Dictionary of Received Investment Ideas

My reply to Riccardo’s comment on my previous post got me thinking about putting together a “Dictionary of Received Ideas” for Investments.

The inspiration for my idea comes from the Dictionary of Received Ideas or Le Dictionnaire des idées recues as it is known in French. The book is a short satirical work by the famous Gustave Flaubert, author of the classic novel Madame Bovary.

Despite being a member of the middle class, Flaubert developed a strong dislike of the beliefs, attitudes, prejudices and misinformed opinions of the bourgeoisie. He collected them for over 30 years, eventually compiling a dictionary to lampoon “the silly remarks that almost give me vertigo”.

Here are some examples:

ABSINTHE. Extra-violent poison: one glass and you’re dead. Newspapermen drink it as they write their copy. Has killed more soldiers than the Bedouin.

MELON. Nice topic for dinner-time conversation. Is it a vegetable or a fruit? The English eat it for dessert, which is astonishing.

OLD PEOPLE. When discussing a flood, thunderstorm, etc. they cannot remember ever having seen a worse one.

ITALIANS. All musical. All Treacherous.

The ideas listed in Flaubert’s dictionary were “received” from other members of the middle class and simply believed. Nobody seemed to examine the logic (or otherwise) of these statements, nor did they make any attempt to check the facts.

In other words, the accuracy of the beliefs was less important that the fact that everyone believed them. Social proof was the only proof that mattered.

I’m guessing that this, together with hearing the ideas repeated over and over, is what annoyed Flaubert so much.

This raises two interesting questions:

  1. Are there “received ideas” when it comes to investing?
  2. If so, what are some of these received ideas?

The answer to the first question is a definite yes. Investors are confronted by these beliefs on an almost daily basis. Sometimes I feel that I can relate to poor Flaubert, especially when these ideas are repeated by people that should know better.

What are some of these received ideas? Here are a few examples (in no particular order):

  • Higher GDP growth results in higher equity market returns.
  • The “illiquidity premium” is a given.
  • Its possible to know the reason why the stock market rose or fell on any given day.
  • Paying attention to economic forecasts will help you to be a more successful investor.
  • Older investors, at or near retirement, should always have a higher allocation to fixed income investments.

The tricky part with some of these received ideas is that they often contain a kernel of truth that either depends on a certain set of conditions being present, or that has been misconstrued or misunderstood.

So rather than simply dismiss the received idea, it’s better if we can identify the point where most investors have gone wrong in their understanding of or their application of the idea.

For example, here’s an article that I wrote several years ago for Investment Magazine explaining why higher GDP growth doesn’t necessarily translate into higher equity returns.*

I think it would be more interesting to hear from you, my readers. What are some of the received ideas that you’ve encountered? Please share them by commenting on this post. Together we can put together a Dictionary of Received Investment Ideas.

* For those of you that are more interested in this topic, I suggest that read the following papers:

Dimson, Marsh and Staunton, Credit Suisse Global Investment Returns Yearbook 2014, pages 18-29.

Dimson, Marsh and Staunton, Credit Suisse Global Investment Returns Yearbook 2010, pages 13 – 19.

MSCI, Is There a Link Between GDP Growth and Equity Returns?

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4 comments

  1. Here’s one received investment idea: “The big institutional super funds in Australia produce good returns for their investors” In reality they are several percentages points short (per annum!) of where they could be.

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    • Thanks Jerome.

      Would you like to provide any proof to demonstrate that this is a recieved idea?

      And if it is just a received idea, then why do you think it has spread so successfully?

      I would be interested to read your thoughts.

      Like

  2. How about – The best industry/super/investment funds are the funds with best return (especially annual tables). Evidence of received idea = industry awards .. Instead, better metrics should be risk adjusted performance or probability of meeting (retirement) objective -eg. income.

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    • Thanks Michael,

      Your comment raises an interesting topic. I agree that performance is easy to compare but tells you next to nothing about the future.

      The challenge is in helping the average person to understand what risk is. Also thinking probabilistically doesn’t come naturally to most people.

      I wonder if there’s a way to communicate these topics that’s more intuitive?

      Like

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