When I wrote about income strategies, I started by debunking a couple of stock market myths. The first was that reinvested dividends comprise the bulk of stock market returns. (The truth is that both dividends and capital gains are roughly equal in their contribution to equity returns.) The second myth was that dividend growth investing is a good idea. The empirical evidence shows that investing for dividend growth is a strategy that underperforms simply buying the current highest-yielding stocks, which in turn, underperforms other popular value strategies. Dividend growth investing adds complexity and reduces performance. Believing the dividend growth myth has probably cost value investors more money over the years than many more obvious investing mistakes. I showed investors a better way to build an income strategy here.
Stock market myths don't just exist in income investing. Everyone has an inbuilt bias to believing myths. It comes from a gap between how people think they assess new information and how they actually do it.
This is how people believe they will react to hearing a novel fact:
They hear something.
They weigh up the evidence for and against the proposition.
Based on the evidence, they ultimately decide whether it is true.
However, the research of Harvard Psychology Professor Daniel Gilbert and others has shown that the process they actually follow is more like this:
They hear something.
They believe it.
They decide to vet it later, and sometimes not at all.
Anyone who has believed supposed maxims such as ‘eating carrots helps us see better in the dark’ or ‘there are seven dog years to a human year’ has fallen for this cognitive trap. They have heard and believed these statements because they sound plausible, despite no evidence of their truth. They never verified these and simply added them to their canon of ‘knowledge’. It is the same for many stock market beliefs as well. Here are just a few of them:
Myth 1 - They’ve marked my buy as a sell
Everyone likes to track their impact on the world, so investors often look for their buy or sell to show up in the reported trades. In such feeds, transactions are allocated to a buy or sell column. Sometimes, a share purchase will be marked as a sale, and vice versa.…
