Transcription
If you took the last 10 years of S&P 500 stocks and bought the ones whose share price had been falling, the bargains, you would have made a median return of 6.7% over the following year. Whereas buying stocks whose share price have been rising, the expensive ones, that would have returned you 10% over the following year.
I know this because I split every S&P 500 stock into five groups based on how far they've fallen from their 52-week high. These results show the gains for the top and bottom groups. After 3 years, the bargains made 21% whilst the expensive stocks returned 31%. After 5 years, the bargains lag behind at 43% versus 60% for the expensive stocks.
The point here is just because a stock share price is low compared to its historic price does not mean it's a good investment. Whereas buying a great company at a fair to low valuation usually does and valuations can be low even if the share price has risen. As the legendary investor Peter Lynch once said, "Trying to catch the bottom of a falling stock is like trying to catch a falling knife." So the next time a stock's price drops and you see comments yelling buy low or buy the dip, remember this analysis. Share price lows alone give zero indication of a good investment.
In this video, I'll disprove seven more popular stock market myths, not with opinion, but with data like this one, where I pulled 40 years of GDP data alongside S&P 500 returns. Now, common sense says when the economy is bad, stocks should drop, and when the economy is good, well, stocks should rise. But across those 40 years, the link between the two is basically zero. Three of those years were actual recessions where the economy shrank. You might think stocks also crashed, but they didn't. They went up 29% on average, nearly three times better than normal years. Stocks loved the recession years.
And here's the most interesting part. When I shifted the data forward by year, matching this year's stock returns against next year's GDP growth, the link suddenly appeared. There's a strong correlation. The stock market doesn't follow the economy. The economy follows the stock market. The point here is that using economic use to time the market is one of the most common mistakes investors make because by the time the economy looks bad, stocks have already priced it in. And by the time the economy looks good, well, stocks have already gone up. Which means the best times to invest are when the news is bombarding you with economic fear, outright panic. So next time everyone else is terrified about the state of the economy, remember this analysis. A bad economy is more often than not exactly when you should be buying stocks.
But what about people whose actual job is to predict stock returns? Well, I tracked 211,000 individual analyst recommendations for over 1,200 stocks across 5 years. Good sense would say that a strong buy rating from a Wall Street analyst would be a good thing. Which is why it's always wise to check the data because stocks rated strong buy, they would have made you 7.6% over the next year. While stocks rated strong sell, they would have made you 20.1%. The stocks they told you to avoid did better short term. But even over five years, strong buy stocks made 31% whilst the stocks labeled strong sell went on to make 34% gains on average.
The point here is that often by the time an analyst stamps strong buy on a stock, the news has already been priced in. It isn't that analysts are stupid or that the companies are actually bad. It's just that everyone already knows it's a good company. So don't take comfort in those strong buy ratings. They mean a lot less than people tend to think.
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Now, back to the miss. I tracked every all-time high for the S&P 500 since 1993 and measured what the market did 1, three, and five years later. The average man on the street would probably warn you against buying at all-time highs. Who buys the high, right? Wait for the dip. Don't pay the highest price the market has ever seen. But that man on the street has never run the data because one year after all-time high months, the median gain was 16.2% versus the non-all-time high months of just 12.9%. And even after 5 years, all-time high purchases were up 83%. Non-all-time high purchases just 67%.
But how does buying at all-time highs bring better returns? Well, the market goes up a heck of a lot more than it goes down. So, all-time highs are actually very common, and they're usually pretty quickly exceeded by the next all-time high. In fact, if you missed the market drop last April in 2025 during the tariff announcements, you might have thought you'd missed the boat once the S&P returned to new all-time highs just two months later in June. Except you hadn't because in the 10 months since June's all-time high, the market has risen an additional 16% to a new all-time high. Avoiding investing in the market because it's at or near to an all-time high has cost investors more money than buying at all-time highs ever has.
And here's another myth you should avoid. I ran a 10-year test on S&P 500 stocks comparing two strategies. Strategy A, buy and hold. Strategy B, a stop-loss strategy that automatically sold when the stock dropped 20%. Then buys back in a month later. The whole point of a stop-loss is to protect your capital by limiting the downside. So in theory, strategy B should have better gains because you've limited the losses to a 20% maximum. But whilst the buy and hold strategy returned 165% on average, the stop loss strategy returned just 115%. In fact, the stock loss strategy only beat buy and hold 20% of the time, one in five stocks.
