A Comforting Past Can Be Misleading
There’s an interesting story about the Thanksgiving turkey. This turkey is fed every day for almost three years—nearly a thousand days. From the turkey’s perspective, life seems good. It receives food daily, and everything appears perfect. However, what the turkey doesn’t know is that on the thousandth day, it will be slaughtered. This illustrates that past experiences may not predict future outcomes.
Source: DSP Netra
The Illusion of Predictability
Just because the turkey has always been fed in the past, it assumes the same will happen tomorrow. But that belief ends in shock. Many investors behave similarly; they believe that if a stock or index has consistently performed well in the past, it will continue to do so in the future. However, markets do not operate this way. Patterns from the past can break at any moment, especially when unexpected events occur.
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The Power of Rules Over Emotions
This is why having a non-discretionary, rule-based investment system is crucial. Instead of relying on feelings or past trends, these systems follow fixed rules designed to handle sudden changes and avoid overconfidence. Just like the turkey should not have blindly trusted its feeding routine, investors should not blindly rely on past performance.
Beware of Recency Bias
The turkey also falls victim to a common psychological trap: recency bias. It assumes that because things have been going well recently, they will continue to be the same. Investors tend to make the same mistake; they believe that if a stock has recently increased in value, it will keep rising. A rule-based investing approach helps mitigate such emotional errors by adhering to a consistent process, regardless of current market trends.
Build a System That Can Survive Anything
The key takeaway is that every day in the market is a new day. Relying solely on past successes is risky. One must develop an investment strategy that is prepared for sudden changes. The goal should be to survive and grow in all types of market conditions, not just during favorable periods.
Is your investment system equipped to handle a shock day? We would love to hear your thoughts in the comments below! If you found this blog helpful, please SHARE it with your friends. Thank you for reading!
