THE SEVEN MYTHS OF INVESTING

MYTHS ARE widely held beliefs that are mistaken as truths. For example, for long periods of time people believed (and acted) as if the world was flat.

- 

Below are similarly misguided assumptions that exist in the financial markets that I have come across during my investment career. I have found the reality that lies behind these to be invaluable in guiding my investment decisions.

Myth 1: There is no free lunch

While I subscribe to the aphorism, "If something is too good to be true, it probably is", I believe there is one free lunch in the financial markets, the impact of which is often understated. This has often been referred to as the eighth wonder of the world-you've guessed it, it's compounding.

Everyone can benefit from compounding. It is not a zero-sum game, and it does not require any special insight. The benefit of compounding can best be illustrated by the following example.

If you can achieve a return of (say) 12% a year from your equity portfolio, it will effectively double in value every six years. This means that for every R100 you put away at age 25, you will have R5 279 when you retire at 60.

If you delay your savings until you turn 30, your R100 will only be worth a comparable R2 674. So you see, it's the last double that has a material impact on your pension savings, which means that you should start saving as early as possible to benefit from the impressive power of compounding.

Myth 2: Earnings drive share prices

While this may be true in the short-term, valuation ultimately trumps short-term earnings expectations.