by borrowing money we can't pay back.

I'm sure that will work out just fine in the long run......

Jul 20, 2014 9:08PM
"...there is absolutely no money on the sidelines waiting to come in to stocks. None. . Nada. Rien"  That's strange.  I've been holding $50,000 just waiting for this bubble to pop.  I guess that is considered "nada" to the big players ... but i'll bet there are thousands of people like me. 
Jul 15, 2014 7:48AM

Nice thoughtful article. At least it made me think. I agree with most, but have doubts about #2 Money on the sidelines.

Keeping in mind that our stupid Government has been printing money hand over fist, this is new money and certainly some of it has crept into the economy and isn't a lot of that sitting on the sidelines as new money?

Jul 20, 2014 9:44AM
Myth #7... All market transactions happen free of charge.  WRONG!! If you forget the FEES, you will lose money every time.

Myth #8... Market fluctuations are truly random.  WRONG!  Wealth and dominance are too important to trust to random variability. They must be carefully controlled and planned in advance.

Jul 20, 2014 10:50PM

Brett, at first I thought you were naïve, but then I learned you work for Murdoch, so I'll just assume you are evil.  Your item #1 conflates real and constant dollar analysis in order to intentionally mislead.  Your item #2 is factually incorrect and your example trying to prove your point is juvenile.  Enormous sums of money are sitting in brokerage cash accounts and money market funds waiting for the right time to invest.  Your item #3 is absurd since the primary determinant of stock value is the P/E ratio which improves in a stronger economy (although there is room for substantial short term fluctuations).  Your item #5 is false.  US corporate balance sheets are in great shape and most of the borrowing you are talking about relates to financial engineering done to take advantage of the great balance sheets.


To your credit your items #4 and #6 are debatable.

Jul 20, 2014 9:11PM

its going to start with the bond market, U. S. treasury issues low interest 10 year notes to finance the gov. very few buyers though so the Fed reserve steps in, prints worthless unearned money and buys these bonds up, this keeps our interest rate low on our 17 + trillion dollar debt  otherwise they would have to raise interest rates to entice buyers, when the fed is forced to stop printing money be preparred  for something that will not be good for us

Jul 20, 2014 10:37AM
'moving onto wall street why not take a chance
it's a vulture culture
never lend a loser a hand
just a vulture culture
living off the fat of the land'.

-The Alan Parsons Project
Jul 20, 2014 5:46PM
Myth #1 is the fabricated "evidence" that Kerry is pushing on Russia. Putin is no angel,but he is certainly not stupid.Our CIA has been killing innocent people since 1953 when they overthrew a democratically elected government in Iran and installed that Piece of Sh!t Shah (no wonder the US is not popular there).They were used in the Ukraine to depose that government so that Victoria Nuland could put the current puppet government in place.These evil unelected people will stop at nothing to get what they want,even if a few hundred air travelers have to pay the price.
Jul 14, 2014 3:43PM

Interesting logic but the author is wrong about


2. 'There's a lot of money on the sidelines waiting to come in to stocks.'


He's taking a singular case to disprove a fact about millions of depositors and investors.


4. 'You can’t beat the index.'


Yes, you can beat the indexes by timing the market which a few really insightful investors do.


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