The 6 biggest investing myths and tips to avoid the traps

We here at Livewire Markets are dedicated to separating fact from fiction; modern-day (investing) MythBusters, if you will. 

We'll be the first to admit we're no Sherlock Holmes. But with our deerstalker cap, pipe and magnifying glass at the ready, we are ready to solve some of the finance world's biggest fallacies.

And who better to crack these codes, than the country's top-rated fund managers, according to Lonsec, Morningstar, and Zenith. After all, these fundies - whose expertise spans global and local equities, fixed income, and property - have arguably seen and heard it all. 

From "Sell in May, and go away", to the death of value investing - we'll shine a light on some of the industry's tallest tales.

And for those not tickled by the thought of busting a myth or two, our league of investing legends will also share some helpful tips on how to avoid the traps and be a better investor. 

What else could you want? 

Fund managers appearing in this series include: 

• Paul Skamvougeras, Perpetual Investments
• Andrew Parsons, Resolution Capital
• Ben Griffiths, Eley Griffiths Group
• Kate Howitt, Fidelity International
• Adam Bowe, PIMCO
• Sam Ruiz, T. Rowe Price
• Simon Doyle, Schroders
• Catherine Allfrey, WaveStone Capital

NB This video and accompanying wire is part of our Top-Rated Funds Series. The series puts a spotlight on some of the country's best funds according to Lonsec, Morningstar and Zenith. The vision below was captured on 18 May 2021.

Edited Transcript

Ally Selby: What's the biggest myth you've ever heard about investing?

Myth #1 - Sell in May and go away

Sam Ruiz, T. Rowe Price

The biggest myth in investing, I think, at least if you look in recent history, is to sell in May and go away. I looked at this over the last decade and it's only worked in three out of 10 years. I think recent history tells you to stay invested.

Myth #2 - Value investing is extinct

Paul Skamvougeras, Perpetual

It's actually recently that value investing is dead, especially in this innovative and disruptive world that value investing doesn't work anymore, and that's not true.

Myth #3 - Real estate is the only asset class impacted by interest rates

Andrew Parsons, Resolution Capital

In our space, it's all about real estate being tied directly to interest rates. The reality is that I've seen real estate performing in the 1980s when you had very high relative nominal interest rates. For us, it's a yield play. 

As far as we're concerned, all investments are related in some way to interest rates. Some are more sensitive than others, but to say that real estate is the only one, or the most sensitive to interest rates and yields, we think is flawed. 

It comes down to real estate fundamentals; supply and demand. When I started out, the narrative was that real estate was a hedge against inflation. Now, it's a yield play. Investors are convenient in the narrative. And what we try to do is just look for the right fundamentals of what you're investing in. More demand from tenants than there is supply, and you'll do okay.

Myth #4 - The stock market is a casino

Ben Griffiths, Eley Griffiths Group

Probably that investing is gambling, like going to the casino. It can be if you approach it that way. But I think if you methodically settle down, follow a process, and invest carefully making the right company, the right management team, it's not gambling, it's investing.

Catherine Allfrey, WaveStone Capital

The myth I hate is that the share market is a casino because I find it quite offensive in terms of the fact that it's my job, and that's what I do every day. I do recognise there is a trading element similar to the casino that can be the share market. And there are, obviously, inflated bubbles that happen through the market. And so, that can put people off. But I think if you do your homework, and do your research into companies, and you follow those quality companies, then it's a very good place to invest your money.

Myth #5 - Markets are always efficient

Adam Bowe, PIMCO

Markets everywhere are always efficient. Having worked for a couple of decades for some pretty extreme market cycles, and for some top-tier active managers, I can say I have lived through plenty of moments when markets haven't been efficient. 

It's not to say it's easy to pick those moments in real-time, but the difficulty in picking those moments is usually down to our own psychological deficiencies and external constraints, whether that's liquidity, risk, or short-term performance. But, certainly, saying it's hard because markets are efficient. I think it's a big myth.

Myth #6 - Share markets only go up

Simon Doyle, Schroders

Equities always go up. Everyone says to make more return you need to own more equities, but there's plenty of periods, 2000 to 2010 for example when equities basically went sideways or down for that decade. If you had a very, very long-term horizon, back equities, if not, I think you just need to be a little bit more circumspect about how confident you can be in equities rising.

Advice on becoming a more successful investor

James Marlay: For those investors that are watching. If there was one piece of advice, a tip, that could help them be more successful, what would that single piece of advice be?

Tip #1 - Think slow

Kate Howitt, Fidelity International

Nobel Laureate Daniel Kahneman wrote a book called Thinking Fast and Slow. He says that we evolved to try to conserve energy and make fast decisions, snap decisions with a lot of assumptions. And that's really good if you're trying to outrun a tiger, but if you're trying to make money from investments, then you need to be thinking slow. 

You've got to find out for yourself what individual processes or habits you need to have so that when you're actually making those decisions, you're in slow thinking mode. Now, we don't like to think slow, because it's very resource-intensive and we evolved to be lazy. And so, it's a lot easier to just make fast decisions. It feels really good, but I think, personally, the one important thing is to find a way for yourself to get into your slow thinking mode.

