Random

Till the cricket world cup hosted by India, Pakistan, and Sri Lanka in 1996, host country had never managed to win the cup which had always been won by the team batting first.

Both these myths were broken as Sri Lanka, one of the host countries won the cup handsomely batting second.

India never loses to Pakistan in a Cricket tournament organized by International Cricket Council-a myth broken in 2009 and since than Pakistan has defeated India in ICC tournaments thrice.

Paul the Octopus who even though predicted only 4 out of 6 matches correctly in the 2008 UEFA cup was considered so highly that he was used in the 2010 world cup again where it ended up predicting all the winners correctly.

The reason I am listing all the above is because these are just random events that happen without any correlation to each other and where the outcome is considered the proof of the evidence.

Just the way “Absence of evidence is not evidence of absence”, just because few successive events randomly without any correlation happen successively doesn’t mean they are indicating a pattern.

Gambler’s Fallacy

When an event or series event occur multiple times close to each other people tend to create co-relation believing that their future occurrence is more likely or less likely to occur. This is called the Gambler’s fallacy.

Investors often commit gambler’s fallacy when they believe that a stock will lose or gain value after a series of trading sessions with the exact opposite movement.

For example, consider a series of 10 coin flips that have all landed with the “heads” side up. A person might predict that the next coin flip is more likely to land with the “tails” side up. However, if the person knows that this is a fair coin with a 50/50 chance of landing on either side and that the coin flips are not systematically related to one another by some mechanism then they are committing the gambler’s fallacy.

The most famous example of gambler’s fallacy occurred at the Monte Carlo casino in Las Vegas in 1913. The roulette wheel’s ball had fallen on black several times in a row. This led people to believe that it would fall on red soon and they started pushing their chips, betting that the ball would fall in a red square on the next roulette wheel turn. The ball fell on the red square after 27 turns. Accounts state that millions of dollars had been lost by then.

History Doesn’t repeat but it rhymes

History doesn’t repeat itself but it rhymes is a cliché.

In the markets history does repeat itself but there is always a twist that makes it different.

The whole cycle does play out but each time there is an angle that has probably not been experienced before lulling even the most experienced, leave aside the newbies into a comfort zone that prevents them from getting trapped.

The cycle looks something like this:

Courtesy “Forbes”

What’s the Key?

  • Keep your focus and goals up front and centre
  • Stick to your risk-profile
  • Understand new opportunities and experience them with a small (5%) or so of overall allocation), if you want, to avoid both regret and loss minimization and also be able to take a bigger call or avoid the opportunity next time basis this experience.

It will also give you the ability to evaluate another opportunity in the future

  • Markets behave like a “spring”, they bounce back with a vengeance even if it takes time to bounce.

Take advantage of accumulation when markets decline or stay flat so that the “spring” effect plays out and you can achieve your long term goals

Ultimately “Stay the Course”

Follow my twitter handle @manver1974 for more such shares

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