STREET DOGS

Facts and beliefs rule the markets but produce different effects. Facts are things that are. A fact affects everyone in the same way. Beliefs are ideas about facts, and only affect some people some of the time. It’s important to differentiate between them.

Despite the fact that markets have made significant gains over the past eight years, you are still required to invest on the belief they will continue to do so.

It’s all too easy to mistake beliefs for facts — to take as a fact, for example, the belief that a longer-term investment horizon is always an advantage, or that costs reduce returns, or that asset valuations are mean reverting. A longer-term horizon per se is not always an advantage. The less time spent in the wrong investment the better.

While there is evidence to support the view that a buy-andhold approach is a superior strategy, it’s not enough to put it beyond doubt. How should we reconcile the “fact” that costs reduce returns with the often heard complaint that (expensive), high-frequency trading and (even more expensive) institutional “sway” provide an unfair advantage? And if asset valuations were in fact always mean reverting, we’d never have to worry that a declining stock might not recover.

Does it matter whether it’s a fact or a belief that turns out to be wrong? Yes, for the simple reason that we should readily change our beliefs depending on the facts. A belief is no better than the facts on which it is based, the qualifications of the person expressing it, and their ability to interpret the facts correctly. Investors need to disregard any opinion that does not meet the criteria. Because, as the saying goes, the many things everybody knows often turn out to be wrong.