Strategy

There are numerous fallacies in investing. For example, while there are many investors dedicated to market timing, clear-eyed research has shown it to be a consistently losing strategy. Another fallacy is one that we call, “action equals alpha.” This is where investors, having chosen an investment based on sound criteria, will sell that investment upon receipt of news or information that they believe makes the investment no longer valuable. Again, research shows this to be a losing strategy; staying true to one’s original thesis is consistently the better course.

Another investor favorite is a reversion-to-the-mean strategy of buying companies because their valuation is relatively low, compared with that company’s own valuation history. The goal is that over time, the stock will rise as the current valuation “reverts” upward to the historical average. But looked at over a multi-year period, this strategy too has shown to be lacking.

Do you think that better-known, more recognizable stocks out-perform less-known ones? Actually, it’s been shown that the opposite is true:stocks with no media coverage outperform stocks with high media coverage by 3 percent per year after controlling for commonly recognized risk factors.

There are some fallacies that are almost unique to investing in high-growth companies in general and technology stocks in particular. One popular fallacy is that the “dot-com” bubble created too many companies, which failed at higher-than-average rates. However, peer-reviewed empirical research shows that the opposite is in fact true: the survival rate for Internet-based business models was far higher than the previous average for newly created companies.

How about the strongly held belief that a high-tech company spending more than its competitors on research and development will out-perform? According to a comprehensive study by the consulting firm Booz Allen Hamilton, it’s simply not true – neither the company nor its shareholders meaningfully benefit.