Investing Hindsight

This is the sort of thing that’s been going around on social media lately:

“If you had invested $1,000 during Amazon’s IPO in May 1997, your investment would be worth $1,395,470.77 as of the close of July 1, 2021.”

“If you had bought a single Bitcoin at its opening price of $.08 in July 2010, it would be worth $414,484.25 today.”  

Social media users are circulating these kinds of posts to get others excited about investing in the stock and crypto markets right now.

The problem with these quick hits is that people are cherry-picking the successes and picking the time periods showing profits. Nobody talks about the failures.

How often do you see these types of posts?

“If you had bought $100,000 of Bitcoin on December 10, 2017, your investment would have been worth $15,885.86 on December 9, 2018, almost exactly a year later.”

Hindsight Bias.

Predicting the future based on cherry-picked successes from the past is called hindsight bias. In more technical terms, hindsight bias is the tendency to see unpredictable past events as predictable – easily predictable even. In other words, it’s the tendency to look at only the positive or beneficial bits of past events as a measuring stick for predicting future events.

For example:  Hindsight bias would lead us to believe that Bitcoin’s boom periods of the past are clear predictors of the future success of new cryptocurrencies. It’s why new cryptocurrencies like Dogecoin – which started as a joke – have gained recent traction and experienced booms of their own.

Hindsight bias has another name – “the ‘knew-it-all-along’ effect.” Everyone’s a genius in hindsight. The problem is nobody ever “knew-it-all-along.” Nobody knew for sure whether Amazon, Google, or Facebook were surefire hits.

If investors were so good at finding surefire hits, Jeff Bezos wouldn’t be the richest man in the world. It would be the guy with the investing crystal ball. Even the best venture capital firms like heavyweight Sequoia Capital have a batting average of 0.100. In other words, they only find that one Facebook unicorn out of 10 deals.

The Reality.

The reality of hindsight – undistorted by bias – is this:

• You can never predict the sure winners of every IPO.
• Timing is a fool’s errand. Computers can’t predict market movements. What makes individual investors think they can?
• You can talk about the gains you would have realized if you had held a stock for 24 years until you’re blue in the face, but the reality is the average retail investor doesn’t hold any particular stock beyond a year.
• At some point, you will have to sell a stock to capture the appreciation. Nobody can time the right time to sell.
• We can’t predict the losers any more than we can predict the winners. At the time of its IPO, investors in Pets.com were just as pumped as the first-day investors of the Amazon IPO. The difference is Pets.com stock went to $0, and Amazon’s didn’t.

Hindsight Bias Clouds Objectivity.

Hindsight bias wants to trick you into thinking that the future won’t be like the past.

How many times have we heard so-called experts say it will be different next time? They look back on the past and discount mistakes as poor judgment. They write off market volatility and poor investment performance – not on unpredictability and volatility of the market – but on our errors in judgment or short-comings? What’s the end game? The end game is to talk ourselves into investing in something that we now think we can predict.

The problem with hindsight bias is that it ignores market volatility and unpredictability, which will never go away. Hindsight bias distorts the past and prevents you from taking true stock in your past investment decisions and performance.

This inhibits your ability to learn from past mistakes and dooms you to repeat them.

That is the problem with hindsight bias. It prevents you to learn from your past and dooms you to repeating them.

Sadly, the closest analog to hindsight bias is a person in a dysfunctional relationship that is about to enter into another relationship with the same type of person. They blame themselves for the failure of the last relationship and talk themselves into thinking that it will be different this time if they tweak their behavior.

It’s never different this time – not with relationships and not with the stock market. ​

Avoiding Investment Bias.

My #1 tip for avoiding investment bias? Don’t continue your relationship with Wall Street. It will never change. Wall Street may be more crazy and unpredictable than ever, thanks to social media.

How do successful investors avoid hindsight bias?

​​They stick to truly predictable investments – assets that have had a long track record of success as a class. IPOs have spotty success rates, but commercial real estate, in general, has predictably and reliably provided investors with consistent income and appreciation over time. The data and facts are there for anybody willing to look.

To reduce hindsight bias, spend the time and do the homework upfront.

​​Crunch the numbers, analyze the data, and do in-depth due diligence to rule out any bias in your investment decision-making. Then with all the cards on the table, only then should you make your investment decision.

​​This will prevent you from looking back on your investment past and rewriting history to justify investing in more money-losing schemes.