When I coach investors and traders, I’m often asked what I think are the most common, most ruinous mistakes that investors make. Unfortunately, there are a lot of them.

There are mistakes like risking too much money on a single trade or investment … not using protective stops … not using disciplined money management … trading too often … not doing your homework … taking on too big a position in any market … not diversifying enough … and on and on.

Over time, I will explore each and every one of the above in greater detail, and more, to help you learn how to become a better investor and trader.

But in today’s column, I want to cover what I think is the most dangerous mistake investors make, bar none.

It’s what I call getting caught up in all the “market myths” that are always out there. Or put another way …

It’s having a set of preconceived notions

about what markets can and can’t do.

The fact of the matter is that markets can do whatever they want to do.

Markets are never wrong. Markets are never irrational.

They are what they are and if you don’t understand a market, it’s not the market’s fault; the fault lies instead with your analysis.

For instance, have you ever heard someone say “a market is defying all logic?”

Or that a market is “disconnected from its underlying fundamentals?”

I’m sure you have. I hear those kinds of phrases all the time on shows on Bloomberg and CNBC.

But the fact of the matter is that …

Markets NEVER defy logic.

And they never defy the fundamentals.

Only people defy logic. Only people can make such statements about fundamental forces as well, because when a market is allegedly defying fundamentals, what it’s really doing is operating on fundamental forces that the analyst or investor simply hasn’t figured out yet.

I fully realize that what I’m talking about here is hard to grasp at first. But if you take the time to think deep and hard about what I’m saying, you will elevate your trading and investing to a whole new level. Markets are never wrong. Only people are.

Especially dangerous for most traders and investors is getting caught up in the various “market myths” that are out there.

For instance, how many times have you heard that rising interest rates are bad for the stock market, and that declining rates are good for stocks?

If you’re like any average investor, you’ve heard that theory literally hundreds, if not thousands, of times. Tune into any media show today, and I’m sure you’ll hear it at least once, if not more.

Most stock brokers, and the majority of analysts and newsletter editors, espouse the same causal relationship between interest rates and stock prices.

But the fact of the matter, the plain truth, is that there is no “standard relationship” between interest rates and stock prices. Period.

Consider the period from March 2000 to October 2002, where the Federal Funds rate declined from 5.85 percent to 1.75 percent, and the Nasdaq plunged 78 percent. Put simply, stocks and interest rates went down together! Exactly the opposite of what most would expect.

Or the period from March 2003 to October 2007, where the Federal Funds rate more than tripled and rose from 1.25 percent to 4.75 percent …

And the Dow exploded higher, launching from 7,992 to 13,930 — a 74 percent gain! Stocks and interest rates went higher together!

The fact is that the relationship between interest rates and stock prices varies considerably depending upon a host of factors, including the value of the dollar, inflation and where the economy is in terms of the economic cycle.

But the bottom line is this: Never assume anything and never, ever get caught in conventional thought about a market or you will most likely lose your shirt.

Let’s consider another myth that rising oil prices are bearish for stocks. That’s a bunch of baloney, too.

The fact is that there have been plenty of times when rising oil prices were bullish for stocks … and where falling oil and energy prices were bearish. Exactly the opposite of what most conventional thought tells you.

Or consider the normal view about a country’s widening trade deficit. The common theory is that a widening trade deficit is bad for stock prices and a narrowing deficit is good.

But history proves that it is entirely wrong, and nothing more than a myth.

Fact: From 1976 to 1998, the U.S. trade deficit ballooned from $6.08 billion to $166.14 billion, and guess what? The Dow Jones Industrials went from 848 to 9,343!

In truth, the relationship between the trade deficit or surplus and stock prices is exactly the opposite of what most pundits claim.

Or consider the myth about corporate earnings that says they have to rise for stock prices to continue higher. But from 1973 to 1975, the combined earnings of the S&P 500 companies rose strongly for six consecutive quarters, yet the S&P 500 Index fell more than 24 percent.

Moreover, according to research conducted by analyst Paul Kedrosky, since 1960, the average annual return on the S&P 500 was greatest when earnings were falling at a clip of 10 percent or more … while the smallest returns on the S&P 500 occurred when earnings were growing at up to 10 percent per annum!

In other words, rising corporate earnings does not guarantee rising stock prices, by any means. Nor do falling corporate earnings guarantee falling stock prices!

There are lots of myths or biases out there about relationships between economic fundamentals and markets, or between markets and other markets.

But the fact of the matter is that almost all of them are exactly that: Myths, and nothing more.

The bottom line: To avoid making the biggest investing and trading blunders …

1. Never assume anything when it comes to the markets …

2. Question everything, and most of all …

3. Think independently!

Right now, gold is trying to bounce a bit. But it won’t get far. It’s headed lower overall. So I hope you took me up on my recommendation to hedge any holdings you have via the inverse ETFs I recommended in my past few columns.

The stock market, meanwhile, is also bouncing. But don’t be deceived: It’s headed lower for a while. So here, too, I strongly recommended hedging any positions you can’t exit, for whatever reason, via the inverse ETFs I recommended in my last column.

Stay tuned and best wishes,

Larry

…related:

OFFICIALS LOSING CONTROL AS MARKETS GYRATE WILDLY!