Close
Close

Debunking Stock Investing Myths

by Charles Rotblut, CFA

Debunking Stock Investing Myths Splash image

Investors often underperform by following investing strategies that are based on perception rather than long-term research or reality. Even though there have been many studies showing what does work, several stock investing myths continue to exist. Understanding and avoiding these myths can make a substantial difference in wealth over your lifetime.

Myth: Growth Beats Value

Strong revenue and earnings growth attract attention. This is particularly the case for companies operating in emerging industries or selling innovative products and services. Such growth makes for great news stories and everybody likes a winner. Therefore, it only stands to reason that soaring growth should lead to soaring stock prices.

...To continue reading this article you must be registered with AAII.

Gain exclusive access to this article and all of the member benefits and investment education AAII offers.
JOIN TODAY for just $29.
Log in
Already registered with AAII? Login to read the rest of this article.

Register for FREE
to read this article and receive access to future AAII.com articles.
  
Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/charlesrotblut.


Discussion

Michael Skinner from California posted 7 months ago:

I have found that a "growth at a reasonable price" strategy both lowers risk (by bailing from or not selecting way above average p/e ratio stocks in the first place), enhances returns, generally leads one to emphasize midcaps (at a greater allocation to this area than total market weights) over the long term. Academic research, the performance of the AAII SI Pro screens, and my own 20+ year performance all validate this.

Likewise pursuit of high dividends from slow or no growth companies is a proven losers game. Better to target companies with growing earnings and dividends (even if the dividends are modest).


Charles Rynski from California posted 7 months ago:

Many investors can augment their returns with the use of conservative options strategies having a limited risk.

AAII could serve the interests of its membership by providing insights regarding the use of simple options strategies to achieve higher returns.


Charles Rynski from California posted 7 months ago:

Many investors can augment their returns with the use of conservative options strategies having a limited risk.

AAII could serve the interests of its membership by providing insights regarding the use of simple options strategies to achieve higher returns.


James Harless from Tennessee posted 7 months ago:

I do not feel safe about options trading. I listened to an hour of Ameritrade on topic a couple years ago, and it seems a lot of trades and need a good math expert, and a high risk to me. If there are simple methods, why is it no offered or covered to help members, as suggested?? thanks. jim h. 9-3-2013


Richard Dubitsky from New York posted 7 months ago:

Buy broad based index ETFs and forget the rest. There are very few Warren Buffets or Peter Lynches among us.
The newsletters, CNBC, Wall St Week chattering class did not see the enormous gains ahead in 1987 or 2009.


Walter Johnson from New Jersey posted 7 months ago:

Reinvested dividends combined with regular contributions helps one dollar-cost average and build new positions. Keep your fees low and spread your risk. Keep a watch list that helps you tune out the daily noise.


John Duguid from New Jersey posted 7 months ago:

Always felt that value beats growth but the stock screens tab on this web sites shows that at least for mid and small-cap index, growth has outperformed value since 1998, even on a risk-adjusted basis. This is most noticeable for the S&P mid-caps. Not sure how to reconcile this observation with other studies.


David Smith from Michigan posted 7 months ago:

Thanks for the article and thougthfull comments that I agree with. I thought you might benefit form a lot of modeling I have done on dividend stocks to test my own myths and try to figure out why I was losing money with "high yield" stocks. Besides all the usual metrics like PEG, EPS growth, payout ratio & "moat width", one way to rank dividend stocks, for long term income & growth investing is to add the current yield (say 3%) to the dividend growth rate (say 5% over 5 yrs). So sum = 8% in this case. Let's stick with this particular 8% total example and assume dividend reinvestment through thick & thin.

Theoretically (in a smoothly growing market that does not exist) any stock with a combined yield + dividend growth of 8% should compound equally. For example 3% yield + 5% divi growth would compound at the same rate as 5% yield + 3% divi growth.

Using long term compounding models that account for downs and ups in stock price, I have found that the current yield imparts a slightly higher compounding effect over the divi growth. For example 5% yield + 3% growth would compound at a faster rate than 3% yield + 5% dividend growth during volatility. However I agree with your articles about the dangers of high yielding stocks (unless very well researched).

My experience after doing this for a while has led me to treat the long term dividend growth rate with a somewhat greater weight over current yield. This increases my probability of owning a reliable dividend growth stock.

Taking both theory and practice into account, as a recent retiree looking for relatively secure income + growth, I would prefer 3% yield with 5% divi growth over 5% yield with 3% divi growth.

I was inspired to test these ideas by AAII and in particular from Lowell Miller who you featured in the Journal. (I ended up reading his book The Single Best Investment).

They key to "beating the averages" is to employ above average numerical research and never panic.


Bernard Scoville from California posted 7 months ago:

Don't forget high-yield bonds, if you want a return on your money. You can find them at www.finra.org and fidelity.com.


James Jennings from Virginia posted 7 months ago:

I take it that a value stock is a non-growth stock. What do I look for? P/E less that 5?


Brad Johnson from Ohio posted 7 months ago:

Hi James, there is no exactly right PE. In general, an aggressive growth investor doesn't concern themselves to much with valuation ratios like the PE, PEG, P/sales, Price/book, etc) as these stocks will tend to have ratios which are very high (50, 50, 125, etc...). Valuations metrics are, however, very important to a value investor. whose goal is to by a great company at the lowest price (hence, low PE, low PEG, etc...). Check out AAII's educational area for further info.
As an example, Warren Buffet is more of a value investor while William O'Neil is more of a growth investor.
Hope that helped some. It is confusing at first!

Brad


Joseph Folk from Virginia posted 6 months ago:

Dividend vs. non-dividend paying stocks--is that a typo that non-dividend paying stocks returned only 1.8% from 1972 to 2013?


James D Williams from Oregon posted 6 months ago:

I'm still learning and I really appreciate these articles. Thanks


Dave Gilmer from Washington posted 5 months ago:

Charles,
When you talk about "Paper Losses Don't Matter", you only talk about Stocks, but is this not really true for most any investable asset.

There are some who think just because bonds have some built in intrinsic value that you should not be concerned about paper losses.

My thought is that on any day the asset needs to be sold you will turn the paper losses into real losses, for what ever unexpected reason you are forced to sell.

Even holding a bond to maturity only assures the original guarantee, it does not insure that the money you made over the 10-20 years will even be above zero in real dollar terms.

And if you own bond funds in your 401k or otherwise, they can certainly lose money.

fd


You need to log in as a registered AAII user before commenting.
Create an account

Log In