”This Time it’s Different” and 2 Other Investing Fallacies
When you’re aware of these three biases, you’ll be ahead of the investing crowd
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When investors deal with an unusual event, they often say, ”This time it’s different.”
It often happens during the formation of bubbles. For example, in 2021, several investors and commentators said we were in a bubble for growth stocks and SPACs.
Some said it was very similar to the Dotcom crash of 2000. But many investors said, “No, it’s not like that. Back then, companies didn’t have any earnings at all. This time, the companies have good revenues. Sure, the prices might be high, but we’re certainly not in a bubble.”
We were. And it slowly started to burst from mid-2021. One thing to remember is that not all bubbles come to a grinding halt.
Didier Sornette, a former professor of Entrepreneurial Risks at the Swiss Federal Institute of Technology, did extensive research on stock market bubbles.
He published a book about it called, Why Stock Markets Crash. Sornette found that between half to two-thirds of all bubbles crashed.
Others simply faded over time, something similar to what happened with SPACs and other Covid-19-related assets that were popular.
The reality is that stock market events repeat themselves. When fiscal policy is easy and credit comes cheap, asset prices rise. And at some point, that trend reverses. There’s no “This time it’s different.”
I get the pull of a bubble. I’ve been there too. Sometimes it seems the market can only go up. But we all know that has never happened in history.
There are many other fallacies and thinking errors when it comes to investing. Here are two others you’ll want to keep in mind if you don’t want to lose your investments.
The “Hot hand” fallacy: When you can’t lose
I’ve been an NBA fan since I was a child. One of the main ideas in basketball is that players sometimes can get a “hot hand.”
I also experienced this when I played basketball in high school. I remember one game when I had 40 points. That season, I was a…
