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Published: Aug 22, 2014 9:50 a.m. ET


Financial hocus-pocus obscures dismal reality for investors


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Dutch illusionist Hans Klok performs in Germany on April 6, 2014.

Do you believe in magic?

Fifty years after the Lovin’ Spoonful first posed the question, we have to ask it yet again. And it seems that for a lot of people on Wall Street the answer is emphatically... Yes!

They believed in magic in the late 1990s. Maybe it was the influence of Harry Potter. They believed in magic in 2006. Maybe it was due to “Twilight” and all those vampires. And apparently they believe in magic today. Can we credit The Walking Dead and the appearance of zombies on our TV screens? Who knows?

Stock market investors still believe in the supernatural, to judge by their enthusiasm for the Standard & Poor’s 500 SPX, +0.33%   at current prices.

Magic? Supernatural? What am I talking about?

Wall Street’s version of magic is the belief, often-repeated, that stocks earn about 10% a year “on average,” with annual returns distributed randomly around that magic number.

Wall Street’s version of magic also includes the belief that stocks earn that number regardless of valuations.

It’s based on the pseudo-scientific belief that finance is a natural science, like biology or chemistry. Stocks “earn 10% a year,” they say, the way water boils at 100 degrees centigrade at one atmosphere. It’s in the scheme of things. The order of the universe.

And to support the claim, they will point to data going back to the 1920s, showing that stocks have earned, indeed, about 10% a year on average over that time, with annual returns varying around that number apparently by magic.

Your money people may have one of those charts on their wall, showing average returns by year bunched around the central number.

OK, so there are two alternatives.

The first is that stocks do, indeed, earn 10% a year as if by magic. The second is that there is no magic involved.

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