As an investor who is very actively involved in the stock market, I hear a lot of unrealistic and outright wrong beliefs regarding the stock market. Sometimes it’s harmless myths being perpetuated, other times it’s dangerously wrong beliefs that lead to terrible advice being given for your portfolio. Here are some very common stock market myths:
Short Selling Stocks Is Anti-American
The Belief: Since you are short selling stocks you are hoping to make money when companies do poorly or go out of business, and thus are encouraging our economy to fail. This would be the opposite of “buying long” in hopes of the stock market going higher in prices and our economy strengthening.
The Truth: Short selling stocks is no different than buying stocks in the typical “long position”. The fact of the matter is that some companies are not bright spots in our economy, and are destined to fail regardless of whether you short sell the stock or not. In rare cases, short sellers can bring to attention scandals within companies and help bring the truth out, such as in the Enron scandal in 2001. Short selling is clearly not anti-American.
When Someone Makes Money, Someone Else Loses It
The Belief: This is the belief that the stock market is a zero-sum game. So when one investor losses money on a stock, someone else has gained that money. In essence, it is the belief that money never grows in the stock market, but is simply transferred from the ignorant to the savvy investor.
The Truth: This is a tricky stock market myth as it can be true in some situations, but in general the stock market is not a zero-sum game. What allows the stock market to go against this belief is that over the long term investors can all profit as long as the stock market is constantly going higher. So even if I lose some money on a few stocks this year and gain on some others, if I invest for the long term I will be profitable as will all other investors since prices are continously going higher over the long term. Only in the immediate short term can the stock market be considered a zero-sum game, where one investor’s loss is another investor’s gain.
Buy And Hold Is The Best Strategy
The Belief: The best way to grow your money is to find stocks you like and sit on them for as long as you can. You can’t beat the stock market, so you might as well just wait it out for many years.
The Truth: Unforunately while this used to be true many decades ago, the truth of the matter is that buy and hold is an extremely poor strategy in this day and age of the stock market. There are few companies these days that provide both genuine value and growth, and that is why buy and hold is an obsolete strategy.
You Can’t Beat The Stock Market
The Belief: Beating the stock market’s own performance is not possible, and those individuals that do actually accomplish this feat will not have their “luck” last for long. Don’t bother trying to outsmart the stock market, just accept that you aren’t going to outsmart the millions of other investors who believe the stock market isn’t beatable.
The Truth: The stock market is able to be beaten in terms of performance! Investors and traders do it every year, and some do it every year consistently. While it is not an easy to accomplish, it is at the very least possible. With that being said, most investors simply don’t have the time to actively manage their portfolios and thus do not have the ability to outperform the stock market over the long term, which is why this myth refuses to die.