Money and happiness | Six myths about investing

In Money and happiness, our journalist Nicolas Bérubé offers his thoughts on enrichment every Sunday. His texts are sent as a newsletter the next day.

One of the themes I like to talk about here is the counter-intuitive side of financial investing: it never ceases to fascinate me.

It’s hard to accept, but almost everything our brain tries to make us do with our investments is a mistake. The Stock Exchange is where light analyzes go to die.

Here are six popular investing myths.

“It pays to invest in the industries of the future”

When it comes to investing money, it’s tempting to try to identify tomorrow’s winners. For example, the most popular topic currently is artificial intelligence (AI). Ask at a dinner party if investing in AI companies is a good idea, and you’ll basically get 100% “yes.”

However, the Wall Street Journal recently reported that of the 17 largest U.S. AI equity funds, only 3 beat the S&P 500 over the past year. This means that 82% of these funds underperformed compared to a simple fund composed of the 500 largest companies in the United States.

Investing is difficult because the winners of a period are virtually impossible to identify in advance. And those who do manage to do so rarely manage to repeat the feat without failing over the course of an investing career, which can span six or seven decades.

“ETFs are distorting the market”

We have heard for several years that the popularity of exchange-traded funds (ETFs) creates “distortion” in the markets, and that the largest ETFs artificially drive up the value of the companies that comprise them. Well, the S&P 500 is up 11% year to date, while its largest company, Apple, is down 8% during this period. And index investors also don’t seem to have managed to save Tesla, also one of the main components of the S&P 500: the value of the automaker has fallen 40% since last summer – while the S&P 500 multiplies the highs records since that date.

“The market is risky because it is very concentrated”

It is fashionable to note that the American market is “risky” because it is dominated by a handful of very profitable companies, such as Apple, Microsoft, Alphabet (Google), etc. What if I told you that the American market is one of the least concentrated in the world? The 10 largest companies in the United States represent 34% of the stock market value, while it is 47% in Canada, 49% in the United Kingdom, 57% in China and 58% in Germany, according to calculations by financial author Ben Carlson. Market concentration is nothing new: in 1900, 63% of the value of the American market was dominated by the railway industry, according to calculations by the firm UBS.

“Markets that reach peaks are fragile”

In fact, because developed country markets are historically up about two out of three years, hitting record highs is not uncommon. And one year’s returns tell us nothing about the next year’s returns. Summits should cause yawns, not cold sweats.

“Strong economic growth is good for the stock market”

This one undoubtedly wins the prize among the myths that we all accept without even thinking about it: contrary to what one might believe, there is no link between GDP growth and stock market returns.

In the study What Matters More for Emerging Markets Investors: Economics Growth or EPS Growth? ^⁠1 published in The Journal of Portfolio Management In 2022, authors Jason Hsu, Jay Ritter, Phillip Wool and Yanxiang Zhao analyzed data from 1900 to 2019 from 15 emerging market and 21 developed country stock markets. They realized that GDP growth did not predict stock performance.

As we can see, South Africa experienced a rather low average annual increase in GDP from 1900 to 2019, which did not prevent it from being at the top in terms of stock market returns.

How to explain this situation ? The researchers note that part of the explanation is that expectations for high growth are already reflected in high stock prices, and therefore gains made afterwards are less impactful for shareholders.

Also, a growing economy will see several companies appear, which will not necessarily result in enrichment of shareholders of existing companies.

Finally, the researchers write that much of technological progress produces lower prices after inflation for consumers rather than high returns for shareholders. “Technological progress renders part of existing capital prematurely obsolete. So, higher GDP growth does not necessarily translate into higher profits. »

“A concentrated portfolio has greater growth potential than a diversified portfolio”

A survey from the University of Chicago Business School^⁠2 carried out in 2019 among 40 recognized economists asked their opinion on the following statement: “In general, in the absence of inside information, an equity investor can expect to obtain better results by holding a well-diversified passive index fund and at low cost than by holding a few shares. Answer: 93% of economists agreed with this statement, and 0% disagreed (the total does not add up to 100% because some participants did not respond). In short, unanimous result. Or, in the comment left by Richard Thaler, winner of a Nobel Prize in economics: “Investment 101”.

You (really) don’t like tipping

Almost unanimous reactions to my text last week on tipping: you (really) don’t like tipping.

Étienne writes:

“Tipping is a form of disengagement on the part of the restaurateur: he refuses to pay his employees at a suitable rate, and delegates this task to customers, while releasing himself from his responsibilities in terms of the quality of service. »

Nicole writes:

“I do not agree with the reasoning that tipping is used to pay someone to complete a task for us. The price of the product/service IS payment for completing that task. This is why a meal at a restaurant costs more than the ingredients for said meal at the grocery store. »

A reader writes:

“Being a hotel concierge, I am one of the people who receives tips. In the case of concierges, few people know that it is a tipped job, yet we work miracles to satisfy our customers’ desires. For example, we have to organize wedding proposals, this requires planning and attention to detail, yet few people leave us a tip, or at least a thank you for the work done. People in tipped jobs have lower base salaries since they rely on tips. It is true that hotel people have the power to advance access to rooms or even offer higher level rooms… The nicer you are, the more services you will have. »

1. Consult the study (in English)

View the survey