The Little Book of Market Myths
Summary
Ken Fisher and Lara Hoffmans take a set of widely held investment beliefs and argue against each with data. The format is one short chapter per belief.
The myths addressed include: that bonds are safer than stocks, which Fisher attacks by pointing out that safety depends on horizon and that bonds have produced long periods of negative real return; that a high dividend yield provides reliable income, where he restates his argument that investors need cash flow rather than yield; that high price-earnings ratios indicate an expensive and dangerous market, where he shows that the historical relationship between starting valuation and near-term return is far weaker than assumed; that a weak dollar or a strong dollar reliably determines equity returns; that high unemployment causes poor market performance; that trade deficits harm the economy; that government debt levels predict market outcomes; and that volatility itself is risk.
The method is to present historical data contradicting each belief. The book's weakness is that Fisher sometimes attacks a crude version of a belief and treats the refutation as settling a more sophisticated version, particularly on valuation, where the evidence for long-horizon predictive power is stronger than his short-horizon tests suggest. He also has a commercial interest in keeping clients invested. The general discipline of testing widely held beliefs against data is the right one and the book applies it consistently.
Key takeaways 7
- Whether bonds are safer than stocks depends entirely on the holding period, and over long horizons the ordering reverses.
- Starting price-earnings ratios have weak predictive power for near-term returns, whatever their relationship to long-horizon outcomes.
- Investors need cash flow rather than yield, and selling appreciated holdings produces it without concentrating in high-yield securities.
- Currency direction does not reliably determine equity returns in either direction.
- High unemployment is a lagging indicator and does not predict poor equity performance.
- Trade deficits reflect capital inflows and do not indicate economic weakness.
- Fisher sometimes refutes a crude version of a belief and treats the sophisticated version as equally disposed of.
Who should read it
Individual investors who want widely held market beliefs tested against historical data, weighted for the author's commercial interest.
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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