Incite -- (v) 1: give an incentive; 2: provoke or stir up; "incite a riot"; 3: urge on; cause to act
Tuesday, May 25, 2004

Isn't there some Johnny Cash song...
Written by: Beck

...about watching a good man die?

So anyway, I just read an article which I really want to shred to pieces. It just seems to call to me, demanding a thorough defenestration (I love that word, so piss off if you don't like my usage). The thing is, though, the author absolutely does not deserve it. I've never even heard of the guy. He's just another market pundit writing another puff piece on stock markets because, well, he's got to put food on the table somehow, and morons love reading about things like "3 Stock Myths Debunked".

It can't possibly be easy to make a career out of being a market pundit. First of all, the market news niche is relatively small, and while everyone with two grand and an online trading account to play with fancies himself some sort of market whiz just waiting to emerge, most people can't stand listening to stories about Alan Greenspan for all that long. Second, market news, more than any other sort of news, is of the factual variety. Very high signal:noise ratio. The need for pundits just isn't there to the extent it is in, say, sports, where the pundits bring the dry bone facts to life. Finally, there's already an in-built talking-head mechanism for market news in the form of the small army of hundreds of Wall Street analysts. What's more, those analysts know exactly what they're talking about. So how does an aspiring market pundit make it happen? By writing crap for the likes of MSN Money.

Many of the problems in "Time to shatter these 3 market myths" seem to be a failure to understand how various concepts relate to each other, and I don't know if it's because the writer is out of his depth, because he's lazy, or because he felt compelled to dumb things down for his audience. At any rate, I've written so much already, I'll be brief from here. If you want greater depth, read the rest, figure it out for yourself, or leave a comment.

Myth No. 1: High P/E stocks are riskier than low P/E stocks

Many market mavens, supported by a flood of academic research findings, tell us that portfolios made up of stocks with low price-to-earnings ratios, or P/Es, outperform high P/E portfolios. Even the few who don't go along still advise that when something goes wrong, high P/E stocks will fall further than low P/E stocks.

Yet, at least for me, applying those axioms to specific stocks doesn't work. If anything, high P/E stocks outperform low P/E stocks.
Well, there's nothing factually with what he's said, the problem is that there's no real myth here. There's the fact that high P/E stocks are more volatile than low P/E stocks. I don't know how Mr. Domash defines risk, but most academics agree that it is intrinsically linked to volatility. But that's not the big problem with this "Myth". The big problem is that Domash appears (if you read on in the original article) to be launching into a discussion not so much of risk and P/E ratios, but rather, he's launching into a discussion of the differencee between value stocks and growth stocks. Regardless, he doesn't seem to have much of a point at all.

Myth No. 2: Beta predicts risk and returns

We hear endlessly that Beta predicts the risk, and possibly the future performance of a stock, mutual fund or whatever.
Please, don't read any further into No. 2. His entire point is that stock betas aren't correlated to performance. Further he makes the tired old argument that historicals don't predict future performance. No one thinks they do. Historicals DO, however, give you an insight into the underlying volatility of a particular stock.
Myth No. 3: High short interest helps stock prices
That was a myth? Since when? Under the right circumstances, a high short interest can produce an amusing event known as a short-squeeze. Under ordinary circumstances, however, high short interest is indicative that a stock is fucked. Proper fucked. Who doesn't think this?

The final bit I'll quote for you is just to give you a more visceral sympathy for how painful it must be to write stuff like this. I'll bet he cried while typing this.
If these three adages were true, we could all quit our day jobs and get rich. Unfortunately, it's not that simple. Stocks move up when the market realizes that their fundamental outlook is improving and vice versa. There are no shortcuts. The more you understand your stock's business and its future prospects, the better you'll do.

Update: Hucklebuck informs me that the song I was thinking of was "Folsom Prison Blues," which contains the fantastic line, "I shot a man in Reno, just to watch him die."

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John Beck

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