Debunkery: Learn It, Do It, and Profit from It
Summary
Fisher and Hoffmans set out fifty beliefs about investing that they argue are wrong, testing each against long-run data.
The format is uniform: state the belief, present the data, explain what the data shows instead. The beliefs addressed include that bonds are safer than stocks, which they test over long horizons and against inflation; that a high price to earnings ratio means the market is expensive and will fall, which they show has weak predictive power; that high dividend yields provide safe income, which ignores the total return and the risk of dividend cuts; that a rule allocating bonds by age is sound, which they argue ignores the investor's time horizon and needs; that budget deficits, trade deficits or high government debt cause poor market returns, none of which the historical relationships support; that a strong currency is good for equities; that small capitalisation stocks always outperform; that stop-loss orders limit losses; that market timing based on presidential terms, calendar effects or technical indicators works; and that high volatility predicts poor returns.
The recurring analytical points are that a belief widely held is already reflected in prices and therefore cannot produce excess return; that correlations people assume exist frequently do not when tested; and that investors need long-horizon growth more than they need short-horizon comfort.
Fisher's firm manages money for individuals and its business depends on clients remaining invested in equities, which aligns with most of the book's conclusions. The data presented supports the arguments but is selected by the authors and the tests are not always specified precisely enough to check. Several of the debunked beliefs are straw versions rather than what informed holders actually claim. The general method, of testing a widely held belief against data rather than accepting it, is sound regardless.
Key takeaways 7
- A belief widely held about markets is already reflected in prices and therefore cannot produce excess return.
- Bonds are not safer than stocks over long horizons once inflation is accounted for.
- High price to earnings ratios have weak predictive power for subsequent one-year returns.
- Budget deficits, trade deficits and high government debt have no reliable relationship with subsequent market returns.
- Allocating bonds by the investor's age ignores time horizon and cash needs, which are what should determine allocation.
- Stop-loss orders convert a temporary decline into a realised loss and do not protect against gaps.
- Correlations investors assume exist between economic variables and market returns frequently disappear when tested.
Who should read it
Individual investors who act on widely held market beliefs and want them tested, noting the author's business interest in the conclusions.
About Ken Fisher
Founder and Executive Chairman, Fisher Investments; Forbes "Portfolio Strategy" columnist 1984-2016
A long, public money-management record plus Super Stocks, which introduced the price-to-sales ratio and outlived its news cycle.
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Common investing beliefs, such as bonds being safer than stocks, tested against data.
Recommended by: The Barefoot Investor
Where it sits in the reference 2
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