MarketWatch Posts the Most Deceptive and Dangerous Financial Headline – EVER! Here's Why

I was shocked when I saw the following headline as the lead story on the front page:

Why I Think the Headline is Deceptive and Misleading

[The above] MarketWatch headline feeds into the anxiety that is being felt by many people that have not participated in the (mostly paper) gains generated by the most recent stock market rally. This anxiety has two interrelated sources:

1. Greed: People become frustrated and jealous when they feel that they are “missing out” on stock market gains being achieved by others.
2. Intellectual: The conventional wisdom – assiduously promoted by the investment industry – is that investors should be fully invested in stocks at all times. Investors that have deviated from this dogma are prone to feel insecure and even guilty.

Investment industry propaganda has successfully inculcated into the investment culture of the U.S. the idea that every moment that a person does not own stocks (every single stock in existence, in fact), is a potential opportunity to enrich themselves that they are squandering. Lottery promoters promote the exact same idea: every lottery ticket that is not purchased (for every lottery in existence), represents an opportunity to win a lottery that is lost…

Seduced By The Lottery

It is, of course, trivially true that if you do not play the lottery, you cannot win the lottery but the question that intelligent people should be asking is not whether it is possible to win the lottery by playing the lottery, but whether it makes economic sense to play the lottery at all. Whether or not you should “play” the lottery or the stock market is not a function of whether it is “possible” to win. Of course, it is possible to win. “Possibility” is not the issue; probability is.

From a strictly economic point of view the decision about whether or not you should play the lottery is a function of the expected return. Expected return is calculated by weighing the probabilities of gains and losses. If the value of the expected gain scenarios (multiplied their probabilities) exceeds the value of the expected loss scenarios, (multiplied by their probabilities) then playing the lottery makes economic sense.

Home Delivery Available! If you enjoy this site and would like to have every article posted on www.munKNEE.com (approx. 3 per day of the most informative articles available) sent automatically to you then go HERE and sign up to receive Your Daily Intelligence Report. We provide an easy “unsubscribe” feature should you decide to opt out at any time.

As it turns out, playing the lottery is the textbook example of an activity that has a negative rate of expected return. People that play the lottery, on aggregate, will lose. This is guaranteed. Furthermore, in a true lottery, the probabilities of gains versus losses are perfectly distributed in an even and random fashion. There is no way for a person to “play” the lottery in such a way as to make the expected returns of buying a lottery tickets positive. The expected return of purchasing lottery tickets is always negative, no matter how many tickets are purchased, when where or why. Therefore, from a strictly economic point of view, playing the lottery is utterly irrational. Thus, economically speaking, contrary to what the MarketWatch headline implies, not playing the lottery is, in fact, the only way to “win.”

Seduced By The Stock Market

A fundamental difference between the lottery and the stock market is that:

• the expected return of playing the lottery is always negative whereas
• the expected return of investing in the stock market can be positive but – particularly relative to the expected returns from investments in bonds or cash instruments – is not always positive, by any means.

Indices and index ETFs will have negative expected returns over given time-frames if valuations are extremely high and/or projected earnings growth rates are very low or negative. At those particular times…buying stocks is no less economically irrational than purchasing lottery tickets, from an economic point of view [but] that does not mean that money cannot be made in the stock market when expected returns are negative. Individuals can and do profit from investing in stocks even if the expected returns over a given timeframe are negative. The same is true of playing the lottery or playing slot machines. These latter two activities always have negative expected returns yet people can, and do, win money during given time frames playing the lottery and playing slot machines.

One of the main reasons that people play slot machines and play the lottery is that they graphically witness people collecting jackpots. People that witness this feel that by not playing, they are “missing out.” Under these circumstances people are emotionally very susceptible to the message: “If you don’t play, you can’t win.” Spurred on by the greed impulse and the aforementioned flawed logical argument, people are lured into committing economically irrational acts – i.e. playing games of chance that have negative expected returns.