Why is that? Well, something new investors in particular often underappreciate is that stocks going down is totally normal. You cannot let it scare you. In fact, over the 10 years of this analysis, 98% of the stocks triggered a stop-loss at some point because they had a 20% decline. That's almost all of them. And in 2019 alone, 66% of stocks dropped 20% within a 12-month window. As Peter Lynch once wrote, "It's equally uncanny how stocks seem to shoot straight up after the stop is hit and the would-be cautious investor has been sold out." Instead of protecting against a loss, the investor has turned losing into a foregone conclusion. Selling a stock because it's dropped more often than not locks in the losses and then locks you out of the recovery.
Look at this chart. Money invested into the Russell 2000 small cap index at the start of the millennium was worth nearly double an investment in the S&P 500 by 2006. For the first six years, stocks with lower total values, small caps crushed it. But then it stopped working. From 2006 to today, large caps have caught up almost entirely. And then look at this. Of every S&P 500 stock for the last 10 years, how many returned 200% or more gains? The answer is 31.8%. Nearly one in three large caps gained 200% at least. But for small caps, that answer is just 21.3%. And in those 10 years, the medium large cap stock returned 108%. The medium small cap stock just 53%. The popular idea that small cap stocks are the answer to huge returns is simply not true. It hasn't been for 20 years and the data shows it.
People look at large cap companies and think, "How could they possibly get any bigger?" But they do. To completely destroy that limiting belief for you, around 10 years ago, right, four of the largest companies on Earth were Apple, Microsoft, Amazon, and Google. They certainly weren't hidden gems, but since then, they've all gained roughly 1,000%. Buying small caps can work. It's just harder. If you can't make strong returns in large cap stocks, you almost certainly can't do it in small caps. It's the equivalent of trying to run a marathon before you've even run a mile. What really works is the same thing that's always worked. Investing in good businesses at fair to low valuations regardless of size. So the next time someone tells you that the real money is in the small caps, remember this analysis. Size doesn't help returns. Quality does.
This is 41 years of data measuring interest rates against S&P 500 returns. Common sense says that when rates rise, lending becomes expensive. So, it's harder for business and consumers to get access to money which stores growth and therefore stocks should fall. And if that's true, the dots on this chart should slope down. But they don't. The link is actually slightly positive. Stock returns, if anything, went up on average when rates rose.
The point here is that the narrative of rising rates kill stocks is one of the most consistent falsehoods in the financial media because in reality rates tend to rise when the economy is doing well and a strong economy is good for corporate earnings. Inversely rates are usually decreased to try and boost the economy because it's doing badly. The legendary investor Ken Fischer has done extensive research on this point where he discovered that rates rises tend to have no negative impact on stock market returns. Summed up by his statement that following Fed rate hikes, stocks have largely been fined 12, 24, and 36 months later, nothing to fear here. So, next time the Fed announces a rate hike and everyone is saying you need to get out of stocks, remember this analysis. The data simply doesn't support the panic.
Here's a big one which trips up almost every investor at some point. I took 11 years of S&P 500 data and ranked every stock by its price to earnings ratio, its PE. I then split them into 10 groups. The cheapest low PEs to the most expensive high PE and measured the returns for each group. In theory, the low PE stocks should be bargains. The high PE stocks, well, they should be overpriced. These were the returns after one year. There's pretty much no pattern. The PE ratio on its own doesn't predict returns.
Now, this isn't to say valuation doesn't matter. It does matter. But whilst almost every new investor focuses in on the PE ratio as their main valuation metric, it's actually proven to be a pretty terrible indicator of value just on its own. And the reason is simple. A low PE often actually just means a struggling business. The market is pricing in the difficulties. A high PE often means the market is correctly recognizing a great business with fast growing earnings.
The point here is that a low P ratio on its own doesn't make a stock cheap and a high P ratio doesn't make a stock expensive. Real value comes from combining valuation with quality, growth, and risk, not from a single number. So, next time you see someone claiming a stock is a bargain or overvalued because of its PE, remember this analysis. A low PE often doesn't represent value at all. But if you want to find out what does represent value, then watch this video here where I walk you through a range of data-backed metrics which help identify great businesses which are crucially trading at fair to low valuations using a way better method than just the PE ratio.