“We are all pattern-seeking creatures, but sometimes our pattern-seeking goes too far.” – Daniel Kahneman
Have you ever found yourself sitting at your desk, staring at a screen filled with charts, graphs, and an endless stream of financial data (just think of the recent elections!). You’re on the hunt for patterns, for that elusive secret formula that will turn your goal into a goldmine. You’re convinced that if you just look hard enough, you’ll find the key to predicting the pattern’s next move.
Sound familiar? If so, you’re not alone.
But as Nobel laureate Daniel Kahneman reminds us, our pattern-seeking instincts can sometimes lead us astray. We are so adept at recognising patterns that we often perceive them where they don’t even exist.
This tendency is aptly demonstrated by the “hot-hand fallacy” or the “hot-hand phenomenon” – the belief that a person who has experienced success with a random event has a greater chance of further success in additional attempts.
In the investing world, this fallacy manifests as the conviction that a stock or fund that has performed well in the past is destined to continue its winning streak, or that a manager who has had a run of successful investments is a surefire bet for future outperformance. We cling to these beliefs, convinced that we’ve uncovered a predictive pattern.
But have we really?
Consider the humorous research conducted by David J. Leinweber at Caltech. He seemingly discovered that just three variables – butter production in the US and Bangladesh, sheep populations in the US and Bangladesh, and cheese production in the US – could predict a staggering 99% of the stock market’s movement.
Time to start a hedge fund, right?
Not so fast. As alluring as these patterns may seem, they are often nothing more than mirages – tantalising from a teetering distance, but vanishing as soon as we try to grasp them. The constant pursuit of these predictive patterns is one of the great behavioural pitfalls in investing. We desperately want to believe that the patterns we observe will continue, that they hold the key to unlocking our financial dreams.
But the harsh reality is that most of these patterns are descriptive, not predictive. They tell us about the past, but they don’t necessarily say anything about the future. And when we base our investment decisions on these illusory patterns, we often find ourselves chasing after shadows.
At WellsFaber, we understand the seductive pull of predictive patterns. But we also recognise that true investing success comes not from chasing these phantoms, but from steadfast adherence to sound financial behaviours.
It’s about having a well-crafted plan and sticking to it, day in and day out, year after year. It’s about resisting the siren song of illusory patterns and instead trusting in the power of discipline, diversification, and a long-term perspective.
The next time you find yourself entranced by a seemingly predictive pattern, take a step back. Ask yourself: is this a reliable guide to the future, or merely an interesting description of the past? By learning to distinguish between the two, you can avoid the behavioural pitfalls that ensnare so many investors.
Remember, the path to financial well-being is not paved with magical formulas or secret codes. It’s illuminated by the steady light of healthy habits, prudent planning, and a commitment to your long-term goals.
That’s the pattern we believe in at WellsFaber – and it’s one that we know can stand the test of time.
We advise, you thrive