Recently Jill & I attended a friend's birthday party. It was a Casino Night theme and of course fun was had by all. After all, we weren't playing with real money!
They had two table games that evening: blackjack and roulette. Seeing the roulette wheel reminded me of a visit I took to Atlantic City many years ago.
GAMBLER’S FALLACY
A friend and I were sitting in a lounge just off the casino floor. He was watching one of the roulette table's "scoreboard" pretty intently. I asked him what he was looking at.
"I can't believe Black has hit on that roulette table 14 times in a row!" he exclaimed.
He hurriedly ran over to the table and dropped $500 on Red.
He won.
He came back, proud as a peacock. And a little fatter in the wallet, too.
"I just knew Red was going to hit there. What are the odds black was going to hit for a 15th time in a row?" he said.
My friend reasoned - very luckily I might add - that, in a situation which is pure random chance, the outcome was going to be Red based on the previous 14 outcomes. The reality is Black had just as much chance of hitting on that particular spin as Red did. And maybe more prescient, the roulette wheel does not "remember" the previous spin(s)!
This, my friends, is Gambler's Fallacy. And with the markets at all-time highs it's a good time to check in and see if Gambler's Fallacy is impacting your investor behavior.
I started my career as a financial advisor in May, 2008. The Great Recession followed shortly thereafter. Great timing, huh?
Since then, our economy has recovered and the markets have gone up. Way up. Yet, talks of a coming recession have persisted since at least 2015. If you follow the financial media or news headlines at all, you probably know this is the greatest bull market or period of extended stock market growth…EVER. Sure we've had a few iffy years in there but all in all it's been a pretty magical run. Like over-a-decade-magical.
"Surely it must go down soon…right?"
I've heard this from clients, from potential clients, colleagues, and even friends. Everyone is right. I won't speculate as to when that might happen, but it will happen at some point in the future. That's what the markets do. They tend to do it more frequently than what we've experienced over the past 11 years, but hey, get while the gettin's good!
We continue to be bombarded by news headlines talking about the markets hitting all-time highs. We can find articles that talk about the historic bull run our markets have been on. Yet I still hear people talking about the market going down. Part of me gets it. When it comes to our money, we're very emotional. Maybe some of us are still scarred by 2008-2009. And that brings me back to my friend above.
The markets do not care about any of the "facts" and "figures" we hear and read about. Like our roulette wheel, the markets don't remember or even know that they've been on an historic bull run. You might think the market is due for a downturn. And you might be right. You will be right…at some point. I don't know when. And you don't know when. No one knows.
But we can't invest or not invest our money because the market has come up black 11 years in a row and it's "due" to come up red next week, next month, next year. We can't be looking for reasons not to be invested, whether that's political reasons, tariffs, taxes, market highs, or the media. That’s called gambling aka speculating. That’s the opposite of what a successful investor does!
We are investors. Long term investors. When the markets are historically positive ~70% of the time we have to be looking for reasons to be invested. We have to ride the waves.
And we can't let Gambler's Fallacy get the best of us.