The 4 Biggest Myths about the Stock Market

Unfortunately sometimes the stock market gets a bad rap. Some people that are just getting started in the stock market and investing hear the rumors from jaded traders. They may hear the bad news coming from the television about how volatile the market is and how no one is possibly making money in this type of market, no matter what type of market it is. There are several stock market myths that unfortunately have begun to become so real in investors’ minds that they are scared away from investing. Here are a few of those myths.

Myth #1: What Goes Up Must Come Down and Vice Versa

Often, new investors get pulled into thinking that the stock market is a zero sum game and a price from yesterday or 2 years ago will be reached again. Take the recent market events for example. Certain stocks reached to double or triple their normal trading price and have not gotten back up there since. Some people are buying into the market thinking that these stocks will hit those prices again but there is no guarantee that they will. I have a friend that bought into a mobile phone company expecting their fortunes to recover and the price to go back up. The price has been steadily declining since. Fortunately he made the decision to sell out with an adequate stop loss. There’s no reason to think that stocks that used to be high will get back to their previous levels. There is also no reason to think that any stock has a reason to drop. I have another friend that repeatedly shorts a popular technology company and gets burned everytime. The stock does not have to drop. The price may correct from time to time but the price may not drop significantly.

Myth #2: Only Big Players Make Money

It is also believed that only hedge funds and big players like Bershire Hathaway can generate consistent wins because the have the power to control the stock price. Even if the big players all agree to buy a stock, the overall market which is made of many players, can dilute the power of the big players. It is possible to generate a return in the market if you take the time to do the research like the big players. That is the only difference between you and them.

Myth #3: Everyone Loses and No One Can Beat the Market

This is a huge myth. If no one can beat the market, how did Warren Buffett turn his paper route money into millions of dollars? How did George Soros become one of the most well known traders? And there are countless others that make a living from investing in the stock market that you would never know about. It is possible to beat the market, but first you have to believe that you can. Making smart choices and taking the time to learn everything you can will help you earn positive returns.

Myth #4: It’s Impossible to Time the Market

This is a popular myth that unfortunately is widely believed. Timing the market involves waiting for the opportune moment to buy or sell. I think the main reason that this myth continues to gain believers is because many people don’t understand the basics of timing the market. It doesn’t have to be an extreme level of trading where you only buy at the bottom and sell at the top. That is not possible. Picking tops and bottoms is not something even an algorithmic trader can do. But it is possible to time a trade. If you’ve been following a stock for a while and you know that you will continue to buy into the stock, you can make it a point to buy on a day when the overall market is down. This is a way to time the market. When you are ready to sell, you may want to sell when the market has rallyed. This is also considered timing the market.

What do you think? Have you fallen prey to some of these market myths?

This post was written by Latisha.


The 4 Biggest Myths about the Stock Market — 28 Comments

  1. Nice work on the myth busting, Stocks are really no different to anything else, it takes time and patience to make money. Leave day trading to the pros, buy solid stocks and hang on to them, it will all work out over time.

  2. I do think the big players have an advantage. They get access to more detailed information, they can make trades that can swing momentum, and can execute their trades faster. I’m not a fan at all of high frequency trading which many of the big firms use.

  3. #1 has some empirical truth to it actually. Historically, market entries at times with low Shiller PEs have outperformed times with high Shiller PEs. In other words, there is somewhat of a pull towards a consistent long term valuation for stocks. But it’s a pretty slow and noisy process.

    #2 is definitely a myth, but the big boys do have some tools beyond just research. They also have various technical tools, and execution capabilities that the average trader lacks. Plus of course education from proven winners and experience.

    #3 is sort of a myth. About 90% of active retail traders do lose money. This is known from the records of bankrupt brokers that have been exposed in open court. But the number isn’t 100% – you can learn enough to win consistently. It’s not easy though.

    #4 is just straight up myth.

    • The noise in the interim is what puts off many new investors I think. If you look at a chart in the short term and see big movements but then zoom out to a longer time frame. Those movements that used to look big are just tiny blips.

  4. I wonder if that mobile phone company happens to be run by a Canadian duo that are ruining the company and failed miserably at trying to expand into sports ownership?

    Educating people, like busting common myths such as these, is a good thing, and something that can we can use more of in general. Unfortunately, there are a lot of people who are simply afraid of investing in stocks (or just so tight with their money that anything which isn’t guaranteed is seen as bad). I know someone who was so skittish, she called her father literally 10 times in an afternoon because one of her holding was falling and she was worried about losing all the money that was invested.

    • Ha! I’m sure you know the exact one I am referring to.
      Controlling emotions when investing is so important. If you are that crazy about each price tick then you must have too much money in.

  5. Great post, the myths you mentioned are very widely believed, I used to believe most of those myths. I began keeping track of stocks that I wanted to buy but didn’t and checked those stocks every six months or so, I found that about half of my stocks did great (over 20% gain) while the other half didn’t (about 10% or more losses). You can definitely profit, but you have to do your research

    • Research is really the backbone to any good investing strategy. Sometimes the leg work is not worth it though if you don’t have the time to keep up with it.

  6. The idea that it is impossible to time the market is just ridiculousness, but then again trying to apply that century old neoclassical economics to the real world usually is 😛

  7. Latisha, while I agree there are always exceptions, I think there is robust data suggesting that market timing and consistently beating the market are not reasonable expectations for MOST people. Mutual fund managers with a ton of resources still have off years and have historically underperformed the market. Even Warren Buffett feels most people would be better served indexing. There are always going to be rock stars, but that doesn’t mean that the majority of people will ever be rock stars for a variety of reasons.

    • Mutual fund managers are the ones that make these myths so believable. Their performance sucks at best and they charge fees that usually eat into whatever profits would have been made.
      There are plenty of individuals that could do much better if they were able to do the research.

  8. Generally, I believe in the efficient market hypothesis that states you can’t time the market. However, this theory also acknowledges exceptions to the random walk that allow energetic and astute investors to profit from market inefficiencies. It’s a shame I’m a buy and hold kind of investor.

    Another great article LaTisha!

    • Thanks Hunter! I’m more on the side of the weak efficient markets than strong. I believe with proper technical and fundamental analysis you can get pretty darn close to tops and bottoms. There were several managers that saw the housing crisis coming because of various signs they were paying attention to. For me it’s more about educating the masses about how to do it the right way.

  9. I used to be an investment banker and I cannot tell you just how much people have the wrong idea of stocks. It is vital people educate themselves on any investment they make that way they make an educated decision. More important, the most important concept I would try to teach anyone is the importance of diversification, not only in their stock portfolio but in all their investments. I have a little bit of everything although my niche is real estate rental income properties.

  10. Hi Latisha, Actually, the empirical research is solid against the success of timing the market. But, there are always exceptions to every theory, but it still does not disprove the overall theory.

  11. Great post LaTisha. I liked your point about taking the time to research like the big boys. Many investors get fooled into thinking that trading is easy and a shortcut to riches. It actually does take time and hard work. Too many get rich stocks products I suppose.

  12. Interestingly enough, I recently read somewhere (I wish I could remember, but I know it was a reputable publication) that those who time the market actually perform better than those who don’t invest in the stock market at all. Now, if you’re selling ALL of your holdings when you think the stock market is up and getting back in when you think the stock market is down, then you’ll probably get some pretty abysmal rates of return. But investing relatively consistently and attempting to put your money in on down days and sell certain positions on up days probably isn’t the worst thing you could do with your money.

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