A recent study found that cells deep in the brain calculate a sort of moving average of past events, giving the greatest weight to the most recent outcomes.
So, even after a long term upward trend, or long term downward trend, a few months in the opposite direction can prompt impulsive investor decisions towards or away from stocks.
Avoid the knee-jerk reactions.
Warren Buffett buying Bank of America? Woops.
Bill Gross betting against Treasuries? Yikes.
John Corzine? John Paulson? Both very wrong in their market calls.
You’ve heard me over past 3 years talk about humility and diversification. My 21 years in the business has taught me that the investment, sector, stock, etc. that I absolutely love is still the one I need to calmly and rationally buy in an amount that I’m willing to be really wrong in and cut my losses quickly if necessary.
Even the best can make bad calls.
Be sure to pay attention to my video next week for my year end and 2012 thoughts.
Click for Leading Economic Indicators Rise in November
I’m a big fan of “behavioral finance” as many of you know. This includes understanding the importance of our human nature to the decisions we make in our lives–including finance.
This week’s video I talk about the tendency for us to only listen to data that supports our pre-concieved conclusion.
As investors, we have to avoid this!
In the meantime, they’ll continue to be volatile.