Tip #2 - Find your own style

Andrew Parsons, Resolution Capital

There's more than one way to skin a cat. What I mean by that is that I don't think it's right for anybody to be too prescriptive. I think you've got to find a style and an objective of what you're trying to achieve from your investing. 

If you want to gamble and try and pick the next Google, Amazon, Apple, etc. you should. But for every one of those, I can tell you there are 50 failures. It's very good that the market picks the winners and forgets the 50, 100, 1000 that fail. If that's what you want to do, be realistic, but also, as I say, there are other ways of investing for the long term which provides a more secure path to wealth. And that's the way we look at it.

Tip #3 - Understand what you're investing in

Paul Skamvougeras, Perpetual

Always do your own work and try and understand what you're investing in, try. I see too many people today, everyone's a Bitcoin trader - and everyone's made money on Bitcoin by the way - I don't know who the loser is, but everyone's made money on Bitcoin. And it seems like everyone is treating it as an investment. But when you actually ask people, "Can you explain it to me?" There's not a lot behind it.

I think it's very important to understand what you're investing in. Do a little work. Also, understand what your risk tolerance is. Are you open to volatility? Are you a risk seeker or are you more risk-averse? That's also really important to consider.

Tip #4 - Avoid it if you don't understand it

Sam Ruiz, T. Rowe Price

My advice for investors, next decade, how can you be more successful is very simple. If you don't understand something, don't invest in it. If you want to understand it, want to invest in it, find someone that does.

Tip #5 - Learn to hold the line

Ben Griffiths, Eley Griffiths Group

I think one of the many things I've learned along the way, and it was drummed into me at an early age and it's so true. And that is: in matters of finance, and funds management, one's got to be patient. Investors need to be patient. They need to take, in some cases, a longer-term view.

In other cases, when a story is momentarily derailed, you need to hold the line and be patient with a company that is well-managed, that's conservatively funded, and well-structured, and not overly risky in terms of how it's funding its operations. If you're buying a business or a stock, that is exactly that; that technically, if you look at a chart, looks like it's technically behaving well, that has a sound model and a sound market opportunity, then you should hold it.

So it's really the virtue of patience. Very easy to take a quick profit and move on. Very easy to lose patience with a stock, because the bloke next door has bought a stock that's doubled in the last week, and yours hasn't. I mean, there are natural human inclinations to want to jump off, but you need to be patient, and you need to sit and nurse stocks. And, who knows, sometimes if you wait long enough, you will get multiples of your money, rather than just a quick doubling of your money. I think the most underestimated attribute for a good investor is patience.

Tip #6 - Don't worry about what everyone else is doing

SImon Doyle, Schroders

If your objective is to do a certain thing, focus on doing that. If you're looking to achieve a particular rate of return, build a portfolio that does that. Don't worry about what everyone else is doing. Don't worry about missing out on something that was better. If you're achieving, through the strategy you implement, what you've actually set out to achieve to meet your goals, then I think that will deliver you the best results over the long run.

Tip #7 - Move on if a company's growth prospects falter

Catherine Allfrey, WaveStone Capital

Our big philosophy is the fact that share prices follow growth in company earnings. So be very focused on earnings drivers for companies. What is the earnings growth outlook for that company? And if you see any of those drivers wavering, or you see, obviously, a downgrade, then move on, find something else to invest in.

Tip #8 - Think globally

Adam Bowe, PIMCO

The world is a big place, so cast your net widely and broadly. When you have a look at investors' portfolios, there's a very large degree in Australia of home bias in portfolios. I think that's going to hurt over the long term from here, particularly when you look at that home bias and what it's exposed to. 

A typical portfolio that we might see on the retail or wholesale side would be a portfolio of cash, term deposits, a couple of hybrids, some blue-chip high dividend-paying funds, and probably an investment property. That's a really typical portfolio. At face value, you look at that and you say, "That's pretty well diversified. You've got some property equities. You got bond-like instruments in there." When you really take a look at that, that's a hugely concentrated bet on the Aussie housing market. It's either directly through the property, or indirectly through the banks, that fund them. 

Having that home bias is a really concentrated bet on an asset class, you have to ask yourself, "Am I that highly convinced that the prospective returns from that are that attractive that I should be looking elsewhere and diversifying that?". I think it's a real opportunity in Australia. 

The one piece of advice I would give would be the world's a big place, diversify that home bias risk. Portfolios can be attractive that construct really attractive income streams and risk-return objectives without having that massively concentrated home bias bet.

Australia's 100 top-rated funds

Livewire's Top-Rated Fund Series gives subscribers exclusive access to data and insights that will help them make more informed decisions. Click here to view the dedicated website, which includes:

• The full list of Australia’s 100 top-rated funds.
• Detailed fund profile pages, with data powered by Morningstar.
• Exclusive interviews with expert researchers from Lonsec, Morningstar and Zenith.
• Videos and articles featuring 16 top-rated fund managers.