As amateur investors, we may not engage in systematic learning about the stock market before investing. All our knowledge about the stock market might come from hearsay or the boastful talk of some stock-picking guru. Therefore, our understanding of the stock market may not be thorough and comprehensive. As a result, some of our perceptions of the stock market may be inaccurate, or even deeply rooted misconceptions. Are the following five misconceptions about the stock market also your misunderstandings?

1. Stock prices reflect the intrinsic value of a company.

The notion that stock prices reflect the intrinsic value of a company likely stems from the media's extensive promotion of Warren Buffett's value investing philosophy and the deeply ingrained economic theory that prices always fluctuate around value. But does the price always reflect the true value of an asset? This question can be traced back to how assets are formed. The price of an asset is primarily formed through investor bidding. Stocks, like ordinary commodities, are sold by company owners who relinquish a portion of ownership, underwritten by brokers, and sold on the stock exchange. Investors bid based on their own price estimates for the company. Investors' price estimates for a company mainly come from their expectations for the company's future. If investors believe that the company will become a super large company in the future, then the company's valuation will quickly be reflected in the current stock price through bidding. Therefore, the price of a stock does not reflect the company's intrinsic value but rather the company's future expected value. This expected value sometimes comes from intrinsic value, and sometimes it comes entirely from imagination.

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Take an extreme example: the current record price for a porcelain auction is a Northern Song Dynasty Ru Kiln celadon-glazed washer, with a total price of 300 million RMB. But if one day 10,000 of these washers were suddenly unearthed, would the price of this washer still be the same? The price of the same item drops significantly just because the quantity has increased. Although this is somewhat extreme, it also reflects from the side that the formation of asset prices is not so rational and does not fully reflect the intrinsic value.

2. The stock market is a barometer of the economy.

The relationship between the stock market and the economy is the same as the normal relationship between assets and the economy. When the economy is in an upward phase, the stock market rises with the economy; when the economy is in a recession, the stock market falls with the economy. However, since the stock market reflects the expected value of asset prices, there will be a certain degree of pre-emptiveness in stock prices, forming the concept that the stock market is a barometer of the economy. But the stock market is also an asset, and its prices are not only affected by economic conditions but also determined by many other factors. For example, the amount of money issued. A very clear recent example is that the U.S. Nasdaq stock index broke 10,000 points for the first time. With the ongoing impact of the pandemic on the U.S. economy and increasing domestic political chaos, it is impossible for the U.S. economic situation to be good. However, the Nasdaq index has risen above 10,000 points. The reason for this is related to the trillions of dollars in currency over-issuance by the Federal Reserve. Such a large amount of liquidity will naturally flow into assets. In the United States, the most recognized assets are still the stock market, so once the currency is over-issued, it will quickly inflate the stock market bubble.

3. The primary principle of investing is to make money.

Is the primary principle of investing not to make money, but to lose money? Of course not, but it is "don't lose money." Many people might laugh at this, who would want to lose money by investing? It's no wonder everyone laughs, even when the proponent of this theory, the founder of the world's largest private equity fund, Blackstone Group, introduces this theory, it will also draw laughter. But if you think seriously, what you should consider first before investing is not how much money this investment will make, but whether this investment will lose money. Because if an investment loses 50%, you need to earn back 100% to make up for the previous loss. A frequently quoted saying by Buffett is, "The first rule of investing is not to lose money; the second rule is never forget the first." Sun Tzu said, "In ancient times, those who were good at warfare first made themselves invincible, waiting for the enemy to be vulnerable." It is also this principle.

4. Insider information is very reliable.

Insider information can be said to be a long-standing legend. There are often people who do not touch the stock market at all, but they invest heavily in the stock market because they hear what they believe to be very reliable insider information, and end up losing everything. This insider information must have a certain source, otherwise it would not convince the believers to firmly invest a large amount of money. I have heard more than one case like this. Let's not talk about whether this insider information is true. Even if it is true, it does not necessarily ensure that the stock price will move in the predicted direction, because the stock price has a great deal of randomness, and many factors will affect the stock price. It is not an insider information that can control the direction of the stock price movement.5. The Financial Statements of Listed Companies Are Accurate and Error-Free

The financial statements of listed companies are audited by accounting firms, and theoretically, they should be accurate and error-free. However, there is often a significant gap between theory and practice. Not to mention the immature A-share market, even in the United States stock market, which has a history of over 200 years, the financial statements of companies are riddled with various false information. There was Enron in the past, and currently, there is Luckin Coffee, with numerous examples at hand. Why does this happen? The financial data presented to the public have been audited by accounting firms, and these firms are well-known and reputable. So, why are there still such oversights? In fact, this is related to the industry's system. Anyone who has conducted an audit knows that accounting firms receive compensation from the entities they audit. If you take their money and then announce to the public in the audit report that their financial data is unreliable, can the business continue? In reality, accountants who want to issue a qualified audit report have to communicate with the audited entity repeatedly, not to mention an adverse audit opinion.