The exact same set of emotions and flawed arguments drive people to invest in stocks even when expected returns are negative. That is how investment bubbles are formed. In a bubble, people are not properly calibrating the probability of gains against the probability of losses. In a bubble, people are simply focused on one side of the equation (potential gains) and the fact that, “if you don’t play, you can’t win.”

Conclusion

Stock market investing is economically irrational – in the same sense that playing the lottery is irrational – when the expected returns from investing are inferior to the returns offered by safer investments such as cash and bonds. Indeed, I happen to believe that right now is one of those times when the expected returns on stocks are negative relative to the expected returns on cash instruments. I therefore believe that it is not presently wise to be heavily invested in stocks…

My concern in this article is to refute the dangerous and irresponsible claims that people should invest in the stock market because “if you don’t play, you can’t win” and that “those on the sidelines, as in the lottery, stand no chance.” Propaganda, [such as that exhibited by MarketWatch,] that encourages people to always be invested in stocks is irresponsible.

Intelligent and mature individuals need to deprogram in their minds the “cult of equity” dogmas promoted by the investment industry and become keenly aware of the fact that there are times when, in order to achieve their investment goals, people need to refrain from investing in stocks.

Contrary to what the MarketWatch headline suggested, in order to win, investors need to learn when and how not to play in the stock market. Specifically, during times when expected returns are low or negative compared to relatively safer investments such as cash and bonds, investors need to learn to attain the serenity that allows them to depart from the herd and contentedly leave fleeting stock market gains on the table.

*http://seekingalpha.com/article/471941-the-most-deceptive-and-dangerous-financial-headline-i-have-ever-seen?source=email_macro_view&ifp=0  (To access the article please copy the URL and paste it into your browser.)

Editor’s Note: The above article has been has edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

Related Articles:

1. David Dreman More Accurately Forecasts Market Trends Than Most Anyone Else – Here Is His Record

We evaluate here the commentary of David Dreman at Forbes.com regarding the stock market via his archived articles since the beginning of 2001 [and what an accomplished record it is. He is tied for second place with Ken Fisher with a 64% accuracy rating which is well above the 46% rating of a list of 36 of his peers. Jack Schannep is the most accurate at 66%. Below are his market forecasts on specific sectors of the market over the years compared to how well said sectors actually did.] Words: 1706

2. Majority of Supposed Stock Market Gurus Get It WRONG! Here Are Their Scorecards

Can experts, whether self-proclaimed or endorsed by others (publications), provide reliable stock market timing guidance? Do some experts clearly show better intuition about overall market direction than others? [NO is the answer to the first question and YES to the second. Let us explain how we came to those conclusions.] Words:360

3. Understanding Systematic Risk, Modern Portfolio Theory and the Efficient Frontier

Risk inherent to the entire market or market segment is referred to as systematic risk and modern portfolio theory says that a blend of investments has the potential to increase overall return for a given level of risk, and/or decrease risk for a given return that the investor is trying to achieve. The expected risk/return relationship is known as the efficient frontier. [If you have a portfolio of investments then you need to fully understand what all this really means and how you can apply it to your portfolio makeup to enhance returns under any circumstances. Let me do just that.] Words: 1325

4. Should Stocks Be the Cornerstone of Your Portfolio?

There is a common notion that stocks, at least if held for a long-time, outperform other assets [and, as such,] should be the cornerstone of any long-term portfolio. [While that is indeed true,] it is best to focus first on how much you are able and willing to lose (i.e. what risk you are able and willing to bear) when determining the optimal allocation for your portfolio. [Only] then [should you] think about what potential investment returns you might be able to capture. [Let me explain.] Words: 1503

5. Portfolio “Diversification” Can Kill Your Portfolio Returns – Here’s Why

Most investors don’t know anything more about diversification than you “shouldn’t put all your eggs in one basket” [but] spending some time trying to understand the ways you might be shooting yourself in the foot could seriously enhance your portfolio returns and stop catastrophic risk. [There are some advantages to diversification if you REALLY know what you are doing but the shortcomings can go a long way towards killing your portfolio returns. In this article we identify what they are and how best to avoid them.] Words: 1055

