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The Biggest Myth About Capitalism and Investing

We’re throwing a bit of a myth-busting party today. And you’re invited!

You see, instead of just debunking one widely held (but false) belief, we’re shining the light of truth on three popular misconceptions. In rapid-fire fashion, no less.

It’s time to cue up The Gap Band’s chart-topping electro-funk hit, “You Dropped a Bomb on Me.” Because we’re about to set off a (truth) bomb in 3… 2… 1…

The Myth of Energy Dependence

Impossible. Improbable. A pipe dream. Take your pick. They’ve all been said in reference to America’s quest for the almighty state of energy independence.

Back in 2008, Robert Bryce, author of Gusher of Lies: The Dangerous Delusions of Energy Independence, told U.S. News & World Report that “we’re being sold energy independence here and now. And that’s just a lie. There’s no polite way to put it.”

Fast forward to today, and, well… how do I say this “politely”?

Grandma just put a fresh humble pie in the oven for you, Mr. Bryce.

The latest weekly petroleum status report released by the U.S. Energy Information Administration (EIA) included a milestone “that not so long ago seemed unimaginable,” says the Dallas Observer.

Indeed…

For the week ending May 31, we officially pumped more oil out of the ground than we imported. And that hasn’t happened since 1995.

 A Gusher of Domestic Oil: Weekly crude oil imports vs. domestic production

Credit innovation – specifically, hydraulic fracturing and horizontal drilling – for the production boost.

Lest you think we just got lucky for a week, consider: In the month of February, the United States met 88% of its own energy needs. That’s the highest monthly percentage since April 1986.

Based on the data, energy independence doesn’t sound like such a whopper, now does it?

The Truth About Buying Low and Selling High

In its purest form, profiting from investing boils down to simply buying low and selling high, right?

Wrong!

New research out of the London Business School posits that “high” is a subjective measure. And it’s only with hindsight that we ever really know at what valuation the market peaks.

The researchers performed a rolling analysis, instead, which only looked at the data prior to the point in time under consideration. And they found that trying to time the market by selling high – and then buying back in at the lows – leads to worse returns.

The key takeaway? Always look to buy on the cheap. But let your winners run, because you never know how high they’ll go. And be willing to sell your losers.

Or, more simply, buy low and use a trailing stop. Simple enough.

Capitalism Cures (Not Causes) Poverty

For decades, we’ve heard that capitalism exploits the poor to further enrich those who are already wealthy.

What a bunch of bull!

Over the last 20 years, almost one billion people have been lifted out of extreme poverty. Expressed another way, in 1990, 43% of people in developing nations lived in extreme poverty. But by 2010, that percentage dropped to 21%.

The catalyst? Capitalism.

Even the left-leaning magazine, The Economist, acknowledges it, saying, “Most of the credit… must go to capitalism and free trade, for they enable economies to grow – and it was growth, principally, that has eased destitution.”

Granted, we’ve still got work to do. Of the seven billion or so people on Earth, 1.1 billion still live below the extreme poverty line of $1.25 per day.

And as The Economist adds, “Raising people above that level of wretchedness is not a sufficient ambition for a prosperous planet, but it is a necessary one.” Amen!

The good thing is, we now know that capitalism helps – not hinders – us from accomplishing that goal.

Ahead of the tape,

Louis Basenese