The Biased Investor: With the Benefit of Hindsight

It’s all so obvious. Isn’t it?

Photo: Aimee Low. Source: Morguefile

That’s the way everything looks when you look back. When we examine the market of the late ‘90s, it’s “obvious” that tech stocks were in a bubble and overpriced. When we look at early 2009, it’s “obvious” that the world was on sale, and that great companies could be bought for a fraction of their true worth. When you look at the past year, it’s “obvious” that the market has lost momentum and is due for another correction. Isn’t it?

But that’s looking backwards with the benefit of experience. We know how things turned out, so the path seems self-evident. We call this “hindsight bias,” and it affects our memories. Jurors in malpractice cases often conclude the doctor should have known the outcome would be bad because they already know how things turned out. After 9/11 or other terror attacks we conclude the authorities should have known about the killers and done something, because we already know about the tragedy.

In reality, the future is never clear. In the ‘90s we didn’t know if revolutions in technology would continue to make us more productive and boost economic growth, or if they would flame out in a wave of enthusiasm. During the Financial Crisis we didn’t know how bad thigs really were inside the banks’ balance sheets, and whether the government would have to nationalize a third of the stock market to keep the economy going. Today, we don’t know if China’s economy will collapse under the weight of its growing bank loans, or if concern about terror attacks will cause US consumers to pull back—pulling everything down with them.

China bank loan totals (billions, USD). Source: Bloomberg, National Statistics Bureau (China)

Investing isn’t like driving across the country. We don’t have signs with big arrows telling us which way to turn. The future only exists as a range of possible outcomes, with some developments more likely, and some less likely. And sometimes freakish, once-in-a-lifetime things happen—black swans, or white swans—that change everything.

In Arabic, there’s a word that describes a deterministic worldview: “maktub: it is written.” It means that the outcome has already been decreed and recorded by God. But investors don’t have access to these decrees. We have to look at the world probabilistically. Nothing is obvious. If the future is written, it’s written in invisible ink.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:21:55+00:00 June 14th, 2016|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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