6. Motivated Stock Pickers CAN Beat the Market! Here’s How

What hope can there be for motivated stock pickers – no matter how much they sweat and toil – to outperform the low-cost index funds that simply mechanically track the market? Well – in spite of the absurd rise of the Nobel-acclaimed, and highly promoted, Efficient Market Hypothesis that claims that individual investors can’t beat the market – it turns out there is plenty! Just ask Warren Buffett, for one. [Let me explain.] Words: 1574

7. Should Technical Analysis Be Ignored? We Think So – Here’s Why

The Web is crawling with technical analysis (TA)…[and,] given its popularity, [begs the questions as to whether or not there] really is something to it. [Based on our research,] the short answer is no, not really, at least not in developed markets like the US or the UK… Furthermore, most of the popular TA indicators that are bandied around are nonsense jargon and should be ignored as useless noise. [Let us explain our position.] Words: 2143

8. Extreme Investing: Do Leveraged ETFs Belong in Your Portfolio?

Some analysts and commentators are warning that this year (2012) could match or surpass the dire conditions experienced in 2008 with the promise of more turbulence from the Eurozone, further political wrangles over dealing with the U.S. budget deficit and a potential host of problems in emerging market countries such as a possible Chinese banking and real estate crash. [While you] should fear plummeting stock markets…there are actually some interesting ways to play the downside or hedge your portfolio. [Let me explain.] Words: 990

9. Don’t Invest in Mutual Funds! Here’s Why

The amount of evidence stacking up that…mutual funds…do not provide value for their investors is just staggering…While there are certainly signs that the public’s tolerance of excessive fees and executive pay is falling, the likelihood of significant structural change in the finance industry is still remote. Given such a backdrop the probability remains that investors in funds will, on average, continue to underperform their benchmarks. So what is an investor to do? [Read on!] Words: 830

10. Value Investing: The Practical Application of Benjamin Graham and Warren Buffett’s Principles

While the average amateur investor may be excellent in their own career field, it doesn’t mean they know what to invest in, or how to pick stocks. In fact being very good at your field can give you the false sense that whatever stocks you pick or your broker picks for you must be good, because after all, you picked them and you picked your broker — and you’re smart so, no doubt, those stock prices will go up. Unfortunately, the smart and talented stock-picking neophyte is not investing at all but speculating. Words: 924

Articles on Timing the Market:

1. Ride the Market Waves With These 6 Momentum Indicators

It is hard to know what to buy or sell let alone just when to prudently do so. Thank goodness there are indicators available that provide information of stock and index movement of a more immediate nature to help you make such important decisions. This article describes the 6 most popular Momentum Indicators. If ever there was a “cut and save” investment advisory this is it! Words: 1234

2. Here’s How to Time the Market!

There are many indicators available that provide information on stock and index movement to help you time the market and make money. Market strength and volatility are two such categories of indicators and a description of six of them are described in this “cut and save” article. Read on! Words: 974

3. Yes, You Can Time the Market – Use These Trend Indicators

Remember, the trend is your friend and now you have an arsenal of such indicators to make an extensive and in-depth assessment of whether you should be buying or selling. If ever there was a “cut and save” investment advisory this article is it. Words: 1579

4. Understanding the Patterns, Trends, Indicators and Formations of Technical Analysis

Technical Analysis is the discipline of finding reliable patterns, trends, indicators and formations, mainly in price, for buying and selling assets…To a large degree, technical analysis is a self-fulfilling prophesy [in that] it is effectively an unofficial agreement amongst market participants to impose more order on what would otherwise be more random. The key is to understand which patterns, formations and indicators are widely adhered to, so as to become useful predictors of price action [and this article does just that. Let me explain.] Words: 470