Here we go again: more financial illiteracy from the financial press. This time it’s The Wall Street Journal.

Brett Arends decided to put together one of those lists: “Ten Stock-Market Myths That Just Won’t Die“.

If I were ever to do such a list, at the top of the list would be the myth that newspapers like The Wall Street Journal actually know what they are talking about when they hold forth on the stock market.

For some reason, that didn’t make Arends’ list. But here’s what he served up as item number 2:

2 “Stocks on average make you about 10% a year.”

Stop right there. This is based on some past history — stretching back to the 1800s — and it’s full of holes.

About three of those percentage points were only from inflation. The other 7% may not be reliable either. The data from the 19th century are suspect; the global picture from the 20th century is complex. Experts suggest 5% may be more typical. And stocks only produce average returns if you buy them at average valuations. If you buy them when they’re expensive, you do a lot worse.

Just seven sentences, consisting of 89 words (excluding the title). And it’s mind-boggling how many different things are wrong in those seven sentences.

Let’s go ahead and count the ways.

One, statements about what return stocks make you on average can only be made “based on some past history”. By definition. That’s what average return means, actually, doesn’t it?

Two, part of every asset’s return — every single asset — represents compensation for inflation. That doesn’t invalidate anything. Those three percentage points that “were only from inflation” are still part of the return on stocks.

Three, it’s not at all clear what “the global picture from the 20th century is complex” means. Arends, wisely, does not say. Which makes it impossible to dispute whatever he may have had in mind (if anything).

So I’ll just go ahead and explain what the global picture from the 20th century says to me, and why I don’t find it complex at all, and neither should you.
• It’s axiomatic that the expected return on stocks doesn’t stay constant over time. For example, the expected return will be a lot higher when T-bills yield 6% than when they yield a fraction of 1%. That’s because the expected return on stocks consists of the risk free return you can earn on T-bills plus a compensation for risk (the equity risk premium).
• Most self-respecting experts won’t be caught dead making statements like “Stocks on average make you x% a year.” Instead, they would say “Stocks on average offer you a risk premium of y% a year.” To convert that into the return you can expect from stocks, given their average performance in the past, you take the current T-bill rate and add it to y, and voila, that’s your answer right there.
• In the US, the average risk premium on stocks in the 20th century was roughly 8%.
• If we expect the future to be, on average, the same as the past, then we can take the current T-bill rate (of close to zero), add the average historical equity risk premium to it, and say that the expected return on stocks these days is about 8%.
• If we have some reason to expect the equity risk premium in the future to be higher or lower than it was in the past, then we can a) justify why we think so, b) cook up some subjective fudge factor to quantity the difference, and b) produce our own subjective forecast of the expected return on stocks these days.
• There is, however, no objective data-based method that will provide you with a credible future-will-be-different-from-the-past correction. Any forecast different from 8% is necessarily — and in the hands of an honest expert, admittedly — subjective.

I do believe that bullet point summary was really quite simple. That is to say, “the global picture from the 20th century is complex” doesn’t seem to be true at all.

Four, when Arends goes “Experts suggest 5% may be more typical”, I would — and hereby do — challenge him as follows: “Experts? Which experts? Name one. A bona fide expert who is willing to state for the record that he thinks the expected return on stocks these days is 5%.”

Which brings us to five, “And stocks only produce average returns if you buy them at average valuations. If you buy them when they’re expensive, you do a lot worse.”

Boy, o boy! The wisdom of the ages, distilled into 25 words!

Here — in no particular order — are some of the thoughts that are wrestling in my head, going “Me first! Me first!”

4a) So Arends believes, does he, that it’s possible to look at the stock market and figure out when valuations are too high or too low? Boy, he must make billions in the stock market whenever he wants to.
4b) I wonder if Arends understands the concept of tautological? Buying stocks when they are more expensive produces lower returns, no kidding?
4c) I wonder if Arends understands the concept of average? If you’re buying stocks with no particular Gods-given ability to look at the stock market through eyes scrunched up just so, and discern when valuations are too high or too low, then roughly half the time you buy them too high, and half the time you buy them too low. I really, really wonder what happens on average?

It’s totally absurd to try and dismiss the relevance of average returns by going “stocks only produce average returns if you buy them at average valuations”. The average investor does indeed, on average, buy stocks at average valuations. He has no basis for telling himself he should expect to earn anything higher or lower than the average expected return.