Summer 2002 Message
Summer 2002 Message
If you are like many investors these days, you may be afraid to open the statements of any of your investments for fear of seeing values drop further. In several recent seminars that we have conducted, we have experienced great interest in a couple topics related to “Behavioral Finance” which help us, as investors better understand how our emotions can affect our investing behavior. One such heuristic is “representativeness.” It refers to our natural inclination to assume that if a certain outcome is repeated often enough, it will continue to be repeated. This has been demonstrated time and again in observing gambling behavior. If a die is thrown six times and a 5 comes up three out of the six tosses, gamblers will tend to bet on 5 coming up again, and someone will comment, “we’re on a streak of fives.” However, it is a fact that for any given toss, the chance of getting a 5 is always one out of six. The effects of representativeness are seen in our present market as more and more investors are beginning to move their money out of the market. “With several consecutive down quarters, the next one or several will be down too.” Ironically, many of the leading economic indicators suggest that the economy is beginning to turn around. Furthermore, we are beginning to see portfolio managers and the likes of Warren Buffet start to move sizeable chunks of cash into the market. Perhaps they are following the old adage, “buy low, sell high.”
As always, if you would like to discuss your financial situation with us, please do not hesitate to contact us.
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